_The role of social reform in transforming Saudi’s economy

When you look at the current sentiment of the KSA commercial market, a lot of focus is directed towards the National Transformation Program and specifically what initiatives may be subject to change, and what might be added. Our understanding is the new strategy will be more focused; however to what extent that will affect the property market remains to be seen. Certainly a lot has changed in the past couple of years, most notably the introduction of the 2.5% white land tax, which was levied on undeveloped urban land earlier this year in March. Current estimates suggest it will generate $1.25bn in annual revenues, and that further white land taxes won’t be introduced until 2020. There are still various issues such as how the government will tackle the perceived shortage of affordable housing, however the big question remains how the government will address social reforms in order to make the NTP a success.

Some of the country’s largest diversification projects will be tourism-led, most prevalently, Entertainment City. Covering 334 square km, the city will be almost the same size as Las Vegas and provide a wide range of leisure attractions and activities, including a Six Flags and a safari park. Backed by the PIF as its main investor, the project is set to open by 2022, and has been described by the Crown Prince, Mohammed bin Salman Al Saud, as “an important centre for meeting the future generation’s recreational, cultural and social needs in the kingdom.”* While we’re certain the function of these resorts won’t deviate too far from Saudi’s existing social etiquette, the government may have to consider relaxing existing laws in order to attract the relevant target audience, not to mention remain competitive with the numerous nations around the world who are contingent on similar diversification strategies. The logical place to start would be with the visa regulations. Currently, unless you are traveling for religious reasons, even acquiring a business visa can be difficult without a local sponsor. Other areas that require revision may include public dress code, gender segregation and policy on acceptable entertainment. Our guess is the code will follow a model similar to the UAE, which would allow most western cultural norms, excluding alcohol. Since the announcement of Prince Mohammed bin Salman being named as heir earlier this summer, his political approach to date would suggest that the country is heading towards a more moderate future, and certainly the recent decree allowing women to drive is further evidence of just that.

Another key area of interest as far as the NTP reforms go, will be the role given to the private sector, and how it will support government strategy. According to the Financial Times, “core elements of the original plan included privatising state assets, creating 1.2m private sector jobs and reducing unemployment from 11.6% to 9% by 2020.”

Certainly the arrival of REITs has provided greater accessibility for global investors. It’s worth mentioning that the emphasis isn’t on development – approximately 80% of all REITs are earmarked for income generating assets, so it doesn’t necessarily mean a lot of money will be pumped into development. So far the majority of investors in REITs are from Saudi and the wider GCC however we see Saudi’s REITs growing considerably. As a point of comparison, UAE has only two, whereas KSA has four or five, with plans to add more in the coming years. Certainly as an investment vehicle, it's proved to be popular with each of them being heavily oversubscribed. I would speculate that as the country’s NTP continues to evolve, supplying housing for its population, which unlike its GCC neighbours has a native resident majority of around 21 million people, will be a central commitment for the government.

Indisputably, the government’s requirement for economic diversification by using the country’s land more resourcefully is only likely to encourage the private sector to follow suit, making REITs an excellent vehicle for regional and international investors. 

*Quote from the Independent