Saudi rental prices predicted to fall as building permits grow 213%

The Saudi Arabian Monetary Agency (Sama) has predicted a decline in residential rental prices owing to the expansion in residential construction by both the public and private sectors.

The report also expected construction costs to drop due to the noticeable decline in the price of building materials such as iron and cement.

Currently, Saudi Arabia is witnessing a decline in inflation pressure indexes. This has forced property owners to lower rents as of next year's first quarter. The Saudi government previously announced its endeavour to curb inflation which has been one of the most difficult economic challenges.

This indicates that there is a price correction process especially as the rise in rent is considered to be one of the primary causes of inflation and its decline is an indicator of the drop in prices in all Saudi cities.

Rental prices expected to fall 20%

Entrepreneurs expect rental prices to drop by approximately 20% in the mid first quarter of 2009 as many property owners will need liquidity in the upcoming period. This is because a number of property investors have been hard hit by the financial crisis.

Real estate experts have said that the decline of inflation will get prices back to normal in the sector, which reflects the required rental prices. Demand has also fallen as the number of available units increases.

Real estate investors have stressed that there is high demand on property units up for sale. However, the rise in prices, which was driven by inflation, curbed the demand and forced tenants to turn to older buildings and apartments and renovate them. This in turn caused the prices of those units to rise and to experience high inflation rates.

The rental prices of new, medium sized apartments in the Saudi capital are between SR30,000 and SR50,000. Prices of such apartments in the western city of Jeddah are between SR25,000 and SR45,000. Prices in the eastern area of the kingdom are lower (between SR20,000 and SR35,000).

Lately, Saudi Arabia has been witnessing successive increases in rental prices which exacerbated inflation rates. This in turn put a challenge for financial departments in the government that admitted that it was difficult to curb inflation rates because of global economic growth.

Fall in construction costs

The recent financial crisis however put a strain on the global economy and led to a decline in the prices of construction material and to losses in international investments. This has created new activity in the Saudi property market.

Despite reassurances by Saudi real estate experts that the Saudi market is strong and immune to financial crises, they have acknowledged the impact of the global financial turmoil. They expect the market to enter into a provisional stagnation, indicating that the crisis does not only bring about negative influence but there are favourable aspects such as the decrease of property prices by 20%.

Saudi cash reserves amount to SR1.3 trillion

Economic experts say that the volume of cash reserves in the kingdom, which amount to SR1.3 trillion, alleviates the impact of the crisis and promotes its status as one of the largest financial centres in terms of reserves. They have ruled out the possibility that the national economy will be influenced the global crisis in light of the large volume of reserves.

The kingdom has learned from past experience that oil prices fluctuate and are unreliable. Therefore, the country has made sure that there provide sufficient reserves in time of prosperity to be used in times of crisis.

In a recent inflation report issued by Sama it was pointed out that many domestic and foreign factors including the current financial crisis will lead to a decline in inflation levels within the upcoming period.

Despite higher spending in both the public and private sector to enhance economic development, there are several other indicators supporting expectations that Saudi inflation levels will drop as of the fourth quarter of this year.

Regarding housing sector, the rush of rental price rises will lose momentum in the coming period due to the noticeable expansion in the area of residential buildings by both the public and private sectors.

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