Real Estate Investments in Riyadh

Real Estate Investments in Riyadh

Riyadh is the largest city in Saudi Arabia and most of the government is conducted from there.  Previously, Saudi Arabia was not cautious in reinvesting the money earned from petroleum exports in the real estate.  In the 1990s, after the recession, the Saudi government passed a Foreign Investment Law in April 2000. The law was to encourage non-foreigners who were legally resident in Saudi to own property provided the ministry of the interior gives them a license. Besides, the acquired could not be sold before five years has elapsed. However, foreigners were forbidden to acquire real property in the holy cities of Medina and Mecca. Reports by National Commercial Bank Capital (NCBC) indicated the prices for the house rose by 13.7% per year between 2002- 2005 per year, while land prices increased by 16.5% annually.

The introduction and implementation of expat dependent tax in 2017 saw the expatriate leave the country. The new tax legislation required expatriates to be paying tax for every dependant they leave with, including children, spouse and parents. That means it discouraged expatriates from leasing the property and the demand for housing declined. Consequently, in Riyadh, apartment rents decreased by 1% and villa rents by 2% for the last quarter of 2018. Reports by KPMG indicated the rental rates are anticipated to drop in 2019.

The government’s social, economic and legislative initiatives have led to an increase in the supply of real property.  The government has strategic Vision 2030, which encourages investment in real property. The government supports the initiative by building enabling infrastructure projects such as Red Sea development for tourists and Riyadh Metro. However, there are concerns for oversupply, leading to further decline in rental rates.

Between January to November 2019, the number of contracts to develop individual residential mortgages recorded a growth rate of 250% as compared with the same period last year. The supply of residential units was 1,290,000 in 2019, and additional 111,000 units are expected to be delivered by 2023.

The government of Saudi Arabia expects to open the Qiddiya entertainment project in 2023; the project will boost the tourism sector. Currently, Riyadh has approximately 17,700, inadequate hotel rooms. However, there are plans to open 4,500 more hotel rooms by 2023.

The government initiatives programs to reinvest in real estate investments will lead to an increase in housing units. The government has plans to have various projects to ensure the country realizes Vision 2030. The price of real properties and rental rates will be expected to decline due to oversupply. However, the government has projects to encourage tourists to visit the country.

Answer 2

Comparable Property 1

Comparable Property 2

Comparable Property 3

Comparable Property and Subject Property

In comparable property, the method uses direct comparison with other similar properties.  The principle implies there must be a substitute property, and the cost should not exceed that similar property. The appraiser should be aware of the current market and available similar properties within the same location. The appraiser should look at the differences that exist among similar properties such as physical, legal, economic characteristics, listings and comparable sales. Also, differences may arise because of the sale dates, financing, and motivation of the parties. The appraiser should particularly search for the most recent sale; information can be obtained from the agent, vendor or the purchaser.

Real properties are unique and difficult to find an identical property; comparable properties do require to be adjusted to reflect any dissimilar characteristics to the subject matter.  Through the analysis from the market, it will show the direction and size of the adjustments. The appraiser needs to determine the paired sales and eliminate some of the components such as location or condition. In making adjustments for comparables, consistency has to be adhered among the comparables for it to systematic and logical.

Advantages and Disadvantages of Direct Comparison Approach

Advantages

• The method is easily understood and can be explained.
• The method incorporates the actions of sellers and buyers and therefore estimates the market value of the property.

Disadvantages

• In some cases, it is challenging to find comparable sales; they can either be non-existent or few in numbers.
• Challenges may results while making comparisons between locations and properties.
• The price given is always historical price and may fail to reflect the current price.
• A comparison approach cannot be applied to special purpose properties, such as churches and government properties.

Procedure in the Comparison Method

• Identification of elements for comparison and adjustments to make.
• Selection of comparable sales; these are similar properties in the locality.
• Adjustment of comparable sale to the subject matter sales price.
• Reconciliation of the comparable sale price with the value indicated in the subject matter.

Adjustments to Comparable Property

If the comparable property is less than the subject matter, adjustment is made by adding the sales price of the subject matter. In contrast, if the value of the comparable property is greater than the subject matter, the adjustment will be made by deducting the value of the subject matter.

Other items that require adjustments include location, market condition (time), physical characteristics, economic characteristics, use and non-realty items.  Comparable sales will indicate varying prices due to location. Market prices may change over time due to the demand and supply of comparable property. Physical characteristics will include items such as condition, age, quality, landscaping and size.  Economic characteristics reflect issues that influence the profitability of the property.  The use of property may be regulated by the building codes, government or by-laws. Non-realty items include items that are not directly involved in the property, such as business concerns and personal items.

In the study case for the three comparable properties, the adjustments should be made in respect of age of the property, street width, number of bathrooms, size of living rooms, number of bedrooms, street directions and the size of the property. Besides, other matters such as right, financing and condition for sale should be considered.  After the adjustments of comparable property and should be compared with the subject matter and corrections to be made.