Saudi Arabian hospitality sector offers attractive investment opportunity, Knight Frank says

Demand for Saudi Arabian real estate investment trusts increasing, real estate agency says

Saudi Arabia PMI dips in March as VAT dampens demand. Tasneem Alsultan / Bloomberg

Real estate investment opportunities abound in the Saudi Arabian hospitality sector despite the economic slowdown and increased property vacancies in general, according to the real estate agency Knight Frank.

"Looking at the real estate market performance across Saudi Arabia, the general trend is that most sectors have remained subdued on the back of a slow economic environment with negative sentiment weighing on activity levels," the real estate agency said.

"Generally, vacancies have been adversely impacted across most asset classes, along with a gradual softening of rents across the country. Nevertheless, some sectors still offer attractive investment opportunities for investors. The hospitality sector is a case in point."

Knight Frank said that the supply of hotels in the key cities of Jeddah and Riyadh remained heavily tilted towards five-star hotel developments with a lack of hotels in the mid-scale sector and that this represents an opportunity for developers. This is especially the case given a more relaxed attitude towards entertainment in the conservative Kingdom and plans to build 'Entertainment City' that will help the country become a more leisure friendly destination.

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The real estate agency also said that there was growing demand for real estate investment trusts (REITs) by investors after the approval last year of regulatory framework allowing REITs to be traded. REITs are traded like stock and bonds on exchange and distribute income from rental properties that they manage, typically commercial real estate. Since the approval of REIT regulation, six REITs have listed and they have outperformed the benchmark Tadawul stock index, Knight Frank noted.

"As the market matures, emergence of REITs is likely to assist in institutionalizing the real estate market in Saudi Arabia, providing a wider range of investors exposure to the commercial real estate market," the agency said.

"In turn investors will be able to take advantage of diversification benefits, long-term stability and potentially appealing returns from regular dividend income."