The start of the year saw an escalation of the sectarian strife between Saudi Arabia and Iran, threatening to plunge the Middle East –a region marred by economic and social upheaval – into deeper turmoil. In early January, Saudi Arabia severed diplomatic ties with Iran after protestors – in retaliation to the Saudis’ execution of a Shiite cleric – set fire to the Saudi Embassy in Tehran.
The political conflict’s immediate impact on the real estate investing sentiment in the Middle East, however, appears negligible. Far more pressing, real estate investors tell PERE, is the economic paralysis caused by tanking oil prices. At press time, Brent Crude fell below $28 a barrel, the lowest level since 2003.
“Everyone is so used to it here,” said Matthew Green, director and head of research, CBRE Middle East, referring to the simmering regional tensions. “It has been going on for 13 to 14 years, just in different locations and at different times. People move on. It is the oil prices that is affecting economies.”
In the Middle East, falling oil prices is creating an “unprecedented budget crisis,” according to Neil Blake, head of EMEA Research, for CBRE. Saudi Arabia’s real estate sector is believed to be more development-led and the oil price drop has led to curbs on state spending on social infrastructure projects, which in turn is impacting property development.
“Western investment in the Middle East tends to follow development. Development projects are partly financed by the government and partly financed by foreign investors,” Blake explained.
Real estate deals in Saudi Arabia were already in decline even before its latest conflict with Iran. The total transactions in the country’s residential sector amounted to SAR 16.6 billion (€4 billion; $4.4 billion) in November 2015, a 38 percent drop over the same period in 2014. Meanwhile, the commercial sector recorded deals worth SAR 7.5 billion, reflecting a 47 percent drop, according to local news reports.