The volatility in oil prices witnessed since the second half of 2014 ushered in a new economic landscape in the Middle East ... and particularly across the Gulf states. Lower export revenues put pressure on spending, forcing governments to rethink their economic strategies and tighten their fiscal policy as they adapt to lower oil prices.

In Saudi Arabia, the response has been a series of wide-ranging reforms aimed at diversifying the economy and encouraging a more productivity-led model. Saudi Arabia’s Vision 2030 and the ambitious targets set out in the National Transformation Plan (NTP) call for a shift from a state-led economic system to a more open market structure driven by the private sector. While we welcome this as a step in the right direction, nurturing the resources driving this reform such as institutions and human capital is crucial and should be viewed as a priority.

The commercial market in Saudi Arabia remained subdued throughout 2016 as both local and international occupiers underwent structural and operational changes. Investors continued to shy away on the back of a lack in quality stock and market opaqueness.

In the long term, the opening of the Saudi stock market to foreign investors is likely to dampen volatility, improve liquidity and lead to the overall maturity of the market. In addition, efforts by the Capital Markets Authority (CMA) to regulate the listing of real estate investment trusts (Reits) are expected to encourage internationalisation and offer real diversity in product.

Emphasis on the housing sector in the kingdom has been the keystone of government initiatives following the Arab Spring in 2011. Since then, various regulatory efforts at improving accessibility to real estate have been underway. These measures are faced with an ongoing shortage in housing supply. While the approval to levy a 2.5 per cent “white land tax” on undeveloped plots within urban boundaries could encourage more projects, the impact of this is yet to be seen.

Looking ahead, 2017 is expected to see a more selective approach to the development of residential projects. Lower oil prices, reduced liquidity and a tightening budget are likely to see a re-prioritisation of projects, with direct emphasis on the delivery of affordable housing and other critical infrastructure.

Benefiting from a more diverse economy, the UAE, particularly Dubai, has been better positioned to weather the impact of lower oil prices. Despite that, a number of cautionary measures were taken to avoid a budget deficit, namely the removal of energy subsidies and the levying of additional fees on services. These however resulted in sizeable shifts in relative prices since 2011, with headline inflation rates increasing from 0.8 per cent in 2011 to 4 per cent in 2015.

Coupled with the appreciation of the US dollar, household disposable income tightened and purchasing powers reduced. The slowdown in the economy and subsequent cutbacks in the job market have dampened the performance of the commercial market. In Abu Dhabi, waves of consolidation have been announced between government and related entities. In Dubai, while international occupiers remain committed to the region, they have chosen to restructure rather than expand their operations. In turn, the investment market remained subdued on the back of a shortage in investment grade stock.

The commercial market is expected to pick up in 2017 as businesses settle to the new norm in oil prices, and blue-chip occupiers expand or set up businesses in the UAE ahead of the anticipated rush in orders in the lead up to Expo 2020. In our view, the long-term potential for corporate taxes may not impact overall demand.

On the investment side, the expected delivery of more quality grade product and improvements in rules are likely to attract corporate and institutional investors.

The residential market in the UAE witnessed sluggish growth throughout 2016. The slowdown in transactional activity on the back of negative sentiment continued to weigh on performance with sale prices dropping in Dubai, albeit at a slower rate than the previous year.

This leads us to believe we are reaching the bottom of the cycle. In Abu Dhabi, sale prices maintained their stability on the back of limited investment quality stock.

We expect the residential property market to gradually recover in 2017. Government commitment to spending on infrastructure that further promotes the tourism and hospitality market and the realisation among developers of the need to phase out projects in line with demand to avoid an oversupply lead us to believe the real estate market has become more mature and resilient.

— The writer is with Knight Frank M.E.