Saudi Arabia's capital markets are undergoing a period of rapid growth and transformation. We sat down with EFG Hermes’ Head of Research Ahmed Shams El Din (LinkedIn) on the sidelines of the Capital Markets Forum (CMF) 2025 in Riyadh to discuss the future of the Kingdom’s growing markets.

Shams El Din emphasized the role of regulatory reforms, institutional growth, and increasing foreign investment in driving this development. We also discussed the growing importance of M&A as a means to consolidate the market, particularly in the real estate sector.

Edited excerpts from our conversation:

Positive outlook on the Saudi market: We are really optimistic about the Saudi market right now. The Saudi economy is performing well, thanks to diversification efforts. Growth in the non-oil sector, driven largely by population growth and tourism, is exceeding our expectations. This has had a positive impact on the equity market, with increased demand and employment fueling this progress.

Increased foreign + institutional investment: Foreign investors now account for about 15% of daily transactions on the exchange, which is a big improvement. Ten years ago, retail investors dominated the market, making up 95% of turnover. Today, institutional investors represent around 25-30% of the market, which is a huge shift. This increase in institutional participation makes the market more efficient and liquid, and it's a result of regulatory reforms and increased openness to foreign investors. Saudi Arabia’s upgrades to MSCI and FTSE emerging market indices and the restructuring of the domestic asset management industry have all contributed to this positive change.

The sectors driving growth: The population boom has been a major factor in the rally of consumer stocks and the broader financial sector. Healthcare and ins. are also showing positive trends, thanks to ongoing regulatory reforms. Recently, the real estate and hospitality sectors have started to see growth, driven by significant activity in these areas.

Regulatory reforms in real estate: There have been some important regulatory changes in the real estate sector. Developers can now plan sales more easily, and foreigners can buy stocks in companies operating in Makkah and Madinah, which has created a positive sentiment around these stocks. More regulatory improvements are expected, such as changes to mortgage laws and better relations between buyers and developers, particularly in off-plan sales. This is a new concept for Saudi Arabia, as the market used to be dominated by land sales and cash-based transactions. The introduction of master-planned communities is giving buyers more financing options beyond traditional mortgages.

The next big thing for the real estate sector: One key development in the real sector would be to allow foreigners, particularly non-residents, to buy property directly, similar to the case in cities like Dubai. Currently, non-Saudis can buy property in selective cases, but must sell it back to a Saudi if they leave the country. Allowing foreigners to buy directly could create a more active secondary market, which is essential for boosting liquidity. This move would mirror what happened in Abu Dhabi, where relaxed regulations have led to a significant rise in unit sales, and it's something we expect to happen in the Kingdom as well. The real estate sector is set for even more growth, with many IPOs expected in the sector.

Supply and demand imbalance: While the demand is there, the supply side is still fragmented. There are a few established developers like Tadawul-listed Retal, but the focus on master-planned community development has only emerged recently. Larger conglomerates, such as Al Akaria, are involved in various sectors but haven’t focused much on community development.

The need for M&A and consolidation: The real challenge for developers is access to prime land, much of which is held by government entities or wealthy families. Smaller developers often lack the financial resources or access to land to capitalize on demand. To overcome this, consolidation will be necessary, reducing the number of small players and creating a few major companies with the financial muscle to drive large-scale developments. As the market becomes more sophisticated, having strong balance sheets will be crucial for developers. Partnerships with other developers, the government, and institutions like Roshn and the National Housing Company will also become increasingly important.

The booming construction and hospitality sectors: The Saudi construction and hospitality sectors are also poised for strong growth, with the region’s construction project backlog close to USD 500 bn, more than 50% of it in the Kingdom. Despite potential delays, there are substantial prospects for contractors, especially as the country’s fast-paced development continues. The competitive landscape is encouraging, and we expect more contractors to list their companies, which will deepen the market and boost investor sentiment.

Shift toward bottom-up funding: Traditionally, Saudi Arabia’s economy has been supported by top-down funding, with oil revenues and the Public Investment Fund (PIF) investing in key sectors. However, as oil prices fluctuate, there’s a shift toward bottom-up funding. This means developing a more active secondary market for private debt and encouraging individual investors and family offices to fund startups and other economic ventures. This could be a key chance for the fintech sector, which we’re very excited about. We expect to see more investments, from peer-to-peer lending to investment funds and ETFs.

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