Meeting demand: By streamlining regulation the government aims to accelerate home building

Although infrastructure upgrades are supplying the construction industry with the biggest share of its projects, housing will remain an important source of work in the coming years. According to Kuwait Finance House, real estate projects account for 35% of ongoing construction projects in Saudi Arabia. With the government keen to bridge the housing gap and support home ownership in the country, plans are in place for an ambitious and extensive house-building programme.

According to an NCB Capital report, total housing stock is expected to expand by 2.2m units in the eight years to 2020, with annual demand rising from 186,000 units in 2011 to 265,000 units at the end of the period. By 2020 the total housing stock is expected to reach 7.1m units for a population of 37m, up from 4.6m units in 2010. This rapid increase in residential units will provide ample opportunities for the contracting industry as well as real estate developers. It should also help the Kingdom deal with the significant housing shortage.

Supporting Supply

Over the last four decades housing supply in the Kingdom has been supported by the Real Estate Development Fund (REDF). The organisation, which was established in 1974, offers interest-free loans to Saudi nationals to purchase or self-build homes. While the capital and loan book of the fund has increased substantially in the last five years, the REDF has thus far been unable to make a significant dent in the housing shortage. Indeed, the waiting list for an REDF loan currently stands at around 2.7m applicants.

As such, the government has decided to empower the Ministry of Housing (MoH) to help address the problem of affordability and housing supply. From 2014 the ministry is taking over the responsibility of assessing applications for the REDF’s SR500,000 ($133,300) housing loans, although the fund will still be responsibility for disbursement of the loan. With the MoH keen to involve the private sector in meeting housing demand, this move should benefit the construction industry. The government has already taken a number of steps that will lead to a raft of new construction contracts hitting the market. For example, the MoH has been allocated a budget of SR250bn ($66.7bn) to build 500,000 new housing units. While achieving this objective will be a long process, Mohammed Alzamea, deputy minister of planning and study for the MoH, said, “The plan is still in progress and we are committed to it. We hope to exceed the 500,000-unit target and are looking for more support from banks to achieve this.”

Within the overall goal, the ministry is currently concentrating on projects that should bring just over 160,000 housing units to the market in the coming years. The first phase of this is delivering 17,000 ready-made housing units, of which 20% has already completed. The ministry expects to deliver 50% by 2015.

Land To Build On

The second and third phases of this initiative will provide developed land for housing rather than homes themselves. The land will be supplied across 91 sites in the Kingdom. In phase 2 plots for some 44,000 units will be made available to eligible citizens, with a further 100,000 units offered in phase 3 of the programme. The MoH started preparing the sites in the third quarter of 2013 and expects full delivery of all land in the first quarter of 2016.


In January 2014 the ministry launched the criteria for accessing units and plots under this programme. It stated that to be eligible applicants must meet three main factors: they must have dependents, must not own suitable housing already and must not have previously benefitted from a support programme.

The ministry is also working on a points system, largely based on income and age, to determine priority access to units and land plots. However, state support is not simply targeting low-income Saudis. “At a policy level, we have committed to providing a distribution that maintains a very heterogeneous community,” Alzamea said. “We do not want these projects to acquire a label of any nature. There should be a balance between high-income and low-income recipients.”

The average income segment for recipients of government support is estimated to be around SR10,000 ($2666) per month, but the new communities will cater to all facets of Saudi society. As such, the MoH is keen to get the private sector on board to give applicants a choice in the housing by encouraging the private sector to offer a range of building options for citizens that have acquired land under the scheme. This will present substantial opportunities for real estate developers and private construction firms to participate in the government’s house-building programme.


This is all part of the strategy to bring responsibility for housing policy under the roof of the MoH as the coordinating and responsible body driving residential supply in the coming years. It will accept applications for housing loans and land allocations, with the latter capped at a maximum of SR150,000 ($39,990), repayable over 25 years (as with the housing loans currently administered by the REDF). However, given that the ministry will not be able to accept more than 25% of an applicant’s monthly income in repayments, it will not be able to offer full loans on housing and land to anyone earning less than SR8000 ($2133) per month, assuming full repayment in 25 years. If the loan is simply for housing, the programme could reach applicants earning just above SR6000 ($1600) a month.

The MoH began by accepting applicants in the southwestern city of Jizan as a pilot scheme before rolling out the programme to the rest of the country in March 2014. Speaking in late February, Alzamea told OBG, “The level of interest is very high as every citizen is looking for a house. There is limited opportunity to own a house without support from the government.”

Land Availability

The ministry’s ability to meet its supply targets will be critical over the coming years. Once again, the biggest challenge to this is likely to be land availability and pricing. According to Alzamea, the MoH has so far received between 40% and 50% of the land bank it has requested and estimates that it will need a minimum of 500m sq metres to achieve its aims. The ministry has received more land than it needs in some locations, while in others land has been harder to acquire. Accelerating this process of land acquisition will involve the MoH working with the private sector by offering loans and logistical support to utilise empty land. A programme for this will be launched by the end of 2014, according to Alzamea. In addition, the ministry has also contracted consulting group McKinsey to help draw up proposals for land regulation. The objective is to encourage owners to make use of idle land. As such, the regulation could include the imposition of zakat (religious levy) on lands in the Kingdom.


The other major issue for affordability is building density. In much of the Kingdom, construction has been carried out horizontally, leading to sprawl and high development costs. However, given historical trends and customer preferences, the appetite for apartments remains limited. The ministry is trying to shift this expectation to some degree. For example, Alzamea highlights a Riyadh development in which 25% of units will be in apartment blocks and the rest in villa developments. This is still a low ratio for a government-led housing project, but the ministry is well aware of the socio-economic problems that are often associated with mass housing projects and working to avoid these. “We like to give our citizens the choice in designing their house. We do not want to have our communities labelled as ghettos,” says Alzamea.

This should give private players opportunities to engage in the government scheme. However, the cap on applicant loans and the government budget for units, coupled with a reluctance to build vertically, may present a challenge for developers and contractors keen to maintain margins. The construction cost for MoH units works out at SR1800 ($480) per sq metre. While this is at the lower end of construction costs in the market – they can go up to SR2500 ($667) per sq metre – it still should allow developers and contractors plenty of scope to sustain reasonable margins. Indeed, given the provision of land and a potential client base by the MoH, the opportunity to partner with the government is likely to be highly sought after by private players looking to take advantage of state support in this market.

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The Report: Saudi Arabia 2014

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