Rethinking the building model to meet Saudi Arabia's housing demand

Given the constricted land environment, development costs and affordability issues in Saudi Arabia, some real estate firms are beginning to rethink the building model in the Kingdom. Indeed, from developing with greater height and density to rolling out fully serviced and planned communities, the built environment across the country is beginning to change.

Reconsidering The Villa

The Saudi market has traditionally been dominated by stand-alone villas, often developed individually by a family on their own plot of land. Given the available space in the country, and a population density ranking among the 25-lowest globally (at 14 people per sq km in 2013), this has hardly been surprising. However, with urbanisation and population growth continuing apace, the model of low building densities not only has cost implications for developers, but also presents a challenge for sustainable development and the rollout of public services.

Villas are still the preferred type of residence in the Kingdom. The mortgage portfolio of Deutsche Gulf Finance, for example, shows that 93.5% of its loans are for the purchase of a villa. However, there is a growing recognition that this is unsustainable in the long term. Indeed, at a growth rate of 2.6%, the Saudi population could reach 59m by 2040, nearly double the current size of 31m. While such a rate of growth may well not be maintained over the next 25 years, there is certainly going to be a significant increase in urban populations. Furthermore, the average household size in the Kingdom is falling, decreasing from 6.08 persons in 2000 to 5.84 persons in 2010. It is expected to drop further to 5.28 persons per household by 2020.

Benefits Of Density

While this will increase the requirements for homes in the country, it also means that the demand specifications for unit sizes will change and developers can look to building more densely. Indeed, recognition of the importance of density is taking hold among private sector real estate firms and public planners. For the former, where the cost of land can make up as much as 50% of the cost of development, building density is increasingly important as a means of maximising revenues and margins. For the latter, density is a crucial tool in lessening the burden on public services and developing sustainably. For example, both globally and within Saudi Arabia, it has been shown that raising building and population density reduces the vehicle miles travelled in a city. Furthermore, while higher density within cities increases the overall infrastructure costs, it reduces the costs on a per household basis, creating savings for public authorities.

End-users too are shifting their preferences based on cost-savings and convenience. “Saudis have swiftly changed their minds within the past five years when the demand for apartments was very weak. Today, young Saudis are looking at apartments, especially in mix-used communities, because it is affordable and the quality of services is higher,” Abdulaziz Y Al Babtain, president of Himmah Holding, told OBG.

Integrated Planning

New developments are now being planned to take such facts into account. The King Abdullah Economic City on the western seaboard, for example, will be a highly dense new urban centre, with a built environment of more than 21 households per ha, compared to 4-8 households per ha in the Dhahran Housing District in the Eastern Province.

Private developers are also beginning to work on bringing more integrated projects to the market. In February 2014, for example, the UAE developer Emaar Properties announced a memorandum of understanding with local firm Abdul Latif Jameel Group to create integrated property projects. Such developments would include a number of services and attractions in a community environment, including parks, mosques, health care provision and community centres. Other companies are looking at planned communities as a means of achieving strong returns on investment. In Jeddah, the Prince Sultan Centre is engaging private developers to support the construction of a $4bn mixed-use project, including a medical city, educational facilities, hotels and residential units, in the north of the city.

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The Report

This article is from the Real Estate chapter of The Report: Saudi Arabia 2015. Explore other chapters from this report.