An underserved market: Making affordable housing attractive to investors

One of the biggest domestic issues facing Saudi Arabia at the moment is the supply of affordable housing. It presents both a challenge and an opportunity. It is a challenge because the housing shortfall is substantial and shows little sign of diminishing, but it also presents an opportunity in that a whole new market can be created for developers providing a much needed supply of quality housing stock to the low- and middle-income segment of the market. To achieve this, the state is not only embarking on its own construction programme, but it is also looking to encourage private sector participation in the affordable housing drive.

By The Numbers

According to the National Commercial Bank’s (NCB) 2012 “Saudi Housing Review” report, the total housing stock in the Kingdom is expected to increase by 2.4m units over the next 10 years, with demand rising from 195,000 units in 2011 to 264,000 units in 2020. This increase is being fuelled by demographic growth and changing habitation patterns. According to NCB, the population will reach 37m by 2020 (up from 29.2m in 2012, according to the Central Department of Statistics and Information) and the average household size will decline to 5.28 persons per unit (down from 6.08 persons per housing unit in 2000, and 5.84 persons in 2010). As such, the total housing stock is expected to reach 7.08m units by 2020.

This illustrates the size of the task facing the construction industry in the next decade and the price pressure that will likely remain in the rental and middle-income segment in the interim. This situation is complicated by the fact that demand is not spread evenly throughout the country. Indeed, the heaviest demand is concentrated in the Makkah, Riyadh and Eastern Province areas. According to NCB, 66% of the country’s residents are living in these regions, while these areas account for 67% of the total occupied housing stock in the Kingdom.

Meeting Demand

The government therefore faces a serious challenge in catering to population-driven demand and the need to regenerate the national housing stock. In the last two years, several government agencies have announced a number of initiatives to address the housing issue. For example, in March 2011 King Abdullah bin Abdulaziz Al Saud revealed plans for a SR250bn ($66.65bn) spending programme to build 500,000 new houses in the Kingdom. At the same time, he announced that the loan size offered by the Real Estate Development Fund (REDF) would be increased from SR300,000 ($80,000) to SR500,000 ($133,300). The programme is overseen by the newly created Ministry of Housing, and in November 2011 the ministry announced that it had selected US developer Parsons to master-plan the project. Built over 32m sq metres of land, the programme has been broken down into 11 developments on sites ranging from 729,000 sq metres to 10m sq metres in size.

The government has also announced a number of other measures to support housing growth throughout the Kingdom. One of the most crucial will be the construction of four economic cities (see analysis). These greenfield projects will not only bring new supply to the market, but, as infant economies in their own right, they will also draw away demand for housing in established centres where the property market suffers from excess demand and high prices.

Pressing Need

These measures should help alleviate the current shortfall, which global real estate firm Jones Lang LaSalle estimates at 1m housing units. However, by themselves they will not be able to completely eradicate the housing gap and are unlikely to address the fundamental issue of affordability in the domestic market in the long term. According to Ergo, a US-based advisory and intelligence firm, currently only 30% of Saudis own their own house. This compares to 65.4% in the US, according to the US Census Bureau. The main impediment to greater homeownership in the Kingdom is the issue of affordability. The recent report by NCB finds that the affordability ratio (the average income to the average house price) in Saudi Arabia is 7.6. In the US, the average house price is only 3.4 times the average annual income of a citizen. In Saudi Arabia, the average annual income is $18,851, according to the General Organisation for Social Insurance, while the average house price is around $144,000, according to NCB – equal to 7.6 times the average income.


There have been attempts to address this issue by bolstering the environment for housing credit. The home loan market is certainly in its infancy in the Kingdom, a situation that makes it even more difficult for Saudis to get on the property ladder.

According to the Saudi Arabian Monetary Agency (SAMA), the country’s central bank, real estate and construction loans accounted for just 7.1% of total bank credit in 2010, while home loans specifically accounted for just 2.8% of total bank loans. The government itself has tried to facilitate lending to local families by changing the regulations regarding REDF loans. Not only has the loan size been increased to SR500,000 ($133,300), but the eligibility criteria have also been changed so that all Saudis, irrespective of whether they own a plot of land, can apply for them.

The government has also attempted to encourage private and commercial participation in the home loan market. In July 2012 the government introduced a much anticipated mortgage law designed to ease uncertainty surrounding foreclosure and the legal rights of lenders such as banks and other home loan companies. The full details of the legislation have yet to be released. Nevertheless, early signs are positive and encouraging, with the financial industry seemingly increasing its confidence in the viability of the home loan market. According to SAMA, mortgage lending increased 83% in the second quarter of the year to SR48bn ($12.8bn), compared to the same period in 2010. Once the particulars of the law become clear, this figure is likely to increase even more dramatically.

This will help the demand for housing, but the supply side still remains a problem. The main issue is the lack of private sector involvement and funding in this segment of the market. In total value, affordable housing should excite developers. According to global consultancy McKinsey, working on the basis of a unit price of $720 per sq metre, the scope of the affordable housing supply in the Kingdom has a value of $36bn. This is sizable for an underdeveloped real estate market.

Balancing Prospects

However, the problem for private developers seems to be bringing a house to market at an affordable price while also turning a profit. With a Jones Lang LaSalle survey in the last quarter of 2011 finding that 58% of Saudi Arabian households have an average monthly income below SR5000 ($1333), the sales price in the mass market, even with the emergence of a viable system for mortgage lending, would have to be reasonably low (perhaps up to a maximum price of SR720,000, $19,000 with a monthly payment of SR2000, $533). According to developers and analysts, the cost of construction makes it hard to bring units to market in that price range.

NCB’s 2012 report stated, “The lack of affordable housing continues to be a challenging issue, especially the limited ownership of modern homes (villas) by Saudis. In addition, the artificially high prices of land plots, which are increasingly sought after as a long-term investment options by high-net-worth Saudis, are accessibly limited to Saudi citizens and home developers.”

In Need Of Land

Indeed, it seems that the land market is the main impediment to affordability. In the wake of the financial crisis, local investors have been putting capital into land with no intention of building on it. In Saudi Arabia’s biggest urban areas, the tight supply of land has continued to push land prices upwards. According to a report by global real estate services firm Colliers International, for example, land prices in Jeddah increased by as much as 30% in 2011 and land now contributes as much as 50% or 60% to the overall cost of development. Even in more rural or less developed areas, where social housing could indeed be constructed, the lack of serviced land means additional infrastructure costs for developers.

Therefore, affordable housing currently remains largely under the purview of the government and public sector bodies. Great strides have been made in bringing additional supply to the market, and both the 500,000 units under the stimulus package and the gradual development of the four economic cities will help to ease supply constraints. In the longer term, however, the entrance of private players into the funding and development of mass housing projects would ease the burden on the government and help to develop a more sustainable market at the lower end of the spectrum.

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