Saudi Arabia: Residential segment heating up

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With a new mortgage law in the works and government plans to spend nearly $70bn on low-income housing, Saudi Arabia’s real estate market appears on track for a period of expansion.

According to a report issued in early June by property consultancy Jones Lang LaSalle, the Saudi real estate sector should see strong growth through the rest of this year, with momentum continuing into 2012 and beyond. This comes on the back of improved economic conditions, with real GDP projected to increase by 5.7% in 2011.

The residential segment is expected to be especially strong. With a young and growing population, housing supply has often lagged behind demand. This in turn has pushed up prices of residential units, often beyond the reach of potential homeowners.

The housing shortage may soon be eased, however. In March, King Abdullah announced a government programme to build 500,000 low-cost housing units. This SR250bn ($67bn) scheme would not only put roofs over many heads, it may also create demand for retail and commercial facilities to serve new residential developments.

Even with 500,000 new units, this housing stock expansion may not be sufficient to meet demand, at least according to some estimates. A recent report by Banque Saudi Fransi said that 1.65m new residential units would be required by 2015, with the burgeoning middle class generating much of that demand.

The residential segment should be given a further boost when a new legal framework governing the mortgage market comes into effect, although it is as yet unclear when exactly that will be. The new mortgage law, which has already been approved by the Shura Council, will cover five topics: mortgage registration, real estate funding, finance companies, financial leasing and enforcement. The law will still need to be approved by the Council of Ministers, before it can be implemented, however.

The mortgage market could be sizeable, which would be welcome news for Saudi banks. According to research by financial services firm Credit Suisse, some 52% of Saudi households meet the affordability threshold for purchasing residential property, and 17% would be potential mortgage seekers. The overall size of the mortgage sector could potentially amount to as much as $240bn, or 23% of GDP, in a decade.

The outlook is not quite as rosy in some other segments, however. For example, in the office segment, a substantial amount of new space has come onto the market recently, reducing the appeal of older properties. According to Jones Lang LaSalle, total office stock in Riyadh (across all locations and grades) is about 3m sq metres, with approximately 70,000 sq metres having been added during the first quarter of this year. Moreover, there are plans for an additional 630,000 sq metres of office space over the next two years.

This excess of space may discourage investors from putting capital into new commercial developments, although given the expected growth in the economy in the coming years, fuelled in part by the government’s investment programme, any oversupply will likely be absorbed in the medium term.

However, in the meantime, the vacancy rate in the capital’s central business district stands at around 18%. With additional supply coming onto the market in the near future, this rate is not expected to decline for some time, and rents are expected to continue to fall during this year and into the next.

This could in turn have an effect on the appetite for new commercial projects. John Harris, the co-head of Jones Lang LaSalle Saudi Arabia, is of the opinion that while the overall outlook for the real estate sector is positive, it might be some time before the next wave of commercial developments gets off the ground.

“For project developers it would certainly be very risky to embark on new office projects right now,” he said in an interview with Gulf News on June 9. “You would be very hard pushed to go into one of the banks and get funding. That would be a very hard sell.”

Although developers may find it difficult to source financing for commercial projects in the short term, they will not be left without opportunities thanks to the coming housing boom. While the office door may be shutting, at least for now, the residential segment is putting out the welcome mat.

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