Saudi Arabia’s residential housing segment underwent significant expansion in 2019 following several years of muted growth. The government has been the primary driver of this recent uptick in activity, launching a number of regulatory reforms and financing initiatives to increase the availability of affordable housing. Current trends in the segment include an expanding mortgage market, more first-time buyers and the development of large-scale housing projects. On the commercial side, major entertainment projects are driving growth, with positive trends expected in the coming years. The real estate market as a whole has also seen growing involvement from the private sector.
Structure & Oversight
Overseeing the sector is the General Real Estate Authority (GREA). The body was previously known as the State Property Department and possessed a more limited mandate, but underwent conversion in late 2018. The current role of GREA includes overseeing the management of state property assets, devising real estate policies and promoting business development with the private sector. The Ministry of Housing (MoH) serves to stimulate real estate supply through a planning, organising and facilitating role. The MoH owns significant quantities of land and works to develop both public and private sector assets by engaging with private developers. Other prominent players in the sector include the Public Investment Fund (PIF) – the Kingdom’s sovereign wealth fund – which oversees state funding for major construction projects in the country, including housing.
The Real Estate Development Fund (REDF) is a government lending initiative that reports to the MoH. In recent years it has created several affordable housing products to increase the homeownership rate of citizens. Meanwhile, the Saudi Real Estate Refinance Company (SRC) was established by the PIF in 2017 to help develop the country’s housing finance market in line with the objectives of Vision 2030. It has been tasked with increasing liquidity in the mortgage market, and providing capital and risk management solutions to lenders to enable them to offer more finance options.
The country has a target to increase homeownership to 70% by 2030 as part of the Vision 2030 strategy. To support the government in achieving the objectives laid out in Vision 2030, the Council of Economic Affairs and Development formulated 13 Vision Realisation Programmes (VRPs). Launched in 2017 the Housing VRP included a number of targets to be met by 2020. These included rapidly expanding the supply of affordable housing units and increasing the share of homeownership among Saudi citizens from 47% in 2016 to 60%. As part of the VRP, the government set itself the objective of raising total outstanding mortgage loans from SR290bn ($77.3bn) in 2017 to SR502bn ($133.8bn) and reducing average residential unit prices from 10 times the average annual income in 2015 to five times. It also aimed to raise the annual growth of the real estate sector to 7%.
After a period of muted growth since 2014, performance was observed across the sector in 2019, with expansion in the residential, hospitality and retail segments. According to the General Authority for Statistics (GaStat), the real estate sector contributed SR210bn ($56bn) to the economy in 2019, representing 7.06% of total GDP and 9.4% of non-oil GDP at current prices, while in real terms the sector grew by 3.4%. This expansion was broadly in line with overall growth in the non-oil economy, which grew by 3.3% in 2019 – its fastest rate since 2014.
Furthermore, 2019 saw the real estate price Index turn positive after four years of declining prices. According to the latest index by GaStat, prices saw a 0.5% increase between the fourth quarter of 2018 and the same period of 2019. The residential sector saw a 0.7% increase, represented by 0.7% growth for residential plots and 2.5% for apartments. The commercial sector, for its part, saw a decline of 0.1% that included negative growth of 0.1% for commercial plots and 1.9% for galleries and shops. In a positive sign for commercial real estate, the wholesale and retail trade, restaurants and hotels segment drove a significant portion of the increase in non-oil GDP in 2019, expanding by a collective by 6.27%. However, momentum across the sector is expected to slow due to lower economic activity in the wake of the Covid-19 outbreak in 2020.
In 2019, 92% of the value of total real estate transactions were in the administrative regions of Riyadh, Makkah, Medina and the Eastern Region. Residential properties represented 65% of the value of all real estate transactions, while the commercial segment represented 31%. Agricultural lands represented the remaining 4%. In Riyadh’s northern districts, rapid urban development of both residential and commercial space is continuing to take place. Global real estate firm Century 21 estimates the city is expanding northward by around 1km every five years. As of November 2019 there were 17 real estate investment trusts (REITs) listed on the Saudi Stock Exchange (Tadawul), with a total capital value of $3.7bn. This represented a 61% increase from $2.3bn in the first quarter of 2018, when the market consisted of 12 REITs.
The availability of land for development has been increasing throughout the country. In 2017 a white land tax was introduced to push landowners to develop unused plots for residential use. The tax imposes a 2.5% annual levy on undeveloped urban plots. This has helped drive growth, as owners who were holding land are now incentivised to build on or sell their plots. As of December 2018 tax payment orders for 400m sq metres of undeveloped land had been issued by the MoH, and SR450m ($120m) of collected white land tax payments had already been used to finance housing projects in a number of cities. “The white land tax is good news for the sector, and we have already seen early results of the policy,” Abdulaziz Al Babtain, CEO of Himmah Group, told OBG. “However, more incentives should be put in place to increase new developments.”
Overall, residential housing supply in Riyadh and Jeddah remained largely unchanged in 2019, reaching 1.24m and 836,000 units, respectively, at the end of 2019, according to data from real estate consultancy Knight Frank. Nevertheless, this housing stock is estimated – by the same source – to reach 1.34m and 872,000 by the end of 2022. Meanwhile, stock in Dammam reached 325,000 units and is expected to rise to 348,000 over the same period.
Authorities are emphasising the need to close the gap between supply and demand of housing units, especially in major cities. The country is facing a shortfall of between 100,000 and 200,000 homes each year, with particularly high demand among the growing Saudi population. In 2018 nationals numbered approximately 20.8m out of a total population of 33.4m, a figure that is set to rise to 40m by 2030, signalling a pattern of consistent housing demand over the next decade. In Riyadh the volume and value of residential transactions rose by 5% and 36% in 2019, respectively. Jeddah saw increases of 9% and 1%, while Dammam saw a decline of 1% in the volume of transactions and a 4% rise in their value. Riyadh saw average sales prices of SR3775 ($1006) per sq metre for villas in the fourth quarter of 2019 and SR3264 ($870) per sq metre for apartments, representing an increase of 6.6% and 3.6%. In Jeddah prices reached SR5547 ($1479) per sq metre for villas and SR3786 ($1009) per sq metre for apartments, while in Dammam prices reached SR3508 ($935) and SR2905 ($774) per sq metre. According to figures from Century 21, average construction costs for villas in Saudi Arabia in 2019 ranged from SR1700 ($453) per sq metre for a low-asset class unit to SR6500 ($1733) per sq metre for a first-class unit in a residential compound. Meanwhile, the cost of building an apartment ranged from SR1800 ($480) to SR4300 ($1146) per sq metre.
Saudi Arabia’s mortgage market witnessed rapid expansion in 2019. According to data from the Saudi Arabian Monetary Authority (SAMA), the country’s central bank, 179,217 residential mortgages were offered to individuals that year, with a total value – excluding interest – of SR79bn ($21.1bn). Of this total, 95% were provided by banks and 5% by financing companies. This represented a dramatic increase from previous years, with 2018 seeing 50,496 mortgages worth SR29.5bn ($7.9bn). Furthermore, 80.6% of funding went towards villas in 2019, 12.4% to apartments and 7% to residential lands. Commercial mortgages also increased from SR255bn ($68bn) in 2018 to SR317bn ($84.5bn) in 2019. This included SR215bn ($57.3bn) in retail mortgages and SR102bn ($27.2bn) in corporate mortgages. In 2019, 93.7% of commercial mortgages were provided by banks and 6.3% by financing companies.
Since 2017 the MoH has been rolling out a number of initiatives to increase the availability of affordable housing and improve accessibility to financing options. As of 2018-19 around 1.6m Saudi nationals were on waiting lists for government housing programmes. Many Saudis are unable to afford what has been on offer in the market, particularly in light of high mortgage interest rates and long waiting lists for government-backed interest-free loans. As part of an effort to address this issue, the Sakani programme was launched by the MoH in 2017 with the aim of increasing the rate of homeownership through the provision of affordable housing. It allocates financing and residential products, including mortgage loans, free land parcels, completed residential units and units under development. The programme is supported by the REDF which, as of 2019, had deposited a total of SR9.5bn ($2.5bn) into Sakani. The initiative has resulted in the successful delivery of large-scale housing schemes, handing over 270,000 units in 2017 and 313,000 units in 2018. In 2019 a total of 200,000 citizens were eligible for Sakani housing products, with this figure projected to rise to 300,000 in 2020.
A number of measures have been implemented since 2017 that helped the mortgage market become more accessible and reduce the cost of borrowing for first-time homebuyers. To stimulate mortgage lending, SAMA increased the maximum loanto-value ratio for first-time buyers from 70% to 85% in 2017 and then to 90% in 2018. In the same year, SAMA also waived administrative fees for mortgage holders switching between lenders and when switching from a floating to a fixed loan rate.
In 2017 the REDF launched a mortgage guarantee programme for citizens on the country’s housing wait list. Those on the list can nominate a relative who meets lending conditions to act as a guarantor of the mortgage. The REDF has also focused on increasing access to funds for self-construction projects and when buying from off-plan developers, which were previously not supported by banks due to higher risk. In 2018 the SRC began offering long-term, fixed-rate residential mortgages of 15-20 years. New mortgage measures have helped reduce the amount of time it takes to close a mortgage, in addition to increasing the speed and ability to reclaim a home following a default, helping to boost the appetite among banks to lend.
Additionally, residential renters and first-time homebuyers seeking a property valued up to SR850,000 ($226,600) have been made exempt from a 5% value-added tax on new commercial and residential property sales that was imposed in 2018. Of particular importance to female citizens, a decision was passed in February 2019 to allow Saudi women access to property loans from the REDF. The sector has also received support from a MoH initiative launched in October 2019 to assist the renovation of ageing housing stock. The initiative provides financing for residential units over 15 years old and is expected to be particularly important for the central districts of Riyadh.
The country is witnessing a gradual but significant change in average household size which stands to become an important future driver of demand. This particularly pertains to a change in the profile of property buyers in light of the Kingdom’s young and growing population. In 2010 the average household size in Saudi Arabia was estimated at 5.6 people, which fell to 5.25 in 2016 and 5.15 in 2019. This reflects the increasing number of young citizens moving out of their parents’ homes. This can be explained by social, cultural and labour market changes that offer the possibility to live separately from extended families. Increasing numbers of Saudis, including women, are entering the workforce, giving them the funds to get on the property ladder. This is supported by the decline in expatriate labour and growing Saudiisation of the workforce, with more nationals filling positions, particularly in the private sector. Higher joint incomes among newly married couples have also provided greater economic resources for property investment.
While the market has been traditionally dominated by low-rise rows of houses and villas, an expected trend over the next several years is greater development of apartment blocks and smaller land plots. With lower prices for land and utilities, these developments offer greater affordability for younger families who are firsttime buyers. Changing realities are also leading to vertical living becoming more acceptable; apartments help to address the problem of uncontrolled urban sprawl in Riyadh, for example. Increased demand for economically sized homes is already being seen. While land plots of 600-1000 sq metres were previously the most in-demand, Dar Al Arkan, the country’s largest publicly traded real estate developer, has observed that 300-sq-metre plots are now in high demand.
The retail segment also has a positive outlook with a strong pipeline of large projects. This is particularly the case for Riyadh, where new malls and mall extensions are under development. Retail stock in Riyadh stood at 2.76m sq metres of gross leasable area (GLA) in the fourth quarter of 2019, and is expected to reach 3.42m in 2022. A substantial increase in supply is scheduled to enter the market in the coming years, particularly grade-A stock in northern Riyadh, which is likely to continue to impact existing grade-B stock.
Retail stock in Jeddah and Dammam stood at 1.86m and 1.11m sq metres of GLA, respectively, in the final quarter of 2019. By the end of 2022 stock is expected to increase to 2.75m in Jeddah and 1.53m in Dammam. Growth is being driven to a large degree by the food and beverage segment, including boutique restaurants. Riyadh’s vacancy rate stood at 16% in late 2019. While vacancy rates in super-regional malls (which are between 90,000 and 150,000 sq metres) and regional malls (between 30,000 and 90,000 sq metres) remained relatively stable in 2018 and 2019, the market has seen an increase in vacancy rates at community malls and grade-B retail centres, particularly as tenants shift towards prime locations in northern parts of the city. Meanwhile, vacancy rates improved in both Jeddah and Dammam between 2018 and 2019, shifting from 13% to 10% and from 8% to 6%, respectively.
Riyadh’s total quality hotel supply reached 16,384 rooms in 2019, according to Knight Frank. After a slowdown in 2018, the segment underwent strong growth, with occupancy rates rising by 5% in 2019. Supply is expected to reach approximately 21,100 rooms by the end of 2022. As of December 2019 Jeddah’s total quality hotel supply numbered 10,997 rooms, while Dammam’s supply stood at 7805 rooms. Occupancy rates rose by 3.1% and 7.5% in 2019. By the end of 2022 supply is expected to reach some 14,200 rooms in Jeddah and 11,500 rooms in Dammam. However, occupancy rates are set to be negatively impacted in 2020 as a result of the global travel restrictions rolled out due to the Covid-19 pandemic.
The country’s office supply is forecast to grow significantly in the coming years, though this has brought concerns of oversupply. Office stock in Riyadh reached 3.99m sq metres of GLA in late 2019 and is expected to grow to 5.14m sq metres of GLA by 2022. Vacancy rates were 6% for grade-A stock and 28% for grade-B stock, improving from 9.8% and 29.8% compared to a year earlier. Grade-A and grade-B rents in Riyadh fell by 2% and 6%, respectively, in 2019. ”While it is difficult to reach high occupancy in dedicated office spaces because of oversupply, we are witnessing growing interest from international companies willing to establish regional head offices in Riyadh,” Ali Al Rakban, CEO of real estate developer AQALAT, told OBG.
Jeddah’s office stock reached 1.21m sq metres of GLA in the last quarter of 2019 while stock in Dammam reached 1.12m. This is expected to rise to 1.7m and 1.46m respectively by 2022. Both cities experienced challenging market conditions in 2019, seeing falling rents and occupancy rates. In Dammam this was due to a slowdown in the oil sector, while Jeddah saw the relocation of key occupiers. Jeddah saw 14% vacancy rates for grade-A stock and 25% for grade-B stock, while Dammam saw 28% for grade-A and 33% for grade-B.
With a young population and an increasing number of Saudis entering the workplace, the demand for housing and offices is expected to remain high. As housing preferences evolve, with a move away from extended family homes to those based around nuclear families, appetite for smaller affordable units to set to increase further. This will boost construction of residential units and drive continued demand for mortgages.
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