The Saudi real estate and construction sectors have been experiencing a period of rapid expansion due in part to a string of giga-projects and an economy rebounding from the pandemic. Indeed, the Kingdom is currently engaged in some of the largest construction projects in the world, including NEOM, the $500bn new city in the north-west, and developments on the Red Sea coast and in the capital city, Riyadh.
At the same time, population growth and a young demographic are pushing demand for a range of real estate options and supporting infrastructure such as mass transit. All of this is taking place within the framework of Saudi Arabia’s long-term socio-economic development plan, Vision 2030, which seeks sustainable growth and economic diversification. The programme prioritises the private sector and innovation, with the real estate and construction sectors opening the doors to more foreign investment.
Currently, there is no specific construction law in Saudi Arabia, and private sector parties are able to agree among themselves on the terms of a contract and pricing methods. Government contracts, however, are governed by the Government Tenders and Procurements Law, which came into force in December 2019. In both private and public sector contracts, the Saudi courts are the adjudicators in cases of dispute, operating according to the principles of sharia law.
The Saudi Contractors Authority (SCA) is the primary government institution for sector regulation. The SCA reports to the Ministry of Commerce, and among its responsibilities are drafting industry rules, negotiating labour issues, researching and publishing statistics on behalf of the government, and promoting sector development. It also manages the Muqawil web platform, which offers a range of e-services, including indicators for the prices of building materials and contractor rates. Additionally, it includes data on the track record of individual contractors to assist the public and construction clients evaluate and choose vendors.
Many organisations, such as the Public Investment Fund (PIF) – Saudi Arabia’s $600bn sovereign wealth fund – and the National Development Fund (NDF), which coordinates between development funds and banks, are increasingly central to the domestic construction and real estate sectors. Indeed, the government’s National Investment Strategy envisages some SR5trn ($1.3trn) injected into the economy up to 2025, with a sizeable portion earmarked for infrastructure.
Government ministries and the 13 governorates in the Kingdom are also key players in the construction sector, as are the following companies: Saudi Binladin Group, Al Akaria, TAMEAR, Dar Al Arkan, Jabal Omar, Makkah Construction and Development, and Kingdom Real Estate Development, among others.
The Kingdom’s oil and gas sector is a significant source of construction contracts, with public petroleum and natural gas company Saudi Aramco responsible for several high-value projects. Petroleum and natural gas make up 32.4% of GDP, while petroleum refining contributes a further 6.2%. In the fourth quarter of 2021, for example, the oil and gas sector awarded contracts worth SR34.9bn ($9.3bn) and the power sector generated SR12.1bn ($3.2bn) worth of deals, while real estate came third, with SR7.6bn ($2bn).
The Ministry of Municipal and Rural Affairs and Housing (MOMRAH), which contains within it the Real Estate General Authority (REGA) is the main governing body overseeing the real estate sector. REGA suggests policies, conducts research, compiles sector data, issues licences, administers training courses and workshops, and arbitrates disputes via the Saudi Real Estate Arbitration Centre. In 2021 it was also tasked with registering properties in the Kingdom and supervising non-governmental real estate activity.
Elsewhere, the State Properties General Authority is another notable player in the sector. Previously known as the State Property Department, the authority falls under the purview of the office of the prime minister, and has been charged with utilising, operating and maintaining the government’s real estate portfolio and strategy in line with Vision 2030 goals.
Government property comprises a considerable portion of the Kingdom’s overall real estate portfolio, with ministries, agencies and entities such as the PIF as the majority shareholders. For example, the PIF owns the Saudi Real Estate Refinance Company (SRC), established in 2017 to help provide liquidity and risk management funding solutions to primary mortgage originators and increase access to affordable financing for homebuyers. Working with banks and real estate finance companies, while also financing itself through a SR20bn ($5.33bn) domestic sukuk (Islamic bond) programme, the SRC aims to support the primary mortgage market and homeownership. Indeed, a Vision 2030 objective is to increase homeownership for Saudis from 47% in 2017 to 70% by the plan’s end date.
To reach this target, the Kingdom could benefit from a deeper mortgage market. “The mortgage market is heavily concentrated at the moment, so attracting more originators to increase competition could be something to consider,” Fabrice Susini, CEO of SRC, told OBG.
The capital markets are increasingly seen as important to real estate development. “We are laying the foundations that, along with the participation of Saudi mortgage lenders, will allow the sector to attract foreign liquidity,” Susini added.
The Real Estate Development Fund (REDF), which comes under the NDF and coordinates with the MOMRAH, is another government agency that supplies Saudi nationals with loans for home mortgages. REDF, in particular, assists in the financing of affordable housing.
The Housing Programme is an initiative that was launched in February 2018, and outlined under the Housing Vision Realisation Programme to help Saudi families own a home based on their needs and financial capabilities. Two tools in particular have supported this process: the Etmam Centre, which coordinates communication between developers and stakeholders to expedite real estate projects and processes, and the Sakani online platform, which supports citizens through the home-buying process, from finding a house to securing financing. As a result, the average waiting times for Saudi nationals applying for state-owned real estate has gone from years to several days. It also saw homeownership increase from 47% in 2017 to 60% in 2020. Furthermore, the Developmental Housing Programme (DHP), has been working with non-profits to meet the housing needs of underprivileged families.
In 2020 the National Housing Company (NHC), which had previously been an arm of the MOMRAH, was integrated into the Housing Programme and restructured. It is now pursuing the NHC Strategy, under which it acts as an enabler for private sector development of the real estate market. It is doing this with the assistance of several subsidiaries – the National Housing Services Company, the National Asset Management Company and the National Financing Services Company. The latter body a central platform for managing SRC finances, and real estate finances for banks and other institutions.
The Housing Programme aims to provide 40,000 housing units under the DHP by 2025, while seeing the real estate sector’s contribution to GDP grow by SR157bn ($41.9bn). It also aims to create more than 38,000 new jobs in the sector.
In April 2022 the Kingdom announced a proposed amendment to laws on foreign ownership of property, and invited public feedback. The proposals include amendments to current rules on ownership in development zones, and in Makkah and Medina. Property ownership is restricted to Saudi nationals in these two locations, with the only exception being offices and branches of companies licensed by the Saudi Central Bank or the Capital Markets Authority.
Currently, land ownership is restricted to Saudis or – subject to certain extra rules – GCC citizens and entities. Non-Saudi, non-GCC ownership is permissible for companies as part of a particular project and requires a foreign investment licence from the Ministry of Investment. Foreign ownership is also permitted when the property is located within one of the four economic cities and subject to the regulations of those cities and the Special Zones Authority.
In addition, foreign individuals may own or lease property solely for use as a personal residence after obtaining permission from the Ministry of the Interior.
In the first quarter of 2022 the construction sector contributed 4.8% to the GDP, a slight increase of 0.4 percentage points year-onyear (y-o-y). These numbers reflect the impact of the Covid-19 pandemic and the long-term drop in oil and gas prices prior to the start of the global health crisis.
Indeed, looking at the annual value of awarded contracts, 2015 saw SR253bn ($67.4bn) at the start of the pre-pandemic oil price decline, while, 2016, 2017 and 2018 all saw annual averages of approximately SR100bn ($26bn). There was a rebound to SR197.1bn ($52.5bn) in 2019. However totals decreased to SR79.6bn ($21.2bn) in 2020 as a result of pandemic-related slowdowns.
As the global and local economies began to revive in 2021, the value of construction contracts rose to SR142bn ($37.9bn). This upturn is expected to continue through 2022. The fourth quarter of 2021 saw SR70.2bn ($18.7bn) – accounting for almost half of the year’s total – of construction contracts issued, suggesting an uptick in activity as the year came to a close.
The oil and gas sector received the majority of the contracts for the fourth quarter of 2021, accounting for SR34.9bn ($9.3bn), or over half of the total. This reflects the sector’s resurgence. Saudi Arabia owns more than 17% of the world’s proven oil reserves and has benefitted greatly from the recent upward surge in oil prices. Following the oil and gas sector, power received SR12.1bn ($3.2bn) in contracts and real estate came in third place with SR7.6bn ($2bn).
In the first three months of 2022 the value of oil and gas construction contracts was up 290% y-o-y, while real estate increased by 126% and power registered 33% growth, according to a July 2022 report published by the US-Saudi Business Council.
In the first quarter of 2022 the real estate sector contributed 5.9% to GDP and recorded 1.2% y-o-y growth. Real estate was negatively impacted by the pandemic, as businesses downsized, travel and tourism largely halted, and quarantines and lockdowns constrained daily life. Underscoring this, GDP shrank by 4.1% in 2020 as international oil prices dipped. However, the economy recovered in 2021, growing by 3.2% in 2021, according to the IMF.
This pre-Covid-19 trend was reflected in the Saudi Real Estate Price Index (REPI), which measures the changes in real estate prices in the residential, commercial and agricultural sectors. From a high of 101.6 points in the fourth quarter of 2014, the index declined steadily in the following years, reaching 80.8 in the last three months of 2019. The pandemic saw the REPI remain roughly at or near this level, with a slight uptick as the economy began to show signs of improvement in 2021 and into 2022. By the second quarter of 2022, the REPI had recovered to 81.9.
The Saudi real estate market focuses primarily on the capital city, Riyadh, the Red Sea port city Jeddah, the holy city of Makkah and the Dammam Metropolitan Area (DMA) on the Gulf coast. In 2020 the office, hospitality and retail sectors saw declines in rental rates and sales prices in these areas.
The residential real estate segment saw positive growth in 2020 despite the continual development of supply; according to JLL MENA, about 60,000 new units were handed over in Riyadh, Jeddah, Makkah and DMA that year. In terms of residential real estate, Riyadh and Jeddah maintained their positions as destinations for real estate investment in 2021, with both cities’ average sales prices growing by 6% annually and the capital city’s average rental prices increasing by 1%. However, Makkah and DMA continued to struggle, with the former seeing sale prices down 10% and rental rates down 4%. The disparity in demand is likely due to a larger supply of master-planned projects to develop integrated communities in Riyadh and Jeddah.
At the same time, demand for residential units has persisted due to the range of mortgage support programmes and demographic expansion. The first three quarters of 2020 saw 84% growth in housing loans and 90% growth in loan values, compared to the same period of 2019. Although the government increased the value-added tax rate from 5% to 15% in 2020, real estate transactions were exempt from this rule. In the same period, average rental rates dropped across the country. This trend was influenced by the pandemic’s mass repatriation of foreign workers, which adversely affected the rental market.
All segments within the sector, with the exception of hospitality, showed partial gains in 2021. The Riyadh office market showed a 4% lift in rentals for grade-A and grade-B office space, while Jeddah rentals saw a 2% y-o-y growth. Both supply and demand, particularly from international firms, continued to rise. Pent-up demand for high-quality office space was a driving force behind this expansion, with growth likely to increase throughout 2022 and the following years in Riyadh in particular, as the Kingdom rolls out its Programme HQ strategy. Launched in February 2021, the programme stipulates that foreign companies wishing to do business with the government and its associated entities have to set up their regional headquarters in Riyadh by January 1, 2024 (see Economy chapter).
While overall the sector continued to encounter rising supply during a time when retail activity was restricted due to pandemic safety measures, Riyadh’s super-regional malls – which are between 90,000 and 150,000 sq metres – saw an increase in average rental rates of 1% y-o-y in the fourth quarter of 2021.
The coming years are expected to see a more widespread return to growth. The World Bank predicts that GDP will be higher in 2022, at about 7% as large trade and current account surpluses accumulate and the government pays down debt. According to the Ministry of Justice, the effects of this economic buoyancy were already apparent in the first half of 2022, with every month save March and April indicating an increase in the number of real estate transactions nationwide. This growth reached a peak in the June-July period when the number surged 37% y-o-y.
There are signs that a recovery in the sector is already under way. In March 2022 representatives from 43 government departments presented some 3000 construction projects worth a combined SR800bn ($213.3bn), at the annual SCA-sponsored Future Projects Forum in Riyadh. Compared to the 2021 forum, where 540 proposals with a combined value of SR400bn ($106.6bn) were unveiled, these figures represent a substantial increase in the pipeline.
There has also been progress with a string of giga-projects around the Kingdom. This is the term used by the PIF to describe projects worth over $10bn. Among these developments are NEOM (see analysis), the Qiddiya entertainment city project outside Riyadh, the Red Sea tourism development project and the Roshn homeownership scheme.
The PIF’s chair, Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud, has great ambitions for the fund, which he aims to take from $620bn in assets in 2022 to $2trn by 2030. As part of the target, the PIF plans to invest SR150bn ($40bn) per year through 2025.
“NEOM and the other giga-projects are tangible and futuristic,” John Brash, founder and CEO of Brash Brands, told OBG. “The government is supporting small and medium-sized enterprises and start-ups to specialise in subjects related to these projects in the Kingdom.”
This bodes well for construction outfits and a range of real estate-related entities and services, from designers and architects to consultants, specialist product manufacturers and financiers – with sustainability at the forefront of many new projects.
“As a concept, sustainability is influencing local real estate market dynamics. Although the pace of adoption might differ from one company to another, the fact is that local and international investors are increasingly looking at sustainability practices before making investment decisions,” Mohammed Al Mymuni, CEO of Tamear, told OBG. “Consequently, local companies are adapting and implementing greater environmental, social and governance standards in their operations, as well as their corporate culture,” Al Mymuni added.
Innovation and sustainability have been made central to NEOM, with the project’s design featuring The Line – two carbon-neutral parallel skyscrapers, 170 km long and 500 metres high – that are expected to house up to 9m people. The estimated cost of the initiative is $1trn.
In addition, Qiddiya entertainment city near Riyadh is being built by Qiddiya Investment and is set to include arts centres, a sports stadium, a motor racing circuit and golf course, festival grounds and the $1bn Six Flags Qiddiya theme park. Saudi-based Almabani General Contractors and France’s Bouygues Batiment International are behind the latter project.
Meanwhile, the PIF’s The Red Sea Project includes an archipelago of some 90 islands off the Kingdom’s coast, as well as regions featuring beaches, deserts and mountains. The Red Sea Development Company (TRSDC) has been managing the project following a 2021-22 environmental survey of the area, with the design focusing on sustainability.
In May 2022 the PIF announced that it was combining this project with another one in its portfolio, the Amaala project. The global wellness luxury destination will be a three-community, 25-hotel and hospitality centre project on 4135 sq km of Red Sea coast. The combined entity will become Red Sea Global, which reported that month that it had nearly $2.7bn of contracts at the bidding stage. Some $15bn-16bn of PIF financing had already been committed to the project, while in January 2022, the TRSDC announced it had secured $3.8bn in financing from four Saudi banks.
In mid-2022 the construction of workers’ housing and the project’s Red Sea International Airport were well under way. The end of 2022 is set to see this international and domestic gateway welcome its first arrivals. In addition, work on the Ummahat Islands, which will have a pre-fabricated beach and overwater villas for an eventual 172-key resort, is also in progress.
The Roshn homeownership scheme is the PIF’s fourth giga-project, which is expected to contribute to the Vision 2030 target of 70% homeownership. The initiative concentrates on six geographical locations: Riyadh, Makkah, Asir, the Eastern Region, Jeddah and Al Kharj. Two flagship communities have already been launched – Sedra in northern Riyadh, and Al Arous in northern Jeddah. These are fully integrated neighbourhoods, with Sedra containing some 30,000 units on 20m sq metres of land, and Al Arous with 18,000 units on a 4m-sq-metre space. The two projects will be connected to nearby metropolitan centres, and include parks, shopping and office districts, restaurants, cafes and mosques. Roshn is working on the scheme in collaboration with the NHC.
“With Vision 2030, the country is building a strong non-oil-based economy, and investing in talent and education,” Brash added. “The ambition and pace at which the Saudis move forwards with giga-projects are incredible, not just from a destination point of view, but also in terms of innovation.” These projects are already forging ahead and benefit from a unified political, economic and investment direction.
The PIF also has a growing portfolio of completed projects. The King Abdullah Financial District in Riyadh is expected to be officially completed in 2022. Built on 3m sq metres, it consists of 56 towers and represents a new business district in the heart of the capital. It will likely be one of the main beneficiaries of the Programme HQ scheme, as international companies make it their regional headquarters.
Another project in the PIF’s portfolio is the Masar urban development in Makkah, being rolled out by Umm Al Qara for Development and Construction. Masar is a 100,000-unit residential development with 28,000 hotel rooms, recreational and retail areas, and a mosque. It is located within the King Abdul Aziz Road project zone which will link Makkah and Jeddah.
Rail has also been a recent driver of construction contracts in the Kingdom, as the Makkah Light Rail, the North-South Railway and the Makkah-Medina High -Speed Railway demonstrate. Meanwhile, the Rua Al Madinah project is carrying out a major redevelopment of the central area of Medina. The city is slated for completion by 2030 and is expected to receive some 23m visitors annually. In June 2022 the China Railway 18th Bureau Group secured a $970m contract to build several tunnels and bridges for the project.
The PIF is also a major investor in a range of Saudi construction materials businesses. Indeed, expanding domestic production in this area is a key part of the Vision 2030 strategy, substituting imports for local building materials.
At the height of the pandemic, cement producers suffered from overcapacity, but have since been rebalancing, with capacity utilisation hitting 70% in August 2021. With the country keen to develop its domestic production of building materials, investors in cement production facilities are also able to receive loans of up to 75% and repayment periods of up to 20 years under government incentive schemes.
The Kingdom also provides research and development (R&D) facilities via the Centre for Engineering Research at the King Fahd University of Petroleum and Minerals, and the Centre of Excellence for Concrete Research and Testing at King Saud University.
The PIF’s investment portfolio in cement includes the Yanbu Cement Company, the largest cement enterprise in the Western region; the Qassim Cement Company, which has a 4m-tonne-per-annum-capacity plant in Buraydah, north-west of Riyadh; Eastern Province Cement, with its plant in Damman; and Southern Province Cement, with a 40,000-tonne-per-day capacity at its factories in the Jazan, Assir and Makkah regions.
Furthermore, Saudi Cement has an available capacity of 8m tonnes per annum of clinker from its plant in the Eastern province, while Arabian Cement, Yamama Cement, Najran Cement and Riyadh Cement are also key non-PIF players in the sector.
Meanwhile, the PIF also has invested in the following businesses: mining company Ma’aden, which has an alumina refinery, aluminium smelter and rolling mill as part of the Alco Aluminium & Steel joint venture with Alcoa; Arcelormittal tubular products company in Jubail, which is designed to serve the fast-growing energy-producing markets in the region; and the Saudi Ceramic Company, which produces ceramic and porcelain tiles, bathroom fittings and heaters. Other domestic materials sector players include Alfanar, one of the world’s largest producers and distributors of electrical products; Altaiseer Aluminium Corporation, a manufacturer of a wide range of aluminium works; and United Transformers Electrical Company, based in Riyadh’s Second Industrial City.
Demand for building materials is expected to continue increasing in 2023, despite rising costs due to global supply chain issues, among other causes. Indeed, while a survey by RICS Global Construction Monitor in the first quarter of 2022 showed that 87% of respondents saw material costs as a strain on activity, 59% also reported an increase in workloads, quarter-on-quarter.
Saudi Arabia’s real estate and construction sectors are positioning themselves for an expansion as they are facing bottled-up demand and pending deadlines, as 2025 and 2030 approach. At the same time, finance mobilisation, R&D and investment are under way, with oil and gas revenue helping to boost government spending from 2023 onwards.
There are some headwinds as the course of the pandemic causes uncertainty, while ongoing lockdowns in China, in particular, continue to have an adverse effect on global supply chains and affect costs. Russia’s invasion of Ukraine in February 2022 is driving up commodity prices. While Saudi Arabia benefits from higher oil prices, it also has to pay more for imported products.
However, with a growing population and a government determined to transform the Kingdom’s infrastructure while creating accessible living spaces, real estate and construction will continue to be at the forefront of Saudi Arabia’s Vision 2030 in the coming years.