The basic outline of the Saudi Arabian property market provides a tempting picture of a land of opportunity. The most populous country in the GCC region, the Kingdom has seen disposable income grow strongly. Furthermore, it has a youthful population and a culture that emphasises family formation, as well as the prospect of purchasing a first home. These factors present a rare combination in a region defined by majority-expatriate populations. Saudi Arabia is therefore beginning to stand out as a market offering a variety of opportunities and risk scenarios for investors and developers.
Getting on the Ladder
Currently, Saudi residents are struggling to get onto the housing ladder. Across the Kingdom, property ownership remains below regional averages. According to the Central Department of Statistics and Information about 60% of Saudis own their home, while the figure in the capital, Riyadh, is 53%. Other estimates are lower – according to Century 21 the Kingdom’s house ownership ratio is 35%, while in Riyadh it is 30%. This compares to ownership rates of 75% in the UAE, 80% in Qatar, 82% in Bahrain and 83% in Oman.
The main challenge is the cost of supply and the impact this has on affordability. Land prices remain an issue for developers building for the mid and lower market. Indeed, land is the biggest consideration for development costs in the Kingdom, with land accounting for as much as 50% of overall development costs.
“In recent years land prices have risen dramatically, for both residential and commercial developments. Additionally, the demand is higher than the supply in both segments,” Aidarous Al Bar, CEO of real estate services company Intimaa, told OBG.
Detailed information on pricing and trends of the land market is limited. However, anecdotal evidence suggests that the cost of purchasing land remains prohibitive. At the beginning of 2015, for example, the Saudi Real Estate Company (known as Al Akaria) sold a large plot in the capital for SR3558 ($948) per sq metre, achieving a price more than eight and a half times the cost at which it was bought and a profit of SR68.3m ($18.2m).
Companies with large land banks are well positioned. However, the high cost of land makes it difficult to build for middle- and lower-income customers. “Developers used to target margins of about 20%, but now they’re going down to 18% if they don’t own the land. If they own the land, returns will be around 25% for mid-to-upper income housing. When you go to low-cost housing, this is where you get the pressure on margins,” Mohamed Tomalieh, an independent financial analyst, told OBG. “You cannot achieve 18-20% in this segment.”
The government has amended regulations to help dampen escalating land prices. The Ministry of Housing has recommended imposing fees on land held without development for a certain period of time, also known as white land. The Council of Ministers approved the application of fees on these lands within city boundaries in March 2015. The details of the regulations are yet to be issued; however, it is likely that the introduction these fees will free up supply for development.
While initial efforts to ameliorate the shortage of affordable housing centred on the construction of 500,000 units through a $67bn programme of government-led building, the Ministry of Housing has reoriented its policy towards supporting the purchasing power of citizens and empowering private developers to deliver units across the country.
In March 2014 the ministry launched an electronic platform, known as Eskan, under which Saudi citizens could apply for a SR500,000 ($133,250) interest-free loan to be used to purchase a home. This system is aimed at reducing the 2.3m-strong waiting list of the Real Estate Development Fund (REDF).
Citizens that receive the loan will have 25% of their monthly salary deducted until the principal is repaid. The government is looking at ways to ensure that all eligible nationals can access this subsidy, but demand currently outstrips supply. “We’d like to extend half a million loans over five years, but the issue is supply. We have a budget for 500,000 people, but there are 750,000 eligible people,” Mohammed Alzamea, public relations director at the Ministry of Housing, told OBG. “So we’re working with banks to provide loans and we’ll share the interest rate costs with them. Under the first phase, we would target people just above mid-income.”
Indeed, even with better access to credit, many Saudis remain priced out of the market, with home loans covering less than 4% of property transactions. Regulations regarding home financing are expected to bolster the sector, although the mortgage law is yet to be fully introduced and uncertainty remains over foreclosure procedures. Nonetheless, 20 financial institutions, including 12 banks, have been awarded a real estate financing licence under the new regulatory framework, while a further 28 institutions have also applied for a licence. In 2014 the value of property loans increased by 31% with the majority (63%) being disbursed to individuals. Once foreclosure regulations are in place, lenders may be emboldened to increase the volumes that they are willing to lend.
Barriers to Borrowing
However, looking at the portfolios of lenders, it seems that the potential for further growth is limited by the sales price of properties and customers’ salaries. The vast majority of loans originated by Deutsche Gulf Finance, for example, are extended to customers with a monthly income of between SR30,000 ($7995) and SR50,000 ($13,325). Tomalieh estimates that the average salary in the public sector is not above SR10,000 ($2665), while in the private sector it is approximately SR6000 ($1599). While this may be on the low side, with Salary Explorer estimating average earnings in the Kingdom of SR16,237 ($4327) per month, it is clear that the average Saudi would not be able to access financing from commercial financial institutions and could not afford property sales prices in the market. The average purchase price of homes in Deutsche Gulf Finance’s portfolio is SR1.63m ($434,395). Even for customers with high salaries, the average debt burden ratio stood at 44.91%, suggesting that many are overextended.
Furthermore, the ability for prospective buyers to access finance became more difficult in November 2014 when new regulations came into force stipulating that borrowers make a minimum 30% down payment on property purchases. While this should decrease the risks associated with home loans, it will also mean even fewer citizens have the income and capital to access financing. “It has become extremely difficult for a normal individual to take a loan,” Tomalieh told OBG.
While the Ministry of Housing programmes should help the situation, many real estate firms are waiting to gauge implementation before starting new building programmes. “It has been a sleeping market in the last six months as developers wait to see what happens with Ministry of Housing regulations and programmes,” Ahmed Bakarman, CEO of Raseel Properties Company, told OBG. “There is uncertainty around land and loans and all aspects of the market. This particularly affects small developers trying to shift a small number of units.”