Saudi Arabia is expected to pump nearly SR1.3 trillion (Dh1.28 trillion) into projects to build new houses for its people to meet a steady growth in the population in the next eight years, the Gulf Kingdom’s largest bank said on Monday.
From around 28 million at the end of 2011, the country’s population is projected to reach nearly 37 million in 2020, National Commercial Bank (NCB) said.
Assuming the average Saudi household size maintains its declining trend thereby reaching 5.28 persons per housing unit, housing stock is expected to amount to 7.08 million units by 2020, NCB said in a study sent to Emirates 24/7.
It said this means total housing stock in the Saudi housing market is expected to expand by around 2.4 million units during that period, with annual demand rising from 195,000 units in 2011 to 264,000 units by 2020.
The public and private sectors are expected to contribute to the growth in investments within the housing sector, the study said.
“Based on market sources for the average housing unit cost of around SR540,000, total investment required for the housing sector will amount to SR1.3 trillion, in order develop 2.4 million new housing units between 2011 and 2020. This represents an average outlay of nearly SR130 billion per annum,” NCB said.
According to the study, one way to measure the current level of investments in the housing sector on a macro level is through gauging the value of Gross Fixed Capital Formation (GFCF) expenditures in residential construction.
The level of residential expenditures reached SR43 billion in 2011, it said, adding that total GFCF in residential projects during 2011-2020 is projected at SR650 billion.
This number, however, falls short of the total investment needed, even after accounting for the recent allocation by the government of SR250 billion for the housing sector.
“Evidently, further investment will be required by the private and public sectors in order to close this investment gap of nearly SR400 billion to meet anticipated housing demand. This gap will surely be reduced once the recently approved mortgage law is fully enacted and more real estate financing companies besides Saudi banks along with licensed foreign banks expand their financing options,” it said.
“In addition, this will contribute to partially restoring the demand supply imbalance and ultimately moderate the land and property prices from their artificially high levels.”
NCB said it believes that the enforcement of the long-awaited mortgage law will not have an immediate impact on the housing market.
But it added that it would help convince individuals and entities to enter the housing market, which would otherwise hold off in the absence of the law.
“The mortgage law will, ultimately, help develop an active secondary market whereby mortgage lenders, among which banks, will be able to clear the assets on their balance sheets and utilize their capital more efficiently,” it said.
“The development of mortgage securitization would also give birth to government sponsored institutions, equivalent to Fannie Mae and Freddie Mac in the United States, resulting in the formation of a deep housing bond market.”
NCB said the housing market is crucial to the development and advancement of the Saudi Arabian economy, the largest in the Arab world.
“While several constraints exist, the potential for growth is plentiful. The demand for housing, especially affordable units, continues to grow at a rapid pace.”
It said the continued migration to the Kingdom's three main regions of Makkah, Riyadh and Eastern Province has been exerting pressure on property developers and banks to provide the necessary facilities to accommodate such shifts.
In addition, the younger age demographic, which represents the largest segment of the population, besides generating additional demand as they enter the marrying age, are gradually “breaking from the extended family life style.”
“The current policy initiatives are aimed at targeting pent-up demand for housing across the low, middle and affluent income categories,” the study said.
“The estimated SR1.3 trillion investment needed to construct the 2.4 million housing units between 2011-2020 illustrates the magnitude of expenditures needed by both government and private entities in order to close the supply and demand gap.
The growing demand in the housing market will create many opportunities for both commercial banks and real estate developers alike to take on more active roles.”