Saudi Arabia’s private sector is taking a leading role in the Kingdom’s ongoing construction boom as private developers rush to snap up a piece of the growing market, new research has revealed.
According to data compiled by the Kuwait-based Global Investment House (GIH), private-sector developers, with the backing of government regulations, are cashing in on the emerging sector by erecting multi-billion dollar properties all across the Kingdom.
“In the past, construction booms in Saudi Arabia were mainly tied to increased overnment outlays for construction. However, we are seeing this time around a change in the leading role,” GIH revealed.
“The tide has turned in the favour of the private sector to play an increasingly crucial role in driving the market forward.”Saudi’s private sector is estimated to self-finance the construction of 800,000 units of the one million units planned for completion as part of the country’s 8th Development Plan (2005-2009).
“It is expected that the demand for housing units during the 8th Development Plan will be met through private sector investments in addition to the REDF (Real Estate Development Fund) loans,” GIH revealed.
The Kingdom’s housing sector is expected to grow at an annual rate of 6.3 per cent during the four-year period of the plan. The figure looks set to outpace the country’s population growth rate, which is expected to reach 2.5 per cent in the next 20 years.
But with over half the population below the age of 25, this may be undermined to a degree due to “the rate of formation of new families”. According to the GIH report, “this unique characteristic is the driving force behind the rapid increase in the demand for new housing”.
“Due to the rapid growth rate of new families in the Kingdom, the 8th Development Plan expects demand for housing increase by an additional one million units. This represents an annual average increase of 200,000 units and implies that the cumulative number of housing units will reach almost five million by 2009,” the report said.
To satisfy this demand, the country requires sufficient residential land plots with a total area of 280 square miles at an annual average of 5,600 hectares.
The residential housing construction sector is estimated to require SR500 billion (Dh489 billion) of investments to construct the one million housing units required up to the end of 2009. And, according to GIH, the government has encouraged banks and other financial institutions to provide housing loans to the sector.
“While the private sector assumes the major role in constructing and furnishing housing units, the financial assistance and infrastructure provided by the government plays a basic role in enabling the private sector to undertake this task,” the firm said.
The total planned investment in the Kingdom’s construction sector over the next five years is estimated to cross $350bn (SR1.31trn). The report added that construction activities exhibited healthy growth, as a CAGR of 7.2 per cent was posted by the sectors between 2002 and 2006 and its contribution to the nominal GDP stood at 4.5 per cent.
A number of new projects – including the King Abdullah Economic City, as well as petrochemical and infrastructure projects – are also helping to support the sector and “keep it in a state of boom”.
GIH also revealed that it expects commercial banks to take up additional exposure in both the real-estate and construction sectors, particularly with the introduction of the mortgage law and increased government expenditure in projects. It added that the growing population and high liquidity should continue the increased interest in consumer loan products.
Commercial banks have been key players in pushing along activity in the real-estate market by providing real-estate financing loans to small-to-medium investors at an accelerated pace.
Real-estate financing loans picked up from SR3.3bn in 2001 to SR13.7bn by the end of 2006, resulting in consumer loans for real estate financing hitting a high CAGR of 33 per cent over the 2001-2006 period.
According to the report, the increased consumer appetite for credit during 2007 – especially to the real-estate financing segment resulted in SR15bn being channelled to real-estate activity by the end of second half of last year, expanding by 9.5 per cent over 2006.
“The well-being of the real-estate market depends on the availability of sufficient financing mechanisms to quench the thirst of the increased demand for funds,” GIH said, adding that it expects building and construction facilities as well as real-estate financing loans to increase.
This would be as a result of local banks expanding their credit portfolios at a CAGR of 21.5 per cent over the 2001-2006 period, coupled with abundant liquidity in the local economy, the estimated population growth, the rapidly increasing demand for housing and the current housing shortages, the firm explained.
According to the report, the new mortgage law due to be passed in the Kingdom this year will also provide further impetus to the country’s construction sector.GIH said it expects the new law to be enacted during the course of 2008 according to the Minister of Finance.
“In anticipation of the long-awaited law, a number of banks have started offering Shariah-compliant home financing credit with tenures extending up to 25 years,” the firm said.
It added that the size of outstanding housing credit is likely to rise from SR4bn during 2007 to reach SR46bn by the end of this decade, according to market professionals, assuming a gradual rise in the share of new residential units purchased through housing loans from 10 per cent to 55 per cent by 2010.
The Kingdom is also seeing the emergence of private sector financing companies in the real estate sector – such as Real Estate Financing Company, National Installment Company and Ta’jeer – where commercial banks and specialised institutions have traditionally been the main players.
“Saudi banks and financing companies are now expanding their housing loan programmes to help people buy and own their houses and are using different innovative financial schemes complying with Islamic Shariah,” the report said.
Riyadh Bank has recently highlighted its Land Purchase Murabaha Finance (LPMF) and Murabaha Home Finance (MHF) programs in compliance with Islamic law. Under the LPMF scheme, the bank grants a maximum SR1m with a relaxed repayment plan over 10 years in 120 installments.
The country’s Shura Council Committee on Public Services have also put in a plan to allow foreign banks operating in Saudi to participate in the financing of housing projects. The move is set to give a boost to available funds for housing, helping to alleviate the housing shortage and further drive market activity.
One of the major challenges of Saudi Arabia’s real-estate sector is that the country’s available housing supply is beyond the purchasing power of large segments of the population, GIH said.
According to data from the ministry of economy and planning, accumulated unmet housing demand stood at 270,000 units by the end of the 7th Development Plan, while vacant housing units were as high as 12 to 15 per cent of total housing units.
The apparent lack of affordable housing available is one of the main challenges to be addressed by the country’s 8th Development Plan, the report said. Increasing demand from both Saudis and expatriates will also put pressure on the market in the coming years, GIH added.
“Economic expansion and increased investment opportunities in the country will continue to encourage the influx of expatriates at increasing rates, consequently demand will continue picking up.”
Population growth at a rate of 2.5 per cent per year will also result in a total population of 25.66 million by the end of 2009, with average household size playing another major role in increasing demand.
According to GIH, Al Riyadh and Makkah will continue to account for almost half the estimated demand, mainly because the two areas account for the largest share of the population.
“With abundant liquidity available in the economy and a ready base demand, we expect both prices and activity to continue their upward climb in the medium term,” GIH predicted. Prices in the Kingdom continued to increase over the 2002-2005 period but not at a level that dissuades developers and consumers, GIH said.
However, the firm added that real-estate prices in the Kingdom are very difficult to track since there is no price registry body. As a result there are different estimates for price increases over the 2002-2005 period but on average prices hiked by 10 per cent to 15 per cent for residential and commercial segments.
According to industry estimates, Riyadh and Makkah witnessed higher prices, however prices vary tremendously within a city. Between 2002-2005 average housing prices increased by 12 per cent per year while average land and office space prices increased by 15 per cent each.
In 2007, volumes of real estate deals reported a new record level of 114m square metres, up from 50.6m square metres recorded for 2006. Total investment liquidity in the sector also amounted to SR100.4bn by the end of last year, compared to SR46.5bn reported for 2006.
Private sector drives Saudi building boom