Markaz expects 50% surge in Saudi demand after mortgage law

The total demand for residential units in Saudi Arabia will be in the range of 500,000 to 800,000 during the period 2009-13, with the economy expected to get back on the growth track next year as oil prices rise, according to a new report. "The demand will experience a 50 per cent upward shift from its current levels if the mortgage law comes into force, thereby turning ar-ound from the historic trend of waning investment in residential real estate and lack of home ownership affordability for the younger generation," Ku-wait Financial Centre (Markaz) said in its June report on real estate. The currently planned organised supply will provide about 73,000 units during 2009-13 and the rest will be tapped by current and future projects by smaller size developers and major projects planned in future. The younger generation, in the age group of 20 to 35, is currently deprived of real estate ownership and they live with the elder generation, which also leads to the choice of villas as preferred housing units. They have to face a rental cost at 45 per cent of their current income levels or a monthly mortgage at 41 per cent, should they decide to move out. The higher equity levels of 50 per cent on an average, which is the result of lower mortgage penetration, also magnifies the lack of affordability. "The mortgage law, if and when passed, will include them in the target market and expand the potential for residential real estate in Saudi Arabia thereby turning around the waning investment trend seen in the past decade," the report said. Supply scenario, currently dominated by projects worth less than $50 million (Dh183m) apiece, is slowly drifting towards more organised supply due to the planned mega cities. However, completions will happen in a phased manner with major completions planned during the middle of the next decade, thus providing attractive opportunities for developers of smaller size projects and also for big projects. The current major cities of Riyadh, Jeddah, Makkah, Al Khobar and Dammam will remain the centre of activity for the next five years till the boom gets shared by the planned mega cities. Rentals and prices contracted on an average by 10 per cent, much less than other cities in the region, driven mainly by a fall in risk appetite. "We expect rentals and prices to bounce back again following economic recovery and re-emergence of risk seeking. We expect Makkah and Jeddah to experience a much higher growth compared to other cities mainly due to the current pent-up demand," Markaz said. Residential real estate is one major type of capital asset and a sustainable trend in its share in the overall capital formation is essential for the prevalence of equilibrium conditions in the economy. Residential real estate investment has been growing at a much slower compound annual growth rate (CAGR) of four per cent in the past decade in nominal terms compared to the 10 per cent growth in overall investment. In the past five years, marked by high nominal capital and gross domestic product growth, overall capital formation grew at a CAGR of 16 per cent in nominal terms while residential real estate grew by a much smaller six per cent. The better growth in non-residential real estate capital, which was at a decadal CAGR of 15 per cent and by 25 per cent in the past five years, should not be construed for commercial and retail real estate assets as this includes the infrastructure capital spending as well. Investment in residential real estate marked by years of relative and absolute under investment. Besides, residential real estate's share in the total capital investment also came down from its high of more than 20 per cent during early 2000s to 13 per cent in 2008 due to shortages in ownership financing. This is corroborated by a 100 basis points contraction in mortgage lending as a percentage of total credit during the past three years. According to the report, the primary cause of the dramatic fall in the residential real estate capital build-up is the lack of mortgage lending. The effect of the current economic slowdown hit bank lending hard, which has resulted in lending contraction. "Given the historic dismal lending to real estate and construction sector, we can expect no significant changes in the trends in bank lending to real estate. Mortgage lending as a percentage of total residential real estate capital formed stood at a meagre average of three per cent in the past five years. Though it has grown up to 5.5 per cent in 2008, it still indicates dismal penetration," said the Markaz report. Saudi Arabia is among the least levered countries in the GCC, measured in terms of bank credit to private sector as a per cent of nominal GDP, and hence is not a highly levered economy. This scenario warrants the necessity for the passage of the mortgage law, which would remove these impediments while a further delay could put the sector in a gridlock till the time it is passed, the Markaz report said. Kingdom