“The top four provinces of Makkah, Riyadh, Madinah and Eastern Province would require a housing investment of more than $160bn by 2015,” NCB Capital said in a report titled “Kingdom under construction.”
Besides, the mortgage market will grow five fold to $23.1bn by 2012, a mortgage to GDP ratio of 4.4 per cent.
“We expect the Saudi Government will expedite the proposed mortgage law, which is already part of its inflation mitigation plan, which in turn will unlock significant demand. This will drive real estate prices higher, thus putting pressure on rental yields.”
In April 2008, rents increased 20.4 per cent over the preceding year, contributing to inflation which hit a 27-year high of 10.5 per cent, due to the lack of residential supply and individuals forced to rent.
Saudi Arabia has relatively high rental yields. Easy liquidity and negative real interest rate give investors a greater incentive to invest in real estate to benefit from attractive rental yields. Thus the upcoming mortgage law will improve housing affordability, driving more people to buy instead of rent.
Saudi nationals, due to their typically large household sizes, generally prefer to stay in independent houses or villas. Many of these houses have been built to custom requirements. In 2004, apartments formed only 37 per cent of all housing.
“We estimate the share of apartments in total housing to rise, given the increasing demand from the low income segment.”
There is a gradual trend towards the western family life style of smaller (nuclear) family units. This is one of the by-products of urban migration. Furthermore, the young population would marry and form new households. The current average household size in Saudi Arabia is estimated to be 5.62.
The report estimated the total household size to decline to 5.2 by 2015. The expatriate and non-Saudi household size is expected to remain constant at 4.1.
The report further expresses a bullish outlook on commercial real estate. Despite commercial rentals rising 15 per cent per annum over the past five years, they still remain low compared to regional and global levels, for instance rentals for prime office space in Doha and Dubai are at a steep premium of 190 per cent and 168 per cent respectively to Riyadh.
According to NCB Capital, key challenges facing the sector in the Kingdom include construction costs, which have been on the rise, driven by rising labour costs, due to unavailability of adequate and skilled labour, and raw material costs. Another challenge for the government is to satisfy the demand for low-income housing, given the typically large households in the Kingdom. The affordability of housing is also a genuine issue for lower income families.
The Saudi economy is one of the fastest growing economies in the world, with a growth in real GDP of 8.1 per cent for the period 2003-06. IMF forecasts indicate that the Kingdom’s GDP is projected to grow at a compound annual growth rate (CAGR) of 7.1 per cent for the period 2007-10.
The construction sector in Saudi has grown at a six per cent CAGR for 2004-06. Construction as a percentage of GDP has moved up from 6.7 per cent to 7.6 per cent during the same period.