Saudi businessmen have brought back a large part of their funds abroad to invest in the highly profitable construction and real estate sector which is going through a boom period, according to a regional study.
The upsurge in the Gulf Kingdom’s property sector, by far the largest in the region, is expected to continue over the next few years driven by soaring oil prices, excess liquidity, high return and strong domestic demand, said the study by the Kuwaiti-based Global investment House (GIH).
Another study expects the world’s oil superpower to pump more than $400 billion (Dh1.46 trillion) into construction projects in the next decade to cope with economic growth and surging demand caused by rapid population growth and an influx of foreign workers needed for the developments.
“Repatriation of funds from abroad to the Kingdom plays a role in increased liquidity in the market, as well as directing such funds to the real estate sector. Significant amounts of Saudi funds abroad have already been repatriated,” GIH said.
“With this in mind, coupled with rapid population growth rates and overall optimism, real estate has moved to the forefront of non-oil sectors and it is becoming a reliable investment channel to earn a fixed return in Saudi Arabia. Further impetus to activity and growth in the real estate market is being provided by rising liquidity in the system, driven by more than buoyant global oil prices.”
Other stimulant factors include the availability of low- cost financing, new innovative financing channels and the introduction of a new mortgage law.
“All of these factors will continue to drive the market, which essentially offers an alternative investment mechanism for local and international money,” said the study, citing official reports.
“The Saudi real estate sector is witnessing a phase of rapid growth that will continue for the next years. It is a market that is driven with demand fundamentals, where demand surpasses supply for almost all segments. The increased demand is expected to continue for the coming years. As a result prices as well as rentals will remain buoyant.”
Like in other Gulf oil producers, the surge in local demand has sharply boosted rents in Saudi Arabia and this has aggravated inflation that has accelerated to record levels over the past two years.
Figures by the Saudi Arabian Monetary Agency showed the rents have recorded their highest increase along with food prices over the past two years, prompting Saudi authorities to consider joining the UAE and Qatar in introducing caps on annual rent rises.
Taking 1999 as the base year, rents in Saudi Arabia remained almost stable during 2000-2006, before they shot up by nearly nine per cent last year. The surge was one of the main factors that pushed the inflation in Saudi Arabia to a record 4.1 per cent in 2007 and experts believe the level would be higher this year despite the country’s anti-inflation measures.
According to the National Commercial Bank, the largest bank in Saudi Arabia, construction projects valued at more than $400bn would be carried out in the Kingdom in the next 10 years.
It said the projects are needed to face a surge in demand, which “is unleashing the biggest building boom ever seen in Saudi Arabia”.
GIH said the boom had largely benefited cement companies in Saudi Arabia, allowing them to pump at maximum capacity and net their highest ever profits. It has also prompted plans to construct two more cement plants to face demand and offset a shortage in supply.
“The current construction boom has caused the cement market to tighten. In early 2007, the government intervened to prevent excessive price increases. The aggregate profit of eight listed cement companies in Saudi Arabia soared by nearly 22 per cent to SR4.49bn (Dh4,40bn) in 2007 from SR3.68bn in 2006,” the report said. It added overall sales volume rose by 13 per cent to 30.33 million tonnes in 2007 from 26.92 million tonnes in 2006.
The figures showed the real estate and construction sectors accounted for nearly 12.5 per cent of GDP by the end of 2006. But it expected the share to sharply widen because of ongoing government programmes to expand the non-oil sector.
“Real estate and construction sectors are within the forefront sectors to have a major role in the diversification plan. Thus, numerous projects are under planning or at development stage especially within the several economic and industrial cities,” it said.
“Many of these projects will be executed by a mix of domestic and foreign capital. This is in line with the government’s policy to allow the private sector investment into infrastructure development to enhance business activity in the Kingdom.”
Factors supporting the construction sector:
- Booming economy and higher gross domestic product growth rates estimated at 8.1 per cent for 2007, as well as higher per capita income
- Expansionary fiscal policy by the government
- Ongoing mega projects including energy and utilities projects, infrastructure, real estate, and new economic zones
- Ongoing development and diversification plans for the Saudi economy away from oil sector, with emphasis on industrial and economic cities
- Increased annual population growth rates estimated at 2.5 per cent in addition to the increased influx of expatriates
- Increasing numbers of pilgrims estimated at six per cent per year up to the end of 2009, thus supporting real estate and construction activities in the two holy cities
- Increased private sector role in almost all aspects of the economy and especially in real estate and construction activities on BOT basis
- Availability of funds and new financing schemes for real estate sector namely; the new mortgage law
Saudis reinvest funds in Kingdom’s realty