A report prepared by "KFHR" Kuwait Finance House Research Ltd. disclosed expectations about further increase in real estate prices in Saudi Arabia, especially residential and office real estate properties during the upcoming period. The report explained that the government increased spending while government other policies seem to address the gap between supply and demand. The increase is also attributed to the rapid adoption of new legislations, regulations, and procedures; notably the mortgage law, which will provide a direct driving force to the real estate sector after approval by the Government of the Custodian of the Two Holy Mosques. The new law will provide a package of measures which reflects a sincere interest in housing issues. King Abdullah bin Abdul Aziz announced a plan to spend USD 67 Billion to build 500 thousand houses and to transfer of the Housing Authority into a Ministry with a budget of up to 4 billion Dollars. He also expressed his commitment to increase funding for housing for a value of USD 15 Billion.
The report highlighted the importance of residential real estate where the real estate sector in the Kingdom accounts for 70% of the total real estate activity. While Saudi Arabia witnesses a significant shortfall in the number of housing units due to the steady population increase rates, it is expected that the population of the Kingdom will reach 29 Million in 2015. This will exacerbate the current gap between supply and demand, which is forecasted to continue on the medium and long terms. This is especially true due the five year timeframe taken to deliver the units to be built according to the commitment made by the Saudi King to increase funding for housing for a value of USD 15 Billion.
The report expected that the approval of the mortgage law, which was planned over 10 years, will increase demand on housing and prices to higher levels due to the increased number of those interested in having their own private housing...
The following are the details of the report:
The demand for real estate is expected to propel higher, owing to the high population growth rates in the region and an ever increasing foreign workforce influx. In recent years, Saudi Arabia has undertaken many economic reform measures that added further clarity to laws and regulations and are aimed at attracting foreign investments and providing direct impetus to the real estate sector. Saudi Arabia, the largest amongst the GCC economies, has also managed to maintain its grip on economic factors even in the current crisis scenario because of its prudent policies and petrodollar wealth. Saudi Arabia is expected to pencil in GDP growth of 7.5% in 2011. Inflation, which dropped to 4.7% in March from 4.9% a year earlier, is expected to rise as spending increased but it is not expected to exceed 6%.
Saudi Arabia is not only the largest of the GCC countries accounting for over 60% of the region’s population, it also continues to experience one of the world’s steepest rises in population; increasing from 7.3mln in 1975 to an estimated 24mln at present. According to UN estimates, the Kingdom’s total population is forecast to reach 29mln by 2015. The growth in population is generating enormous pressure on the country’s residential real estate market and is opening up the Kingdom for vast arrays of growth opportunities in other segments of real estate as well.
Going forward, Saudi Arabia is projected to have one of the more resilient, safest and robust real estate markets in the GCC. Residential prices which increased at a rate of 10% p.a. during 2002-2005, will continue an upward momentum. The growth of real estate sector is forecast to have moderated to 5% during 2009 (owning to the overall global slowdown), but the moderation is believed to be transient and the market is likely to pick up pace this year on the back of an unbalanced demand and supply equation. We envisaged that, while real estate values are increasing, on a relative income basis, there will be higher valuations once the mortgage law comes into effect.
The residential segment is dominating the real estate sector in Saudi Arabia accounting for more than 70% of total real estate activity in the Kingdom. The kingdom is facing massive shortage of housing units because of huge demand-supply gap. The demand-supply gap seems to persist in the medium to long term even after taking into account the supply of 100,000 units every year. King Abdullah announced a plan to spend USD67bln to build 500,000 homes and turned the country’s housing authority into a ministry with a budget of USD4bln whilst he pledged to increase funding for housing by USD15bln. The delivery of these units could be extended for a minimum of five years given the prolonged time for the tendering, design and approval phases and also taking into account the Saudi current construction capacity of around 120,000 units per year.
Residential prices which increased at a rate of 10% p.a. during 2002-2005, will likely to continue an upward momentum, once the current economic slowdown is over. Prices reportedly grew up to even 100% in some of the prime locations of main cities like Riyadh which too faced a correction evident by the rise in yield to the extent of 200 basis points. The growth of real estate sector is estimated to have moderated to 5% during 2009; however, the moderation is believed to be transient and prices are forecast to increase after the introduction of the mortgage law.
The Saudi Arabia mortgage law, which has been in planning for almost ten years, is likely to be approved soon. While the timeline remains unclear, we envisaged a faster turnaround given that the His Majesty King Abdullah is striving to resolve social and housing issues. The implementation of the mortgage law is expected to drive Saudi housing demand and prices as more people access the market and will propel the creation of private mortgage finance companies estimated at USD32bln a year for the next decade and more active participation from financial institutions.
The Shoura Council has approved the package of five draft laws related to mortgages, the draft laws can be described as follows:
• Mortgage Registration Law, which provides for the use of mortgages in real property financing, including the registration of such mortgages;
• Execution (Enforcement) Law, which expands the court’s authority to provide injunctive and declaratory relief; and to enforce such orders;
• Financial Leasing Law, which regulates the incorporation, activities and governance of financial leasing companies;
• Real Estate Finance Law, which regulates the incorporation, activities and governance of companies engaged in real estate financing;
• Control of Finance Companies Law, which regulates the incorporation, activities and governance of finance companies.
Essentially, the mortgage law package provides a clear framework for financing the purchase of residential and commercial property which will result in greater business certainty, and, consequently, increased confidence in this sector and the facilitation of financing in this sector. Other related benefits are as follows:
• Increasing confidence by developers, purchasers and foreign investors
• Increasing liquidity in an under-liquid market
• Reducing ambiguity, thereby reducing disputes and providing greater stability to transactions
• Reducing transactional costs through clearer and more efficient processes
• Permitting the Kingdom to adopt international best practices in real estate financing
Recall that on March 18, King Abdullah announced a plan to spend USD67bln to build 500,000 homes and turned the country’s housing authority into a ministry with a budget of USD4bln whilst he pledged to increase funding for housing by USD15bln. In addition, the Shoura Council cleared a hurdle that had delayed the mortgage legislation for months on March 27 by passing rules that define the provider of a loan as the owner of a property rather than the borrower. This will create a smoother foreclosure process and removes a legal ambiguity that has deterred banks from lending. The council also resolved disputes on mortgage securitization and approved penalties for violations of the rules. With the new ruling, the king and the council of ministers now have sole responsibility for any other changes and final approval reducing red tapes.
The positive impact for the Saudi mortgage finance market should be the kicker for the Shoura Council and the Saudi government to get this in order and in greater urgency. According to industry observers, the total outstanding home finance provided by the private sector in Saudi Arabia aggregates to less than 1% of GDP compared with well over 50% in most developed countries, and approximately 6% in Kuwait and 7% in the UAE.
Saudi Arabia has an estimated office space of 8.0mln sq m which is expected to grow by 20% to 30% by 2012. Riyadh is the prime business district in the Kingdom and accounts for approximately 50% of the total office space, followed by Jeddah. Most business areas are highly congested, and a trend towards developing office areas in mixed-use developed is now becoming popular. Although Riyadh has the largest office space in the Kingdom, the supply still falls short of demand of all business classes. The city aims to provide world class solutions for office space through the development of King Abdullah Financial District. It is expected to be the largest financial centre in the Middle East, and will spread over an area of 1.6mln sq m offering floor space of some 3.3mln sq m.
Elsewhere in the Kingdom, office space is scattered along the major roadways. Office space development across the Kingdom has accelerated in the last two years with a far greater proportion of new space falling into the higher quality bracket. However, a majority of the existing office buildings are primary grade, with occupancy rates ranging between 75% and 95%.
An additional supply of 558,000 office units in expected in the Kingdom by the end of next year which is likely to impact the occupancy and lease rates. Riyadh is likely to get most affected by the incremental supply as it had the highest lease rates in the Kingdom. Occupancy rates in Jeddah and Dammam are expected to remain strong since the market is considerably undersupplied, and has the highest occupancy levels.
The Kingdom’s hospitality industry is widely dominated by religious and domestic tourists and hence has remained fairly resilient to the crisis. More than 15mln domestic trips out of the total of nearly 30mln are religious tourists, and more than 50% of inbound tourists are religious tourists. We believe that the hospitality sector in Saudi Arabia will continue and always be dominated by the Two Holy cities of Makkah and Madinah.
Saudi Arabia's hospitality sector is expected to remain resilient during the current financial crisis as religious tourism remains immune to economic cycles. Development plans in the two holy cities will underpin the robust performance of the hospitality sector in the medium to long term (beyond 2011). Initial steps taken by the government toward the development of religious tourism are quite encouraging, as there is a great demand potential, which so far has only been partially explored. And with the current inadequate supply, the Hotel Industry has much room for improvement and growth within the Kingdom. With new relaxed Umrah and visitor visa regulations, the international community is now able to visit the Kingdom, which will eventually allow a more even spread of visitors, meaning a more balanced occupancy rate throughout the year.