JEDDAH: Saudi Arabia continues to attract massive investments and remains the favored destination for real estate developers around the world despite a shaky global economic recovery. The Saudi housing industry saw remarkable growth opportunities and became the fastest growing housing industry in the Middle East region. Last year’s real estate investments were expected to reach around SR1.5 trillion ($400 billion), according to a market research report.
Recovering oil prices, continued government stimulus packages and gradual relaxation of bank lending are some of the important factors attributed to the growth of the residential real-estate market in the Kingdom, said the report titled "Saudi Arabia Housing Sector Outlook" prepared by RNCOS, specializing in industry intelligence and creative solutions for contemporary business segments.
Although the Kingdom is witnessing huge developments in the housing construction, the housing market still suffers from a large demand-supply gap due to the rapid expansion of the expatriate community along with the domestic community and rapidly declining household sizes, the report added.
Moreover, the majority of the Kingdom's populace does not have their own houses and live in rented accommodation. As a result, Saudi Arabia will need to construct over 1 million houses by 2014. This demand could further escalate if the mortgage law to ensure easy financing gets its final approval. The RNCOS report said new mortgage regulation in Saudi Arabia will change the real estate market as it will promote young buyers, who at present find it hard to attain finance to acquire property. The acceptance of the law will open the domestic market, with apparent and definite funding channels giving an additional boost to the sector. With the introduction of new law, the demand will experience a 50 percent increase from its current level.
Presently, real-estate investors at a young age have to pay an average rental cost of 45 percent of their existing income or a monthly mortgage at 41 percent in case they choose to buy on their own.
The mortgage condition will certainly be key to prospective market growth. With this mortgage law, prospective buyers will be integrated in the target market and consequently, the potential of the residential real estate will get bigger in Saudi Arabia. This will on the contrary change the decreasing investment trend seen during the past decade. Particularly, Jeddah and Makkah are likely to record much higher growth levels than the other cities of the Kingdom, largely because of the current pent-up demand.
Jarmo T. Kotilaine, chief economist at the National Commercial Bank, said: “The commitment made by the government to prioritize housing development as a central focus of its economic stimulus measures is indeed likely to drive the Saudi housing market forward at a rate matched by few other countries. In an uncertain international economic environment, this offers not valuable reassurance of addressing an important structural economic concern but will also support economic development by stimulating construction and financial services.”
The recent royal decrees allocate SR250 billion for the purpose of building 500,000 units in the coming years. The process of awarding government contracts to developers and designers has already begun, he said.
As welcome as the recent developments are, progress is likely to prove gradual in the face of numerous obstacles, he said, adding that the ambitious development plans will likely require several years to bear fruit and materially change the current situation of endemic shortages. Affordability concerns are unlikely to be significantly addressed in the near term given the limited availability of mortgages and the internationally high relative cost of land which may have to be addressed through additional policy measures, he said. It will be essential to combine the spending commitments with administrative steps to boost the efficiency and timeliness of government spending. In addition, ongoing review of the results is needed to make sure that the policy will bear the maximum results, Kotilaine said.
“The improving access to funding should over time result in a supply response involving a shift from the high-end cash markets to a more mortgage-linked middle-income housing. This will be critical for ensuring that the structural shortages are overcome with time. However, careful supervision and regulation is needed to ensure that the improved availability of credit does not end up fueling a bubble by driving up prices rather than the supply. The world offers numerous examples of new imbalances emerging when access to credit grows faster than the supply of real estate,” Kotilaine added.
Commenting on the report, John Sfakianakis, chief economist at Banque Saudi Fransi, said: “The Saudi housing market offers enormous potential for growth as it unlocks its potential. Housing is based on domestic drivers of demand, not speculation. Young Saudis are in search of affordable housing throughout the country which remains under-supplied. However important steps are taken by the government to address supply mismatches. The 500,000 units announced earlier as well as the additional funds provided to the Real Estate Development Fund as well as increasing the threshold for Saudis to receive a loan are all important drivers.”
The RNCOS report said the Saudi Arabian housing sector has been witnessing revolutionary changes on the back of emergence of global furniture brands. Today, quality has become the special focus area, which once used to be the challenge for local manufacturers. Moreover, the household furniture market will undergo a phenomenal development phase. It is expected that the demand for housing furniture will surge at a CAGR of 9.2 percent during 2011-2013.
Ongoing analysis found that the simple lines and clarity in designer furniture products are in great demand in the country. Dark red and black colors are the key furniture tones favored the most. Additionally, more flexible, functional, and smaller furniture, which incorporates more than one function, is receiving acceptance in the Saudi market. Local manufacturers are using other alternative wood to reduce environmental effects.
With the growing needs of a young population, the housing market in Saudi Arabia has shifted its focus from palaces and luxury villas to the needs of a changing society. With a population of more than 27 million, the Kingdom is notably the most populated country in the Gulf. Demand for housing surpasses the supply, where approximately 70 percent of the population is aged below 30. In the coming years, demand for affordable housing will go on outstripping for luxury villas as the majority of the population have enough money for housing units in the range of SR0.8 million and SR3.5 million.
Source : Arab News, Jul 11, 2011 23:03