The real estate sector in Saudi Arabia plays a vital role in the non-oil economy of the kingdom. Its contribution to the gross domestic product, which stood at of 6.8% in 2004, is expected to rise to 7.2% in 2009. In the meantime, the kingdom is expected to carry out ongoing projects at a total cost of SR2 trillion ($500bn).
However, the residential real estate sector will remain unable to meet demand in the near future. The property sector, which official figures have as growing at an annual rate of 5.8% between 2004 and 2009, will continue its upward trend in the near future, but at a slower pace. Rental rates are expected to increase by between 5% and 10% in 2009.
According to official estimates, the number of occupied housing units in the kingdom totalled 4.3 million in 2007, of which about 50% are self-owned. If the kingdom seeks to meet demand, 1.5 million new homes will need to be built by 2015.
Reports have revealed that the real estate and construction sector in the kingdom provides one of the most attractive investment opportunities in the region, and there are more than 285 real estate projects valued at $260bn under construction or design.
The contribution of Saudi Arabia’s real estate sector to the economy represents 5.1% GDP at SR55bn, amid expectations of further growth by the end of the Eighth Development Plan in 2009 at an annual rate of 5.8%, and to raise its share in GDP to 7.2%, making it an important focus, especially in light of current development experienced by Saudi Arabia.
Currently, the kingdom is finalizing the draft regulations on property mortgages to be issued this year.. The Custodian of the Two Holy Mosques King Abdullah bin Abdulaziz has the directed the Council of Chambers to coordinate with the Ministry of Trade and Industry and the Ministry of Finance to implement the mortgage system in the kingdom as soon as possible.
The kingdom is expected to announce the new mortgage law before the end of this year, after completing a list of its details, which is currently being discussed by the Experts Commission of the Cabinet, where it is currently undergoing the final stages.
The importance of issuing the mortgage system lies in enabling the business sector to contribute to facilitating the ownership of citizens to their homes, as well as supporting and financing of national industries especially in light of the reluctance of local and foreign banks to provide loans to those industries.
An economic study prepared by the Research and Studies Centre of the Chamber of Commerce and Industry in Riyadh, has shown that experts in the area of finance with interest in real estate believe that the absence of housing finance mechanisms and legislation is one of the most important obstacles explaining the absence of giant real estate companies in Saudi Arabia, and the provision of appropriate mechanisms to assist housing seekers in the kingdom.
Experts have predicted that the adoption of the mortgage law will open the domestic market, with clear and guaranteed funding channels. Saudi real estate experts expect the application of the mortgage law in Saudi Arabia to rein in the rising prices of residential units which has rendered the dream of owning a home unattainable for the majority of citizens. A number of real estate experts have called for the rapid activation and application of the law as soon as possible.
Saudi banks are expected to set up independent mortgage firms, or in cooperation with real estate companies. The mortgage law will also move liquidity in the banking and real estate companies.
Despite the amount of real estate finance in Saudi Arabia, which amounted to about SR5bn last year, it seems small compared to the size of the market, as according to the Saudi Arabian Monetary Agency (Sama), the percentage of residential real estate financing of the total credit facilities had shrunk considerably.
Weak lending operations have led to a decline of investment in residential real estate sector over the past decade, resulting in a contraction in investment levels by more than 20% of the total capital investment in the country. According to Almarkaz, this figure had fallen to 13% in 2008. Projections indicate that the expected passing of the mortgage law in Saudi Arabia will introduce a shift in the direction of demand for housing, which will rise by about 50%.
Real estate experts believe that the mortgage law would be highly beneficial, both to the real estate market and the banks, which will have to update their programs and services and improve them to be able to meet the needs of the sector during the next phase.
A recently published report by Jones Lang LaSalle confirmed that mortgage in Saudi Arabia will add positive aspects in the kingdom’s real estate market, while also facing obstacles in its implementation.
In addition, the report confirms that the mortgage law will increase the numbers of those who seek to own housing, thus the lack of demand for residential rental units, adding pressure on prices of residential units which will lead to lower selling prices and competition among developers, spurring local developers to increase construction of housing units which will contribute to advancing development by the construction sector and related sectors.
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