Saudi Arabia’s real estate sector remains attractive despite challenges
The demand for real estate in Saudi Arabia is expected to remain healthy as the rising Saudi population and evolving lifestyles are expected to keep real estate demand positive in the years to come. This is anticipated across the Kingdom, but especially in the major urban centers of Riyadh, Jeddah, Makkah, Al-Khobar and Dammam. According to recent reports, current demographics require that around three million housing units need to be created by 2040 to meet the needs of the growing population. A young population that is of marriageable age has also catalyzed the demand for rented accommodation, since most newlyweds seek independent residential properties either on rent or lease. Additionally, the preference of those with higher disposable income to own residential property has also spurred the demand for housing.
Yet, this structural increase in demand is curtailed due to costs of residential units that are too expensive for the average person. The problem of high land prices continues to thwart attempts by private sector developers who find themselves largely unable to meet the price requirements of the mid to low-end sectors of society who wish to buy property. This is further exacerbated by a significant rise in building costs that are hampering attempts by developers to meet a target of building up to 500,000 low-cost homes. As a result, rental inflation is expected to remain high over the coming years.
Mr. Anees Moumina, CEO of SEDCO Holding Group explained, “Realestate investments will serve both investors and the beneficiaries. From the consumers’ side, there has always been an attraction to own homes. As investors start to develop real estate, they will try to create differentiation in areas such as design, innovation and the general betterment of their real estate development. This will result in the end product improving, and thus will be to the benefit of the consumer,” he said.
According to Issam Hamid, Chief Investment Officer at SEDCO Holding Group,”the announcements by The Custodian of the Two Holy Mosques King Abdullah in regards to building 500,000 housing units is a great step to address the housing shortage among low-income Saudis.” Due to the current supply/demand imbalance, he suggests that the “government should consider providing further incentives to attract private sector investments in the social housing segment.” It can be recalled that in early 2011, King Abdullah had approved designs for thousands of new housing units that were ordered to be built in different provinces around Saudi Arabia.
A number of royal decrees issued in March of that year called for the establishment of 500,000 low-cost housing units, costing $66 billion (SR250 billion), in order to meet the country’s housing demand.
However, according to Khalid Johar, Head of Strategy & Investments at SEDCO Development, a subsidiary of SEDCO Holding Group, the combination of increasing building material prices and the impact of the recent changes to the labor laws has led to increase in construction costs. There is minimal reliable statistical evidence to support this trend. However, our observation of the market suggests construction costs have increased by 5% to 10% per annum over the past two to three years.
Sameer Kazi, Head of Corporate Real Estate Investments at SEDCO Holding Group stated, “when real estate projects or intentions to build are announced, it raises the anticipation of increase in supply. However many of these projects are not delivered on time which does not help address the supply/demand imbalance and supports further price increases.”
The role of speculation in the real estate market cannot be underestimated, for example, as occurred during the announcement of the new Saudi mortgage law.
The law is expected to encourage banks to expand lending in a $16 billion market that now accounts for less than 4 percent of all home purchases. The market may increase to about $32 billion annually over the next ten years.
Kazi stated, “because of this, real estate land owners expected liquidity to come right away and automatically their price expectations went up. These price hikes based on speculation then turned off potential buyers/developers. After 2-3 months, when individuals realized that the mortgage announcement doesn’t mean immediate liquidity, prices stabilized and once again the supply/demand factor took center stage.”
However, in the medium term, the passage of the mortgage law is expected to make the real estate sector more attractive, serving the interests of both the investors and intended beneficiaries, Kazi pointed out.
Mr Kazi further explained that for investors, given the liquidity in the Saudi market and the overall Shariah-compliant nature of real estate, “people are attracted to this sector and have a long-term positive outlook.”
The law, as it is, is part of a long-term vision and not of the short-term benefits of the corporate sector, as it is unlikely to have an immediate positive impact either on real estate companies or banks. In the long run, the law aims to establish a stable, efficient and sustainable market for mortgages, which should underpin the government’s long-term social reforms.
In addition, the new labor law on Nitaqat, “may adversely affect the supply pace of home construction as there are unlikely to be enough laborers to build homes. In this case, even if there is capital through mortgage or equity, you will drastically increase waiting periods for potential customers,” Kazi pointed out.
According to statistics published by local dailies, there is a need for about 1 million housing units by 2020, meaning the construction of 150,000 housing units every year. Real estate experts expect apartment construction for low-income families to be limited, as the surge in prices along with rising wages in the construction industry compromise the profitability of such projects.
Despite its challenges, the Kingdom’s real estate sector provides some of the most attractive investment opportunities in the Gulf region. Currently, more than 285 real estate projects worth SR260 billion are either under way or being planned. The current demographics require that around 3 million housing units to be built by 2040 to meet the needs of the growing population, reports indicated.
Amid some lingering uncertainties and reservations in the face of challenges that loom over the horizon, Saudi Arabia still has great opportunities ahead, Kazi noted.
The Kingdom’s best areas for real estate investments, according to Kazi, are in logistics – distribution of hubs & warehouses; hospitality – hotels; residential and retail. However, office investments, he mentioned, “are relatively unattractive and not receiving much attention from investors.”
SECDO Holding Group remains focused on real estate projects, converting idle lands into bankable options, particularly with assets in the hospitality business which include a 5 star hotel + shopping mall under construction in Tahlia Street; the 800-room Elaf Hotel in Makkah which was recently completed; and plans to develop another 5-star hotel in Jeddah.
Recently, SEDCO Development, partnered with NCB Capital to launch the Al-Ahli SEDCO Residential Development Fund, a public close-end Shariah compliant investment opportunity, which will provide investors with capital growth by purchasing land plots in Jeddah for development, construction and sale of residential apartments targeting the middle income segments of the population. The fund carries a minimum subscription of SR 50,000 and aims to have an internal rate of return of 10 percent per year and has now successfully closed after reaching its initial target of SR 350 million. SEDCO Development has already acquired a 100 percent interest in a 25,934 square meters residential development site located in the Al-Salamah 2 district of Jeddah 6 months ahead of schedule. The site is ideally suited for the development of a medium density residential apartment project and is in accordance with the investment criteria of the Fund.
The Group’s current development activity is focused on residential compounds primarily for rent for expats and middle income homes for sale to the local community as well as a landmark hotel and retail property. SEDCO Holding Group is also looking to add hospitality and commercial property to its extensive portfolio of hotels, shopping malls and office buildings in Saudi Arabia by acquiring stable existing assets that may be available for sale.