Saudi Arabia’s property market – hot, hot, hot!
March 12, 2012
Saudi Arabia’s property market is hot. Other places may worry, but the oil Kingdom is rolling in money. Result – a property boom. With oil prices soaring, and the economy expanding 6.5% in 2011 (the highest growth in the past eight years) there is a rapidly growing population, rising rents, and dramatic rental yields of between 8% to 11%. With an almost virgin mortgage market boosted by a new law and investors skittish about the over-volatile local stock market, it is hard to see the Kingdom’s property boom pausing anytime soon.
- In Jeddah, there was a 15% rise in average sales price of single-family dwellings (villas and duplexes) to SAR3,980 (US$1,061) per sq. m. in 2011, while the average sales price of multi-family dwellings (apartments) rose by 14% to SAR2,450 (US$653) per sq. m.
- In Riyadh, the capital, there was a 9% rise in the average price of single-family dwellings (villas and duplexes), to SAR3,150 (US$840) per square metre (sq. m)., according to Colliers International GCC. Likewise, there was an 8% rise in the average price of multi-family dwellings (apartments) to SAR2,860 (US$762) per sq. m..
House prices have been rising for almost a decade now. From 2002 to 2005, house prices rose 13.7% annually while average land prices rose 16.5% per year, according to the National Commercial Bank Capital (NCBC), the largest bank in the Middle East.
Saudi Arabia is experiencing a bonanza from high oil prices. Petroleum accounts for more than 75% of government revenues and 90% of exports. Saudi is the world’s largest oil producer and exporter, and also has huge clout as leader of the Organization of the Petroleum Exporting Countries (OPEC).
Mindful of the lessons of the 1970s to early 1980s, this time the Saudis are spending their petrodollars cautiously, reinvesting a large portion of the windfall into real estate and encouraging foreign investment. In addition, huge local stock market fluctuations from 2006 on encourage investors to shift their focus to real estate.
After deep recession in the 1990s, a Foreign Investment Law was passed in April 2000 to encourage a service-oriented economy. Seven months later a new Real Estate Law allowed legally-resident non-Saudis to own real estate for their private residence, provided they get a license from the Ministry of Interior.
With the permission from the Ministry of Interior, the law also allows ownership of real estate by foreign investors in order for them to conduct their business activities and have accommodation for their employees. To prevent speculation, five years must elapse before property can be sold.
Too many people, nowhere to house them
Saudi’s sharp population growth is causing housing demand to outstrip supply. The Kingdom’s population is growing by more than 2% annually. It is dominated by young middle-class Saudis who are first time homebuyers. About 45% of the country’s population are below 20 years old. In addition, demand from expatriates is also exacerbating the housing shortage, with about 5.5 million expat workers in the country.
Low and middle-income households make up about 80% of the unmet demand. Home ownership is currently below 35%, mainly due to lack of morgage finance. Saudis generally prefer to buy rather than to rent properties. There was a housing shortage of about 1 million dwellings in the Kingdom in 2012, according to Jones Lang La Salle. About 275,000 units a year need to be built from 2012 to 2015 to meet demand, according to Banque Saudi Fransi.
New mortgage law passed
Currently, less than 1% of all home purchases are financed by mortgage loans, according to CB Richard Ellis.
To encourage private banks to be more aggressive, in March 2011the Saudi Arabian Shura Council passed a long-awaited mortgage law, to widen funding options. The Real Estate Development Fund (REDF), a state-funded entity, currently dominates the home financing market. As part of the stimulus package announced last year, REDF funding was increased and loan amount was raised. However, it is still not enough.
The Saudi riyal is pegged to the US dollar at 1US$=SAR3.75. Because of this, when the US Fed repeatedly cut its key interest rates, local rates were also cut by the kingdom’s central bank the Saudi Arabian Monetary Agency (SAMA), pushing the reverse repo rate down to 2% since January 2009.
Yields high, rents rising
Rental yields in Riyadh are very high at around 7.8% for apartments, and 8.6% for villas and duplexes, according to Colliers International. In Jeddah, yields for villas and duplexes fell to 8.8% in Q4 2011, from 9.1% in the previous year. While yields for apartments fell to 10.8% in Q4 2011, from 11.5% in the previous year.
Yet residential rents continue to rise:
- the average monthly rent for villas and duplexes soared by 17% to SAR270 (US$72) in Q4 2011 from the same period last year, according to Colliers International
- the average monthly rent for apartments rose by 14% to SAR222 (US$59) per sq. m.
- the average monthly rent for villas and duplexes rose by 11% to SAR350 (US$93) in Q4 2011 from a year earlier
- for apartments, rents rose by 7% to an average of SAR264 (US$70) per month.
Major real estate developments
The Saudi government has launched four integrated economic cities, and is launching another two later this year - one in Tabuk and one in the Eastern Province. These huge projects aim to meet residential and commercial property needs and to improve the investment climate in the country.
These economic cities will create over 1.3 million jobs and house more than 4.5 million residents, contributing SAR563 (US$150) billion to GDP and increase Saudi Arabia’s per capita GDP to SAR125,625 (US$33,500) by the year 2020, according to the Saudi Arabian General Investment Authority (SAGIA).
|King Abdullah Economic City (KAEC)||Rabigh, north of Jeddah||168 million sq. m.||Q4 2005||2016||100 Billion||Includes 260,000 apartments and 56,000 villas|
|Prince Abdulaziz bin Mousaed Economic City (PABMEC)||Hail, north of Riyadh||156 million sq. m.||Q2 2006||2018||30 Billion||Develop 30,000 housing units|
|Knowledge Economic City (KEC)||Holy city of Medina||4.8 million sq. m.||Q2 2006||2014||25 Billion||Develop 30,000 residential units|
|Jazan Economic City (JEC)||Jizan, 725 kms south of Jeddah||100 million sq. m.||Q4 2006||2011||102 Billion||Include residential areas with complete amenities|
|Source: Ministry of Economy and Planning|
Ministry for Housing established
To address the huge demand for housing in the Kingdom, in early-2011 the government established a Ministry for Housing to help build houses on government sites, providing free land and loans. An additional 132,000 units are expected to be finished by 2015. In addition, the government has allocated about SAR250 billion (US$66.7 billion) for the construction of an additional 500,000 new dwellings in the coming years.
Most property analysts expect that house prices will continue to rise in the coming years.
- House prices, land values and rents are expected to rise further in 2012, according to Jones Lang LaSalle.
- Saudi house prices are projected to grow by about 5% annually from 2012 to 2013, according to Rasmala Investment Bank. The Kingdom’s will remain strong specially in urban property markets such as Riyadh, Jeddah, Makkah, Madinah and the Eastern Province.
- “Out of the whole GCC region, Saudi Arabia is likely to see the most growth in real-estate prices during 2012 - mainly driven by local demand and escalating land and construction costs,” said Matthew Green of CB Richard Ellis.
“With government plans to spend nearly US$70 billion on low income housing the market outlook for Saudi looks particularly strong,” said John Davis of Colliers International, MENA.
“There is very strong positive sentiment about the outlook for Saudi’s economy, and that is fuelling demand for high quality properties within the Kingdom. We are seeing strong demand from both end users and investors seeking a market with high yields and plenty of scope for capital growth,” said Ziad El Chaar of Damac Properties.
With the passing of the new mortgage law and the establishment of the Ministry for Housing, Saudi’s housing market boom is expected to continue in the coming years.
Healthy economic growth
The near-term economic outlook for Saudi Arabia is very strong, mainly due to high oil revenues, according to the IMF.
Saudi’s real GDP growth was 6.5% in 2011, on the back of increased government spending. It was the highest growth in eight years, according to the IMF. The economy grew by 4.1% in 2010 and 0.1% in 2009. In 2012, the economy is expected to expand by 3.3%.
Inflation was about 5.3% as of January 2012, according to the Central Department of Statistics, and has been stable at around that for the past three years.
Unemployment has been around 10% for Saudi nationals for several years. The government plans to create about 150,000 jobs to ease the unemployment problem in the country.
- Amid calls for King Salman to be deposed, Saudi Arabia’s property market is weakening - October 29, 2015
- Saudi Arabia’s property market – hot, hot, hot! - March 12, 2012