Real Estate & Construction

A House For All

Real Estate

There is a growing demand for affordable homes in the Saudi Kingdom, while the ever-growing stream of pilgrims to the Holy Cities of Mecca and Medina has led to vast sums being invested in the hospitality sector.

Remarkably, an estimated 60% of the population does not own a home, which is a surprisingly high ratio for such a wealthy country. Saudi Arabia has rapidly urbanized over the past few decades. As a result, over 80% of the population today lives in urban centers, where greenfield land is scarce and expensive, rents are high, and mortgages hard to come by. However, despite these shortcomings, prices per square meter in the residential market have remained restrained. In a report issued in 2013, Colliers estimated that in Riyadh villa prices ranged from $550-$1,150 per sqm, with apartment sale prices more in the $670-$1,050 per sqm range. Despite these numbers, the lack of adequate mortgage legislation makes even these difficult for new families to afford. In Jeddah, higher prices and land shortages have had more of an effect on the market, with estimates from Colliers showing villa prices at $1,000-$2,150 per sqm, while apartments ranged from $850-$1,550 per sqm at sale price.

In 2011, King Abdullah launched the $67 billion ESKAN plan, which foresees the construction of some 500,000 affordable homes across the country. The Ministry of Housing was established to execute the scheme, which so far has proved harder than anticipated. It took time and effort to get the new ministry up and running and formulate the necessary legal framework.

However, 2014 finally showed some promising signs of progress. Firstly, the Ministry of Housing, in January, announced it was constructing some 18,000 housing units, as well as developing plots of land for another 46,000 units. Construction will mainly take place in Jeddah, where the Slum Areas Development Department intends to tear down several low-income districts to build affordable homes, offices, and shops.

Secondly, the Housing Ministry, in March 2014, launched the ESKAN online application procedure. Conditions include for the applicant to be Saudi, married, and over 25 years of age. Women can also apply if they are financially supporting a family. Priority considerations include the number of family members, social status, and special needs. The Ministry will take several months to make a final decision. Applicants will pay for their subsidized homes or land, or pay off their subsidized loans, over a period of 10 years through a 25% deduction of their monthly income.

One of the main obstacles facing a successful implementation of the ESKAN scheme is that much land appropriate for development, especially in and around the main cities, is owned by a small proportion of more prominent families, who perceive land as a prime long-term investment vehicle and who are generally not willing to give up their property without some sort of adequate compensation. As a consequence, even constructing affordable homes in Saudi Arabia has become such a costly affair that it is extremely hard for developers to make a profit.

The Saudi people who can afford to acquire a home generally do so for life. There is practically no secondary home market, while less than 4% of home purchases are financed through mortgage loans. In July 2012, the Saudi government, however, approved its first ever Real Estate and Financing Law.

Most experts have welcomed the law as a positive development to establish a more mature market, although they do not expect to see major changes in the short term, as banks are likely to adopt a wait-and-see attitude. However, one limitation with the new mortgage law is that it will require a 30% down payment from prospective home owners, seen as a measure that will help reduce speculation in the market.

So far, the Real Estate Development Fund (REDF) has dominated the home financing market. However, the National Commercial Bank estimated there were no less than 537,000 applications on REDF’s waiting list, while another 1.7 million applications have yet to be reviewed.

The Real Estate and Financing Law furthermore allows foreigners to own property in the Kingdom. “I don’t think that it will have much of an impact, as most expatriates working in Saudi are low-skilled, low-paid workers and their incomes won’t permit them to acquire property,” John Sfakianakis, Chief Economist of Banque Saudi Fransi, told Arabian Business. “If Saudis can’t locate affordable homes, I don’t think expats will find it easy to afford property.”

MECCA & MEDINA

Affordable housing is a particularly pressing concern in Mecca and Medina, as the Holy Cities are visited by millions of pilgrims every year, many of whom prefer to temporarily rent an apartment than take up a hotel room. In addition, both cities have embarked on massive urban redevelopment schemes, making scarce land even scarcer, and thus more expensive. In 1Q2014, some 25% of all construction contracts awarded in Saudi Arabia concerned Mecca. Only the mining city of Waad Al Shammal attracted even more contracts. In 2013, some 12 million pilgrims visited Mecca and Medina, which is set to increase to 17 million by 2025. Hence, the Al Masjid al Haram Mosque, home to the Holy Kaaba, will have its capacity increased from the current 700,000 to some 2.5 million worshipers. Price tag: some $21 billion. The mosque and its surroundings are today dominated by the newly built, 485-meter-high Clock Tower, a $3 billion complex of malls, hotel rooms, and some 15,000 housing units, while much more is still to come. In May 2014, Colliers International issued a report on the hospitality developments in Mecca and Medina, where the Mosque of the Prophet’s capacity is expanded from some 600,000 today to 1.6 million by 2040. In Mecca alone, according to Colliers, tens of thousands of housing units and hotel rooms are to be built. One of the biggest projects under construction is Jabal Omar, a $5.3 billion project that consists of 37 towers offering six five-star hotels with some 13,500 rooms, 520 restaurants, 4,360 shops, and seven high-rise residential buildings.

“Our part in the Jabal Omar project includes the Sheraton and Westin Hotels, just across the Kaaba,” said Murat Giray, CEO of the Saudi construction firm Baytur. “The hotels will add 1,142 five-star rooms to the market. The project is slated for completion by the end of 2015. We are targeting Mecca for other, similar projects, as well, because over the next 15 years the amount of investment, especially in the hospitality sector, will be bigger than all investments in the rest of the Gulf combined. Mecca is a critically important market for us. We are trying to set ourselves up for a long-term involvement.”

In early 2014, according to Colliers, Medina had some 217 hotels with over 46,000 rooms and 4,000 service apartments, only 32% of which belonged to the four- and five-star categories. In 2013, the government announced it intended to erase about half of the existing hotel stock to create space for a series of new, luxury hotels, as well as such prestigious developments as the $30 billion Knowledge Economic City. Mecca and Medina will be connected by the Haramain High Speed Rail, which is due to be completed by 2016.

OFFICE & RETAIL

News regarding the Saudi office market is dominated by the recently completed Kind Abdullah Financial District (KAFD) in Riyadh, which aims to become the country’s main financial hub. It consists of 42 buildings offering a total of 2 million sqm of built-up area (BUA), nearly half of which is office space. Some experts, however, fear this may be a bit over-ambitious. The Economist, for example, noted that even if all companies moved their premises to the KAFD, still one-third of the complex would remain vacant. Average office rents in Riyadh varied between $266 and $400 per sqm in 2008 and between $266 and $530 in 2012, according to a report by CB Richard Ellis. In Jeddah, the average price varied between $159 and $320 per sqm in 2012.

Regarding retail, the Economist Intelligence Unit (EIU), in 2013, estimated that Saudi retail sales amounted to some $83.3 billion in 2011, which is expected to grow at a CAGR of 9.5% to reach $131.2 billion by 2016. As elsewhere in the region, the country’s mall-based shopping culture has increased significantly in recent years, with supply rising from 600,000 sqm in 2005 to 1.1 million sqm in 2012. An estimated 417,000 sqm is set to be delivered by 2015, bringing the total amount of mall space to some 1.5 million sqm. The most significant recent development in that respect was the Emirati Al Futtaim Group signing an agreement with the Riyadh-based Kayannat Real Estate Company in June 2014 to construct Saudi Arabia’s largest shopping mall at a cost of some $1.6 billion. The 250,000 sqm Al Diriyah Festival City will include an Ikea anchor store, as well as a 500-room hotel.