There may be a worldwide recession looming and property markets declining elsewhere, but the real estate sector in Saudi Arabia is set to grow sharply over the next four years. This is according to a recent report from Jones Lang La Salle – a financial and professional services firm specializing in real estate. This growth is fuelled by an expanding economy and positive demographic trends, according to the report, the Gulf’s Powerhouse – Saudi Arabia’s Real Estate Market.
As the global financial crisis continues to affect international real estate markets, many experts believe the Kingdom of Saudi Arabia is still a haven for profitable real estate investment. It has been reported that only a very modest amount of real estate projects have been delayed here compared to other similar markets. And, it is expected that public and private construction expenditure will continue to drive the industry through this difficult period.
This was also vouched by Kingdom’s leading business figure Dr. Abdullah M. Bin Mahfouz – Vice President of Jeddah Chamber of Commerce and Industry – who recently said that in spite of international markets reeling from the financial crisis, development and investment in Saudi Arabia’s real estate sector is expected to remain strong.
According to the Saudi Finance Minister Ibrahim Al-Assaf, non-oil sector of economy growth stood at 3%, composed of public and private sector growth at 4% and 2.5% respectively. The private sectors over all contribution to the economy increased to 47.8% of GDP, from 46% in 2008.
Real estate plays an important role in non-oil economy of the kingdom of Saudi Arabia. A strong economy and demographic fundamentals are the core stimulating factors behind this phenomenal growth in real estate.
A property law passed in 2000 makes it possible for foreigners to own real estate in Saudi Arabia. A non- Saudi, non-GCC citizen who wants to buy must be a legal resident of the country and must purchase the property for his own use. The law also gives permission to foreign investors who look to own real estate as part of conducting their business. International companies can also purchase employee housing for licensed projects. Permission from Saudi Arabia General Investment Authority (SAGIA) is required for foreign ownership of land. To be approved, a property development project needs to be valued at above SR 30 million (US $ 8 million) at current exchange rates. In addition, the money needs to be invested within five years of the original land purchase date. To prevent real estate speculation, the Saudi law doesn’t allow properties to be sold within five years of the time of purchase, according to Global Property Guide. The holy cities of Makkah and Madinah are off-limit for foreign ownership.
Structure of Real Estate Market
Since the 70s, real estate – including raw land, or land developed with commercial or residential buildings – has widely been perceived as an investment safe-haven in Saudi Arabia. It is worth mentioning here that the establishment of the local stock market in 1985 did not dissipate interest in real estate investment throughout the 1980s and 1990s. Since around 2002, real estate investment has been rising, as have land prices and rents, predominantly in urban areas.
Land acquisition in Saudi Arabia is a top-to-down process. The government releases large plots of land to a limited pool of investors who either develop the land on their own or sell it to other developers or wholesalers. In turn wholesalers determine, according to demand and supply conditions, whether to hold on until land prices appreciate or to begin immediately to sell it to consumers. Some opt to develop their own real estate plots into smaller, mainly residential projects. It is generally seen and estimated that large developers hold on to land for an average period of 3-4 years.
The government here is the distributor of raw land and the private sector is the dominant real estate developer. Individuals and private businesses own most housing and commercial units respectively. Most real estate transactions are conducted through real estate agents, who charge buyers a flat rate of 2 percent commission. There are limited direct sales or leasing activities between landlords and tenants. Geographically, the urban real estate market is divided into three regional centers: Central Region (Riyadh), Eastern province (Al-Khobar, Dammam), and the Western Province – that is Jeddah, Makkah and Madinah.
By type, the real estate is divided into three groups.
• Raw land
• The Housing market comprised of apartments, villas, floor in villas (duplex), traditional homes and
• Commercial units, which consists of office buildings, shopping malls, hotels, and industrial
facilities including warehouses.
In terms of volumes (building permits), the housing market represent 91 per cent of the real estate industry, while value estimators suggest that this sector comprises 75 per cent of all real estate activity.
Real Estate Market Remain Rosy
According to a report on the Saudi real estate scene by Colliers International – the global real estate consultancy – the demand-supply dynamic remains very positive with robust economic growth patterns set to continue underpinned by high oil prices. Imad Damrah – the Country Director Saudi Arabia for Colliers International recently said, “Saudi Arabia is an interesting market to watch because it has one of the most inwardly serving property sectors in the MENA region.” He also added that the Kingdom remains a prime opportunity for investors and developers offering the largest markets in the GCC and a population set to grow from 25 million to 33 million by 2020 While Dubai and Abu Dhabi remains the region’s largest
centers, Saudi Arabia is emerging as the real estate market to watch. Although perception of the country is mixed about accessibility for investors, the Kingdom’s continuing efforts at refining its investment environment has earned it the top regional ranking in the World Bank’s 2009 Doing Business Report.
By 2012, the Kingdom can expect a shortfall of one million housing units. Real estate service company Jones Lang La Salle establishes this estimate according to the recent MENA House View 2009. However, this demand for new space is currently being matched by the supply of quality residential accommodation at affordable prices. According one report by CB Richard Ellis, published in April 2009, land prices in Jeddah rose by 100% in the past two years, primarily due to trading in land, rather than development. As a result, more than 60% of Saudi households are now unable to afford to buy their own homes. Such figures reveal the strain, which is being placed on the housing sector. This is being compounded further
by the lack of financial process in place that would enable the lower-middle class access to capital. Lots of hopes are thus being pinned on the upcoming Saudi Mortgage Law to address such hiccups. Imad Damrah, country director for consultancy and valuation for Saudi Arabia at global real estate adviser Colliers International, has rightly warned that changes were necessary if a major housing shortfall is to be avoided.
The rate of annual growth of the real estate sector in Saudi Arabia was nearly 5.1%, achieving a 40% growth in fixed capital in the real estate market from 2000 thru 2005. The sector was able to achieve growth in GDP of SR 41.7 billion in 2000 to more than SR 54.5 billion in 2006. This was supported by a series of drivers that have made it the biggest and most attractive market in the region. Economic reports indicate an activity of some SR 200 billion annually in the real estate market, which has an estimated total volume of nearly SR 1.4 trillion, while the statistics indicate the need for over 200,000 extra housing units annually until 2020. Residential units make up some 75% of total real estate activity in Saudi Arabia, which needs over SR 75 billion investments annually in order to meet the demand for housing.
“Given the size of the market, the current economic status and the demographics in place we expect to see a substantial increase in demand for real estate advisory services in Saudi Arabia, as investors look for opportunities in the region with minimal exposure to the global financial conditions”, said Abdallah Al-Faadhel, Director Jones Lang L Salle’s branch in Riyadh. Also, with present trends of robust prices and an insatiable global appetite for oil, it is not really surprising Saudi Arabia remains unscathed by the economic crisis that has engulfed most other countries.