Riyadh rising: Housing demand continues to outstrip supply

Friday 01/05/2015
Jeddah apartment buildings under construction

Dubai -With property investors in the Middle East focused on the United Arab Emirates, the market in neighbouring Saudi Arabia, the region’s largest economy, has been relatively overlooked.

Though Saudi Arabia remains a difficult place for foreign investors to do business, the opportunities available far outstrip the pain of taking advantage of them, real estate agents said.

The kingdom’s financial regulator, the Saudi Arabian Monetary Authority, continues to support initiatives that reduce the economy’s dependence on oil and year-on-year growth in the non-oil sector has outstripped growth in the oil sector for several years and is expected to continue doing so, according to data gathered by Saudi lender National Commercial Bank (NCB).

“Real [gross domestic product] GDP growth is expected to rise by 4.3%, due mainly to an expected growth in non-oil sector by 5.4%, driven by the private sector that will offset the negative contribution of oil,” said Said A. al-Shaikh, the group chief economist at NCB.

The key beneficiaries will remain “the construction and manufacturing sectors, growing at 6% and 5%, respectively. Our projections for the two sectors are supported by buoyant activity in the projects market and strong business confidence.”

A higher business confidence has resulted in increased hiring activity from both the local as well as expatriate human resource pools.

As business activity ramps up, so has purchasing power, resulting in higher demand for housing. According to a research note

by real estate consultancy Knight Frank, a combination of rapid population growth and a shortfall in the number of units built has exacerbated the housing under-supply issue in the kingdom.

In 2011, the late King Abdullah announced a plan to construct 500,000 homes. The programme was “slow to gain traction due to problems relating to land availability, the complexity of allocating aid, and slow moving bureaucratic processes”, the Knight Frank report said.

To bypass these obstacles, the Ministry of Housing launched a scheme called ESKAN last year. Through this programme, Saudi families were given two months to register online for a state-subsidised home loan or a subsidised sale of land or housing. But even this was slow to take off because to be eligible for the scheme, a number of conditions had to be met: applicants could not be existing homeowners and they could not be previous recipients of aid from a state-subsidised housing programme. Also, applications are prioritised according to factors such as family size, monthly income and age being taken

into consideration.

In spite of these initiatives, residential housing prices in Riyadh rose 5-7% in 2014. Like any organically growing metropolis, these growth numbers are not uniform across the city. Congestion issues in the south, for example, have been responsible for prices stagnating there. In the north, which has seen notable development activity, prices have seen a healthy uplift of around 9%.

In his first address to the nation since assuming the throne, King Salman vowed in March to speed up efforts to tackle the kingdom’s housing shortages, and in less than 24 hours sacked the kingdom’s Housing Minister Shuwaish al-Duwaihi, while appointing Essam bin Saeed, the current minister of state and cabinet member, as acting minister of housing, highlighting the urgency of resolving the housing issue.

“In the short to medium term, with new supply unlikely to be able to fully offset pent-up demand, we expect residential prices to continue to move in an upward direction,” said Khawar Khan, research manager at Knight Frank.

Saudi Arabia has witnessed rapid population growth over the past decade, outpacing the region’s average. According to SAMA data, the kingdom’s population reached 30 million in 2013, up 2.7% on the preceding year and 36% higher compared to 2003. Unofficial estimates suggest that, in 2013, Saudi Arabia’s population was around 52% larger than the rest of the Gulf Cooperation Council (GCC) combined, and – in contrast to its neighbours such as the UAE, Qatar and Kuwait – the kingdom’s expatriates were in the minority. In fact, non-nationals account for less than one-third of the total population.

Employment growth across Saudi Arabia has been strong. In 2013, it rose 13.9% year-on-year to 10.9 million, while the unemployment rate edged up from 5.5% in 2012 to 5.6% in 2013. A higher level of joblessness among non-nationals was responsible for the increase. By contrast, the unemployment rate for Saudi nationals declined 0.4% to 11.7% in 2013; a sign of progress in the “Saudisation” programme.

The number of inhabitants in the administrative region of Riyadh, which accounts for one-quarter of the kingdom’s population, rose 2.8% to 7.5 million in 2013. SAMA data show that, alongside the Eastern region, Riyadh’s population was the fastest growing in Saudi Arabia from 2008 through 2013.

“This growth can largely be attributed to increasing urbanisation, high birth rates and rising numbers of expatriates joining the local workforce. The latest available data, for example, show that the number of non-nationals in Riyadh’s labour force increased at an average rate of 5.2% per year between 2006 and 2013,” Khan wrote.

According to Labour Ministry data, average wages for Saudi nationals in Riyadh stand at almost $1,305 per month and $15,584 per year. While household incomes are often higher than this due to multiple family members being employed, average income levels are nevertheless low relative to average house prices. With an average 130- 160 sq metre apartment in the south of Riyadh priced at around $98,568, the average price to income ratio is six to one – high by international standards. Assuming a deposit of 20% and a mortgage amortised over 20 years at 4%, payments account for roughly 37% of average income.

In the case of an average-priced villa of $293,040, the mortgage payment increases to $1,412 per month – higher than the average monthly income. There is clearly a considerable mismatch between affordability (based on suitable financing mechanisms) and current residential values.

In recent years, Saudi Arabia’s residential construction sector has been expanding rapidly. SAMA data show the value of residential building construction across the kingdom rose for the ninth consecutive year in 2012 – increasing 11.4% to $25.5 billion in current prices.

Not surprisingly, Riyadh is an important driver of construction activity in Saudi Arabia. The capital accounted for an average of 27% of all residential and commercial permits issued across the kingdom from 2003-13.

Moreover, the number of permits issued in the capital rose 319% over the 10-year period – outperforming Saudi Arabia as a whole, which experienced a 215% increase. Despite rising development activity, however, demand for residential units continues to outstrip supply in Riyadh.

The capital has a requirement for around 50,000 housing units per annum over the next five years and has an estimated housing inventory of 1.15 million units.

However, due to construction delays and the lack of available land, developers have found it increasingly difficult to bridge the gap between supply and demand. What is more, although there are a number of large housing schemes planned to be completed in the short term, there is unlikely to be enough capacity in the system to deliver the required number of units to satiate current levels of pent-up demand.