Saudi Arabia set to see continued growth of its residential real estate market

Saudi Arabia has seen its residential property market expand rapidly over the last year due to increased demand caused by various government initiatives to boost the housing sector.

Over the past year, residential prices in Riyadh have risen by 5% to 7% overall, according to the Riyadh residential research report from international real estate firm Knight Frank.

However, it points out that there have been variable performances across the capital’s districts, with congestion issues in the south, for example, responsible for prices stagnating.

Meanwhile, in the north, which has seen notable development activity, prices have seen a healthy uplift of around 9%, the report says.

In the short to medium term, with new supply unlikely to be able to fully offset pent-up demand, the firm expects residential prices to continue to move in an upward direction.

In recent years, Saudi Arabia’s residential construction sector has been expanding rapidly. Indeed, the latest available data from the Saudi Arabian Monetary Agency shows that the value of residential building construction across the kingdom rose for the ninth consecutive year in 2012, increasing by 11.4% year on year.

Riyadh is an important driver of construction activity in Saudi Arabia and the capital city accounted for an average of 27% of all residential and commercial permits issued across the
Kingdom between 2003 and 2013.

Moreover, the number of permits issued in the capital rose by 319% over the 10 year period, outperforming Saudi Arabia as a whole, which experienced a 215% increase.

The report points out that despite rising development activity demand for residential units continues to outstrip supply in Riyadh. Indeed, 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 just 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’s 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.

Figures from the Central Department of Statistics and Information (CDSI) show that just 60% of housing units in Saudi Arabia are owner occupied and in Riyadh this drops to 53%. By comparison, the levels of owner occupation in neighbouring countries is much higher at 75% in the United Arab Emirates, 80% in Qatar, 82% in Bahrain and 83% in Oman.

The report explains that in order to address the housing undersupply issue, the government has launched a number of projects in recent years although not all of these have achieved the success that had been envisioned.

For example, in 2011, the government announced a programme of works to build 500,000 homes across the kingdom.’ However, the scheme struggled to gain traction due to issues related to a lack of land availability, complexities in allocating aid and slow moving bureaucratic processes,’ the report points out.

Another more recent initiative was the introduction of the mortgage law. If successful, it will provide low and middle-income Saudis trying to get on the first rung of the property ladder easier access to finance, and is projected to push up the kingdom’s homeownership to 80% by 2024.

‘In the short to medium term, we believe that urban regeneration will need to play an increasingly important role in Riyadh as existing road and power infrastructure limits the extent to which the city can expand,’ the report says.

‘That said, the planned metro has the potential to regenerate existing neighbourhood’s in close proximity to its stations as the project opens up travel to parts of the city which currently suffer from congestion, and are seen as less desirable,’ it explains.

‘Moreover, there is a need for a more varied residential product. While Riyadh is dominated by low rise development, young Saudis looking to get on the first rung of the housing ladder are faced with little choice in terms of the type of residential stock available,’ it points out.

‘Going forward however, through the regeneration of existing neighbourhoods, and by building a range of residential stock, including apartments, town houses and villas, these issues may be resolved,’ it adds.

‘Over the next couple of years, we expect residential prices to continue to rise in Riyadh as the city’s rising population exacerbates the already acute housing shortage. Beyond that period, improving infrastructure, as well as new international developers entering the market, should boost construction activity and thus housing completions,’ the report concludes.