Experts based in Saudi Arabia analyse its real estate market and how the government is playing an active role in combating industry challenges
Which sectors in Saudi Arabia real estate market are doing the best: residential, retail, office or hospitality?
Ahmad: Driven by a growing population and rising income levels, the performance of retail and office in selected cities is considered attractive. Also, currently hospitality sector across the kingdom is doing extremely well.
Although the activity level in the residential sector has recently slowed down, the demographic and organic growth of the population base will likely ensure the sustainability in this sector. Therefore, it is considered the most attractive in the long run.
Jones: Given the current market scenario, and increasing population in the country, the residential market outperforms its competitors. A shortfall in residential market supply has put a considerate amount of pressure on the residential sector. On the other hand, a plethora of supply in the office and hospitality sector will take time for the market to absorb.
Ahmad: Residential and retail are the best performing asset classes across the all major cities of Riyadh, Jeddah and Dammam. However, in holy cities of Makkah and Madinah, hospitality and retail has outperformed other sectors.
Report by Knight Frank suggests that there is an increase in the demand for office space, will the demand be met in the near future?
Damrah: There is an increase in demand in relatively all sectors which is underpinned by a growing economy and high population growth rates. However, the Riyadh market is anticipated to have some imbalance in the future as supply is expected to substantially increase. On the other hand, the supply demand balance should not change much within Jeddah as both supply and demand are expected to increase in tandem with each other.
Jones: Office space demand has largely been driven by the public sector, precisely the non-oil public sector which is largely concentrated in the commercial cities. Following the supply of few commercial flagship projects, vacancy rate have remained relatively stable, showing signs of match of demand and supply in the market. Overall, as demand is generated over the years, the country is in line to receive a considerable amount of supply for the next three years with a view to match the supply.
Has rents in residential markets and offices remained stable? Could you elaborate on why or why not?
Ahmad: Given the issue of affordability in the residential sector, the rental market showing healthy growth. Rents are increasing because demand for housing outstrips supply. However, this is not the case for office sector where situation differs from city to city. For example in Jeddah rents are stable as future supply is relatively limited. Contrary to this office rents in Riyadh are decreasing due to oversupply situation. The outlook of office sector is therefore less resilient as compared to residential sector. However, some of the projects continue to perform well due to excellent parking, work friendly environment and other services they offer to their tenants.
Damrah: In Riyadh, rents have remained relatively stable in the office market as developers are trying to secure tenants as much as possible before King Abdullah Financial District (KAFD) completes construction, whereas apartment rental rates have increased which is mostly due to relatively limited supply increases relative to demand.
While in Jeddah’s office sector, rents have sustained their increase in prices as demand is relatively balanced with supply. The city’s residential sector situation is similar to Riyadh’s.
Jones: Office markets remains relatively stable, as new supply in the market keeps pace with the ever generating demand in the country. On the other hand, the residential market has witnessed a steady growth in the rental segment, as public shits to rentals from owning a house due to the lack of affordable housing in the country. Additionally the lack of supply in highly populated areas have also contributed to the rental growth in the country.
What are some of the major challenges faced by developers in Saudi Arabia?
Damrah: High land prices, unavailability of land in strategic locations, the 30% down payment requirement by Saudi Arabian Monetary Agency, labour shortages, time consuming to obtain permits and the lack of professional contractors are some of the major challenges.
Jones: One of the major challenges, in my opinion, is to match the demand of the customers, as customers vary a lot depending on area to area. The major point of obstacle being the difference between willingness and ability, much of Saudi Arabia’s population is attributed to young generation leading to comparatively low income which makes affordability a major drawback for purchasing a house. Over and above the income factor, with the new mortgage laws in place which restrict the loan amount to a maximum of 70% is another factor for slowdown in the sales market.
Ahmad: Some challenges scarcity of credit, Escrow laws, Saudis wary of off plan purchases, cultural acceptance of community developments, and new laws of 30% down payments for residential real estate financing.
How has the rise in population in Saudi Arabia been challenging to deal with by the local real estate market?
Ahmad: Saudi Arabia is the largest potential realestate market in the GCC with abundant oil wealth along with a growing population. The increase in population, particularly youth, drives a long-term demand for housing. The local market presents best opportunity for residential and retail asset classes. That being said, affordability still remains the substantial challenge.
Jones: The local market has witnessed a steady increase in demand over time with population increase and due to various government initiatives to boost the housing sector. With the government expectations looking at a rise in the population in the coming years, the rising population will outweigh the current supply in the market causing property prices to rise in the country.
Damrah: The growing population has positively affected the market in terms of natural demand, especially for real estate components like residential and retail. However in many cases, the market has not been able to cater to this demand, which has put pressure on prices. This has affected affordability, especially for the residential sector where we are seeing multiple initiatives by the government to make housing more affordable.
How is the lack in affordable housing being addressed by the Saudi real estate sector?
Ahmad: Saudi government’s main priority is to tackle the affordability issue so that more Saudis can shift from rental market to house ownership. Ministry of housing is working with private developers to release more houses in affordability market. Similarly REDF is trying to facilitate citizens to build or own a house but increasing land and housing prices makes it difficult to achieve the desired results.
Jones: The cabinets structuring of new laws in the real estate sector can be a welcome move to boost the affordable housing supply in the market. Statistics revealing that up to 50% of space inside the big cities such as Riyadh and Jeddah is underdeveloped and owned by wealthy individuals with an intent to earn speculative profits. The imposition of tax on unused/undeveloped land can have a positive impact in the industry where developers will have the opportunity to target areas of low-mid income generating families.
Damrah: To alleviate this shortage, the Ministry of Housing’s latest mandate involves developing 500,000 low cost housing units across Saudi Arabia. There has been some progress; however, there were certain challenges that have left the progress behind the desired targets. Approximately 65 projects are under construction (74,518 units), 25 projects are under bidding (21,360 units) and 95 projects are in the design stage (141,567 units). Overall, the Ministry is in the process of providing land, housing units and loans to over 306,000 applicants. In addition the REDF has reduced the waiting period for housing loans from 16 years to 10 years. The target is to reduce this further by 5 years.
Construction projects getting delayed is quite common in Saudi Arabia. Could you highlight some key considerations for the delay?
Ahmad: Delay in construction projects is normal across the all GCC countries. Shortage of labour, increasing cost of hiring new labour and technician, changes in design during the construction and developer-contractor relationship are among the major causes of delay.
Jones: Delays can cost a fortune to contractors. Construction delay can be due to a number of reasons, depending on country to country. Construction activity delay in Saudi Arabia has been focused primarily on two main factors, which are lack of man power and political instability.
Damrah: If we look at recent delays, this is mostly due to labour market corrections that are expected to be smoothed in the coming few months. Furthermore, inadequate planning and lack of proper project management could also be a major reason for delays.
How has the dipping oil prices affected the real estate market?
Ahmad: Lower oil revenues should have limited short term impact on the Saudi real estate market given the willingness of the government to fund expenditure from its total reserves and by issuing of sovereign bond of $5bn as it tries to close the budget deficit caused by the collapse in oil prices.
There is still a focus on social infrastructure with the highest areas of spending (after defence) being education, health and transportation. The Saudi real estate market is heavily dependent upon high levels of government spending and while the more prudent approach is unlikely to have an immediate impact on the real estate market in 2015. If oil price stays down then government may not be able to maintain the trend of rapid increase in spending, which could constrain the growth of the real estate market in the longer term.
Jones: Countries which rely heavily on oil as a major source of income, and countries which have high cost of oil production are the ones which are heavily effected when oil prices plummet. Parallel to this the real estate industry is first in line to absorb the risk of declining oil prices, as investor money from oil producing nations shrink and taking a cautious approach to enter the market.
Damrah: Despite a general slowdown that can be attributed to several factors, up till now the market has not reacted negatively. This can be explained by two major reasons, firstly the government spending has not been affected in the budget of 2015 despite the falling oil prices. Saudi government announced the largest budget on record in 2015 at $227bn, which marks a growth of 0.6% from 2014 budget plan. And secondly, demand in the market is genuine which is based on strong demographics.
What role does massive mixed-use development projects such as JEC’s Kingdom City play in boosting the country’s real estate sector?
Ahmad: Massive mixed-use projects not only generate employment but also creates demand for surrounding small real estate developments which benefit from shadow effect of the large development. However, affect is not limited to that city and does boost the country’s real estate. For a country’s real estate sector it brings prestige, creates landmark or a symbol of aspiration and encourage economic and technological progress.
Damrah: I believe the most important factor they play is to create contemporary CBDs and new nodes of future growth in the city. It also helps in opening up investor’s appetite for large-scale development projects and provides assurance that quality mixed-use developments can achieve a price premium. Furthermore, they elevate the standard of construction and open up opportunities for various real estate investments around their location.
Jones: As we say diversification is an important tool to reduce the risk of any portfolio, hence applying the same concept to a country’s source of revenue is equally important. Saudi Arabia being an oil rich nation, which depends heavily on oil as a source of income, a diversification into the tourism and retail attractions can have a lasting effect on the country. Not only the real estate sector is boosted by this, but it also enhances tourism in the country creating a source of income for the oil rich nation.
What are some of the trends you have noticed in the current Saudi Arabian real estate market?
Damrah: We have seen that developers are becoming more sophisticated in their developments. They are focussing more on their target segment and how they can differentiate their developments from competition, which has increased in the market. Developers are also becoming more specialised by only concentrating on sectors that best describe their ability.
Developers have started to make strategic plans that will help transform their business model from speculative land trading to professional real estate development.
Jones: The Middle East region is very sensitive to oil price fluctuation, as major revenue is generated through oil extraction. In line with that context, the real estate market in the region is also directly co-related to oil price. As the real estate sector involves heavy investments, cash generating countries in the Gulf region will boost the real estate sector when oil prices are at the peak.
With the recent plummet in oil prices, and with Saudi being one of the top oil producing nations in the world, a direct impact on the real estate sector was bound to be seen. A considerable amount of correction continues in the Saudi Arabia real estate market as oil prices have not seen any recovery lately. Major cities such as Riyadh and Jeddah which drive the country’s prime business activities have seen a slowdown in the real estate sector in term of transactions.
Ahmad: Investors are looking for more income generating opportunities which provided boost to real estate income generating funds. In a market where interest rates are low on treasury bills and government bonds, income generating funds provide attractive opportunities to invest in various real estate asset classes in major cities of Saudi Arabia.
How will appointing a private builder, Majed Al Hogail, former managing director of Rafal Real Estate Development Company, as housing minister of the country positively affect the real estate market?
Ahmad: He has just been appointed, it is too early to measure any effect on the real estate market but we expect positive affect in the long-term as he is aware of the challenges faced by housing market and might be a right person to prepare long-term strategy to tackle those issues.
Damrah: I believe this will have a positive effect on the residential market, especially as the ministry has been reaching out for the support of private sector to build residential units. The ministry will better be able to reach out to developers as the minister is someone with a hands on experience of developing real estate projects. He understands the issues developers faced in the past and are currently facing in turning out viable projects.
Jones: Rafal Real Estate Development Company have a very good reputation in the Saudi market and have delivered some quality schemes. The new minister will bring that experience and respect from the property industry to the position and will be able to act as a conduit between the private sector and the government, so that the latter can deliver the base requirements to allow the private sector to deliver tailored product to the market.