The inspired ideas of forward-thinking planners and implementation of the laws can take years to reach fruition in the unique environment of the world’s biggest oil exporter and home to Islam’s holiest places. But ideas included in a 2001 Real Estate Law – which, for the first time, envisaged foreign investors buying property – could hold the seeds of a major new investment play in the Saudi kingdom, as it stabilises under new King Abdullah Bin Abelaziz Al-Saud.

The Saudi real estate boom is being fuelled by the 2004/05 spike in oil prices and the wider demands of a modernising economy with a very young population; the repatriation of funds from Saudi citizens is fuelling investment funds. Many Arab investors perceive the post-9/11 Western world as a more hostile place, where they do not want to place all their funds, and nowhere is this sentiment so apparent than in Saudi Arabia.

“Arab investors have not left London – they have long seen it as a favourable place to invest and have huge holdings there – but they are covering the table to spread their risks,” says one upmarket property expert.

Winners all round

In this particular roulette game, almost everyone seems to be a winner, provided they are allowed to play. In Saudi Arabia there are significant limitations on who can invest but also a significant opening up for future foreign investment, with notable extra opportunities for Muslim investors.

Tanmiyat Group chairman Solaiman Al-Majed told a symposium earlier this year that the growth of real estate in Saudi Arabia “is considered the second highest in the world after Shanghai”. Saudi-based Tanmiyat joined the Gulf Finance House-backed $3.8bn Legends-Dubailand project last year as a strategic investor, underwriting 40% of the $302m private placement flotation for the project’s first phase.

But increasingly, Saudi and other Gulf Co-operation Council (GCC) investors are able to buy into mega-projects at home. According to the Kuwait-based Gulf Investment House, the Saudi real estate and construction sectors, which are thought to be the largest in the Middle East (data on this are limited), now comprise about 11.5% of GDP. Economists believe that property investment will continue to drive the non-oil economy forward.

Demand is high: a March 2005 Commerce Ministry report forecast that 4.5 million new housing units were needed by 2020 to cater for a fast-rising population of 20 million plus. An increase in consumer financing reflects the need for more housing: real estate loans provided by the banking sector increased to SR27.2bn ($7.3bn) in Q1 2005, compared with SR2bn recorded in the same period in 1998, when the economic mood in Saudi Arabia was very different.

Bank offerings

Saudi banks are providing a range of products to attract clients. The Saudi British Bank (SABB), to take one typical example, is offering Manazel Home Ownership, a facility structured under its Amanah Islamic Banking Solutions umbrella to provide Sharia-compliant financing up to SR2m. Under this variant of Islamic financing, the beneficiary pays an advance lease at a percentage based on the age of the property (up to two years 10% and up to 25% for properties that are more than seven years old) and then rent to SABB for up to 25 years, after which the property is considered to be bought directly.

Such offers are fuelling a domestic housing boom, while big entrepreneurs – from global investor Prince Alwaleed Bin Talal Al-Saud and senior members of the ruling family down – have piled into prestige office buildings, shopping malls and other ventures. Prince Alwaleed’s 300-metre Kingdom Tower in downtown Riyadh has become a defining image of the new Saudi Arabia.

Foreign investment

The price for undeveloped land in major cities such as Riyadh is rocketing. As in the other Gulf states, key plots are held by ruling family members, who sell them at auction to individuals or wholesalers.

While the majority of investment in Saudi real estate comes from nationals, the prospect of foreign investment is being welcomed and will be further enshrined in law when the kingdom finally gains full membership of the World Trade Organization (WTO), the subject of several years of tortured relations.

New law

A Real Estate Law was passed in 2001, with eight basic articles setting out “the system of real estate ownership and investment of non-Saudis”. For the first time, resident non-Saudis could own a private residence (provided they had Interior Ministry permission), could buy real estate, conduct business activities and/or accommodate their employees; and they can also rent their properties.

According to the Saudi Arabian General Investment Authority (Sagia): “It is anticipated that the new law will encourage major international companies and property developers to enter and influence the Saudi real estate market.”

There are limits – including a provision that at least SR30m should be invested in order to receive a licence to buy land and buildings for sale or rent – but the law provides a solid basis on which the market can build.

Investment vehicles based in other GCC states are one way in. Rikaz Development and Planning launched the SR662m Bahrain Monetary Agency-regulated Royal Amwaj Real Estate Development Fund earlier this year. The Saudi-based company said the fund “is open to non-Saudi investors looking for exposure to the kingdom’s emerging real estate market”. Royal Amwaj is a one million square metre mixed-use waterfront development south of Al-Khobar, part of a seven million square metre project planned by Rikaz.

Holy cities boom

The holy cities of Makkah and Madinah – where non-Muslims cannot go – have have become some of the hottest areas in the Saudi market with prices spiralling upwards. Land in these areas is considered to be the most expensive in the Arab world.

Jeddah-based Saudi Real Estate Development Company general manager Motasim Hajaj recently quoted the cost for a developed property in Makkah and Madinah at about $21,333 per square metre.

Studies by King Saud University show that Makkah and Madinah are now the preferred places for real estate investment, followed by Riyadh, Jeddah, Al-Khobar, Damman and Abha.

The possibility remains that foreigners may be able to invest there. In February, the Shura (Consultative) Council began looking at a draft law that would ease restrictions. Council member Osama Kurdi says the body is “looking to extend the period of leasing real estate to foreigners from two to 10 years with further provisions for renewal”.

Jewar Real Estate Marketing Company director Saleh Al-Habib says: “The new law, if passed, would boost the real estate market in Makkah and Madinah, and enhance real estate and leasing transactions in off-seasons.”

Muslim interest

Interest from foreign Muslim investors has risen dramatically as the number of pilgrims increases. Saudi studies have calculated that by 2020 more than 10 million pilgrims will visit each year.

Estate agent Mowad Al-Hassan has registered “a growing interest on the part of foreign investors”, with surging pilgrim numbers and King Abdullah’s interest, when Crown Prince, to expand housing and prayer facilities in Makkah via a SR35bn project. Real estate investment in Makkah alone in the past three decades has been estimated at more than SR400bn. The Makkah Development Authority is thought to be close to approving the building of 153 residential towers at an estimated cost of $3.7bn, which would house 350,000 pilgrims.

In late 2004, then Crown Prince Abdullah launched six huge development projects headed by the SR12bn, 230,000 square metre Jabal Oman residential towers project, developing the area around the Haram mosque. It includes prayer facilities for 200,000 pilgrims, five-star hotels, commercial centres with room for 4500 shops and 3000 showrooms, a central transport station and parking facilities for 12,000 vehicles.