Modernising the economy of a hugely conservative society often means finding a way of getting money and resources to trickle down in ever greater volumes to the wider population. This is certainly the case for the Saudi residential market, which is increasingly fragmented – even though primary land purchases are still dominated by only a handful of which purchase plots from members of the royal family or other highly placed individuals before selling them on to consumers.

Demand from a growing and increasingly wealthy population has, to some extent, short-circuited this procedure, as ordinary citizens have started to directly participate through real estate investment trusts and smaller real estate companies.

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The Riyadh-based Samba Financial Group, which publishes regular research on the sector, estimates there are approximately 3,500 real estate development companies in the kingdom, although there are only 30 large players.

In the past three years, a few companies, including National Instalment and Ta’jeer Company, have gone into the business of providing loans to individuals to buy either land or completed housing units.

Investors move on

There are now signs that consumers may even be moving on from the once popular residential development schemes, in which small investors were entitled to take up a house within a large project.

A spokesman for Bin Saedan and Company, one of Saudi Arabia’s first developers, said that previously customers might have invested in a property fund or simply supervised the building of their own house. “Now there is a big demand for finished housing, apartments or villas,” he says. “End-users want to have a completed property.”

The government is putting better regulation in place to support this trend. It plans a mortgage law by the end of 2006, and is also tightening regulation to avoid conflicts over land titles, which have not been uncommon in the past.

Saudi-based banks see increased consumer lending – eventually for housing – as a major growth area. “Compared with other markets, levels of personal debt to GDP are very low – ground enough for saying the consumer market is likely to grow,” says John Coverdale, head of SABB, a local HSBC affiliate.

Sharia target

All products offered to Saudi investors are effectively Islamic financing. “The bank that gets a sharia-compliant mortgage product right will find a hugely profitable growing business,” says a Riyadh-based European banker. His bank is working on such a product – but is yet to find the right formula. “We need such things as we do nothing other than follow the general demographic tendencies of the kingdom,” he adds – and these lead towards a large, youthful and often financially limited population seeking housing and the wherewithal to finance it.

More is needed to create a viable market. As yet there is no plan to create a land registry. Better regulation is needed to manage the question of water shortage. In common with Kuwait and the UAE, Saudi Arabia provides households with free water.

No one quite knows how big the market could become. About 38% of the population is less than 15 years old and just 3% more than 65 years old. According to one estimate, the population of 24.1 million will nearly double by 2050.

The country presently hosts just over 3 million expats, a figure just under the total number of working age Saudis. Expats boost the rental market, although they can buy as well.

Jeddah’s Chamber of Commerce has estimated that the city, already home to 2.5 million people, needs another 1 million housing units, particularly for people on middle and lower incomes, while Riyadh, which has seen population growth rates of 8% per year, said it would need 1.5 million new housing units by 2022.

The government’s housing development plan aims for the construction of 800,000 units between 2003-08, of which 92% will be built by the private sector and the remainder financed by the state-owned Real Estate Development Fund (REDF).

One of the private sector’s advantages in financing home purchases is highlighted by the REDF’s failure to collect SR30bn ($8bn) in outstanding repayments. A fund spokesman says that some borrowers believed they did not need to repay government money. At the end of August, King Abdullah increased the fund’s capital by SR18bn. In the year to August, the REDF paid out SR1.183bn to finance the construction of 5,100 houses. This also highlights the difference between the market’s interest in high-value construction and the growing need for affordable accommodation.

Price fluctuations

This split in the market explains reported wide variations in prices even within the same city. Tracking prices is difficult because the kingdom has no central price registry. However, according to Samba, average house prices have increased by 13.7% per year from 2002 to 2005. This has not put off developers or consumers. Riyadh and Mecca have seen the highest increases, although there are wide price variations even within cities.

Kuwait-based Global Research has reported increases in land prices in Jeddah of 40% from mid-2005 to mid-2006, reaching SR12,000 per square metre (m2) in prime locations. In 2003, the price on the Corniche, a favoured spot for luxury high-rise apartment blocks, was SR1,000-2,000 m2. In Riyadh, prices stood reportedly at just SR156 per m2 in December 2003.

The most expensive land in Saudi Arabia – indeed, arguably in the world – is found in plots adjacent to Mecca’s Holy Mosque, which have reached SR400,000 per m2.

Global Research says that such phenomenal prices do not equate to a bubble: “In the face of very high demand, supply has more or less lagged behind in the past two years, leading to drastic increase in property prices. This has been particularly true for the low and middle-end housing market.” However, investors had not been put off by rising prices: “Similar capital inflows into the sector are expected to continue, especially as institutional exposures increase.”

Construction boom

Samba estimates that new real estate construction will amount to SR484bn by 2010, most of which will come from the housing sector. In the past ten years, housing supply in Riyadh has outstripped population growth, bringing the market back into balance.

Samba estimates a 92% housing occupancy rate in the capital, again putting pressure on the affordable housing sub-sector.

Between them, Jeddah and Mecca can expect SR190bn investments in new construction by 2010. At Abraq, in the eastern part of Jeddah, the government has invested SR320m in an affordable housing development.

In Medina, more than 50 projects, valued at SR25bn, have been approved in the area to the east of the Prophet’s mosque, including a complex of nine residential towers and a shopping mall. Meanwhile, in Mecca, a complex of residential towers in Jabal Omar close to the Grand Mosque will cost an estimated SR12bn to build. The SR6bn Al Bait Towers, also near to the city centre, are close to completion. ZamZam Tower will open this year, with 1240 luxury suites being sold on a time-share Sokouk basis.