Global Acclaim of the Saudi Arabian Real Estate Industry
Although the widespread global economic meltdown, in the recent global economic recession, did not spare the Saudi Arabian real estate market, the sector did not wane away but rather maintained its standing as one of the main revenue generators in the Saudi Arabian Republic. The kingdom’s real estate sector accounts for 5.1% of Saudi Arabia’s Gross Domestic Product, which is valued at SR55 billion (Lang, 2011, p. 1). As such, at this macroeconomic front, there is a strategic real estate expansion initiative projected to reach the SR2 trillion threshold investments in the whole nation. Nonetheless, with the current real estate ventures amounting to SR 1 trillion, the Saudi Arabian mortgage division has ranked second at the global front, trending close to Shanghai China (Lang, 2011, p. 1). The current fiscal stamina in the real estate market in Saudi Arabia can not only be attributed to the global rise in oil prices but also to the thriving business environment prior to the 2008 – 2009 economic boom.
This encouraging move at the macroeconomic level has greatly been necessitated by the rising demand of residential units, noting the population growth rate which has been on the upward trend (approximated at 2.5% annually and a population of about 27 million people as at the end of 2009) in recent times. Statistical research approximated the occupied residential houses to be about 4.3 million in 2007 compared to the current projection of the 2015 housing unit’s demand of 5.8 million (Lang, 2011, p. 1). Saudi Arabia’s capital, Riyadh, has a yearly population increase of over 8%, its total population is expected to hit the 10 million scorelines by the year 2020 and this has qualified it as a viable target as a pioneer mega-metropolitan in the Gulf domain within the next ten years (Lang, 2011, p. 1).
With statistics showing a 40% shortfall in the kingdom’s housing sector, it is unlikely that the kingdom would meet the residential real estate sector promptly (Lang, 2011, p. 1). In spite of this, the Riyadh convention, where the key players in the Saudi Arabian real estate market had a conference; highlighted the central role played by Housing Finance corporations in satisfying this looming residential house shortages. To supplement the public effort towards this goal of meeting residential demand, Saudi Arabia has fostered a welcoming outlook towards foreign investors in the real estate market, as such the Kingdom has realized a broad spectrum of not only splendid expertise but also heavy housing investments. The campaign for the implementation of equal rights policies in the foreign department has seen a rise in the number of investment licenses issued to foreign investors. In addition to favorable foreign investment laws, the kingdom has also provided attractive incentives to the targeted foreign investors both in lengthened lease periods and tax waivers. As such the Saudi Arabian real estate market has been strengthened to gain international appeal and has become one of the global entities in the global real estate front.
Saudi Arabia hosting most of Islamic cultural and religious heritage is home to Muslim pilgrimage which attracts an innumerable number of Muslim faithful each year as they reverence the holy cities of Mecca and Medina. Such international tourists demand quality residence at the time of their pilgrimage thus state as well as private developers have and need further harness this golden treasure of demand in the real estate front, by providing housing facilities that meet the international standards, leading to higher gains in the kingdom.
Stimulus package for holistic community development
The stimulus package intervention measure does spell the commitment of the executive in prioritizing the real estate sector, this has not only triggered the realization of social equity in the form of job creation and community development but also has catalyzed infrastructural expansion. As such, the integration of infrastructural expansion initiatives has improved the connectivity in the Saudi Arabian transport sector enabling accessibility which is key to the economic stability of a nation. The general economic stability has cushioned the susceptible fronts of the real estate sector from collapsing, availing timely redemption to the feeble housing sectors in tough and rough fiscal climates, which has ultimately resulted in a thriving real estate market at all times.
In this year (2011), for instance, in a bid to assure Saudi citizenry of good housing facilities, the executive custodian of the Holy Mosque has declared a supreme decree which has seen an improvement in the financial status of the Real Estate Development Fund from the minimum annual allocations of SR 300,000 to SR 500,000 and the overall capital investments rose to strike the SR 40 billion mark adequate for holistic community development in the housing sector (Lang, 2011, p. 1). This can best be illustrated by the 500,000 residential houses scheduled to be established under the watch of the Housing Commission in the current initiative amounting to SR 250 billion. The primary role of this project is to ease the uprising residential house demand by constructing and supplying modest and affordable residential units to the citizenry. In spite of the unpredictable microeconomic inflationary trends, residential unit investments would certainly better the community’s social fabric and living conditions in the long run.
The Governments Strategic role in triggering and sustaining real estate ventures
The legislation of new mortgage laws through the joint effort of the Council of Chambers, finance ministry, and trade and industry ministry has streamlined the real estate platform giving the citizenry not only the financial back up through loans, insurance cover, and home ownership rights but also by providing the necessary vetting systems and policies for proper construction personnel.
The aforementioned stimulus package from the government and the monitory surveillance of the prevailing real estate market by the government is cross-cutting in impacting the housing sector of the economy. In a more direct way, such bodies as the National Guard, General Housing Authority, and GOSI have developed 17,000, 500,000, and 691residential housing units respectively (Lang, 2011, p. 1). Some benefits of the government’s intervention in the real estate market are indirect, for instance, the plight of the government to foster the establishment of civil institutions such as health centers, hospitals, schools, and business centers demand unreserved contribution and partnership of the private sector, and the end result of such partnerships would be again to each citizen of the kingdom.
It is therefore apparent in this view that the government facilitates the growth of the real estate industry not only through the legislation of the governing policies, the provision of stimulus packages that catalyze real estate investments, the active integration of private partnerships in a broad spectrum of real estate industry platforms but also by providing the delicate balance of a fair playground through various surveillance and control mechanisms.
The pivotal role of Infrastructure in the development of the real estate market
At the international front the viability of real estate investments in a kingdom is gauged with respect to the level of its infrastructural status; especially the transport infrastructure in its trio perspective of the land, sea, and air effectiveness and connectivity. Saudi Arabia has made huge efforts in meeting these international expectations by initiating 6 ventures in the Airport domain valued at SR 25 billion, 2 ventures in the Port domain valued at SR 12 billion, and 23 projects in the Railway domain valued at SR 96 billion (Lang, 2011, p. 1). This has assured the kingdom of again in their competitive outlook at the international front, thus enjoying a better foreign real estate investment attraction over most nations in the world.
In effect, the developed Saudi Arabian infrastructural facilities have provided the much-needed link between cities and towns revolving them into economic giants in which case job creation has heightened the housing demand both at the residential and industrial fronts. In addition to this, the improved connectivity in the wake of infrastructural enhancement has seen the emergence of new economic hubs coupled with the associated economic boom has raised the demand for real estate services thus necessitating immediate supply for the same.
Proper property management for optimum profits
The gain in long-term real estate investments is basically anchored on the quality of the mortgage and the proficiency in its management. To effectively optimize revenues, tap costs, and compress losses the current highly funded real estate projects need increased quality assurance oversight management personnel. Leasing programs must be dynamic and flexible to the current trends in the housing demand and supply chain, thus, it is only the tentative adjustment of lease charges as depended on supply-demand fluctuations which would ensure full estate occupancy and optimal gain.
The purchase of land for residential purposes in Saudi Arabia is much higher now than it was in 2008, arising from the general trend of increased land prices all across the kingdom as evident in each elite suburb. This was triggered by the dwindling economic climate which was a precursor of the global economic slump by means of which the initial quarter of 2010 the purchase of residential plots went down by a 10% margin (Lang, 2011, p. 1). From the second quarter up till now, the demand for residential plots has been appreciating with the purchase price being approximately SR 1,700 per square meter, up by 13.5% compared to that of 2010. The elite neighborhoods of Khobar and Jeddah have registered the highest inflation of about 20% with the purchase price per square meter soaring to SR 3,000. In such other places as Dhahran, Dammam, Riyadh and Makkah the plot purchase price ranged between SR 500 to SR 2,000 per square meter (Lang, 2011, p. 1).
The production cost in constructing residential units is also on the rise given the soaring prices of steel which was relatively steady two years ago but now stands at 37.9% higher than that of 2010. Electric cables are also up by 10%, nonetheless the price of bricks and cement has maintained a steady price (Lang, 2011, p. 1). It is anticipated that the cost of construction materials would heighten as the government and the private sector try to meet the national directive of putting up 500,000 residential homes before 2015 (Lang, 2011, p. 1). Moreover, energy and transport demands in the construction industry coupled with the utility requirements of water, sewer and gas has also heightened the production and maintenance cost in real estate market.
Although underexploited, the industrial sector of real estate’s treasure is been tapped by the integration of research proposals of higher institutions of learning who are advocating for academia commercialization with the basic objectives of protecting intellectual assets, widening the labor market and propelling national economic status to higher heights, the net effect of which is to replenish, sustain and prosper the demand for both productive and commercial industrial real estates.
The government is also advocating for the formation of community based non-profit institutions to foresee the construction and provision of affordable residential units to the vast majority of its populace. This system has realized its success in its differential approach, considering every subset of the whole kingdom for equitable distribution of available public resources. Local governments’ autonomy is thus greatly boosted in resolving regional trends and market variations.
The emergence of Intermediate residential units
Professional housing developers are currently eyeing to tap the emerging class of a middle income citizenry as opposed to the former micro-level outlook of real estate sector. With an estimate of 900 annual demands for mid-scale residential units in the market, the optimization of this ideal venture is being exploited by putting up such modest houses near the central business districts. Coupled with broad initiatives from the government, of according subsidized housing services the real estate developer is optimizing the uprising niche of middle income clients by providing modest residential units with purchase values ranging from SR 650,000 to SR 800,000 (Lang, 2011, p. 1).
The varied preferences of this class of the well paid working public requires that their family autonomy be considered in providing able and spacious residential units under which state the purchase tag ranges from SR 200 to SR 250 per square foot. Although the residential front of real estate sector is fostered by the incentives from the government and infrastructural development, the provision of decent homes to the citizenry in a whole different story altogether; such social equity can only be realized through the concerted effort of all the stakeholders involved; the government, the private sector and the citizenry.
The main stumbling block for both the government and private entities, in streamlining the real estate industry would be in bridging the gap poised by the diverse and widely varied range on the supply and demand fronts. With the youth (age 16 – 35) being the majority in Saudi Arabian population (about 60%) and most of them having joined the work force as novices (Cobb, 2010, p.1). Affordability should therefore be the center of attention given that many among the populace earn monthly wages of less than SR 8,000, in consequent, the current property market value is way too high beyond what they can manage to afford.
Analysis
Real Estate Market Dynamics
The general trend of real estate market dynamics is cyclical in Saudi Arabia, with the prevailing real estate market fluctuations being the most accurate indicator of the state economic growth; population growth triggers a heightened demand for all the varied facets of real estate services, such as residential units, business/retail malls, official constructions and industrial premises (Cobb, 2010, p.1). In consequence, the corporate division and the government strive to meet the demand by investing heavily in the real estate sector, thus, pulling the cash flows from the promising demand basically through total transfer sale of real estates or through lease rental offers. Such a thriving market is usually short lived and more often than not, it is closely followed by oversupply which distorts the prevailing real estate cost status, resulting to staggering and reduced gains in this sector. At this moment the consumer is most favored by the declining rental cost, and in effect a lot of consumers are wooed into active spending thus raising demand, and thus does the cycle recur. The alternating real estate market fluctuations have an inherent economical function of maintaining a sustainable equilibrium between demand and supply ratio (Cobb, 2010, p.1). Such an economic equilibrium is indispensable in boosting investor confidence, for it cushions real estate investors against unforeseen risks and it also ensures healthy living environment thrives in the kingdom.
Taxes
Considering Saudi Arabia’s tax table; transfer taxes in the form of stamp duties for documentary purposes are not levied, sales tax has been offloaded, income tax is imposed on foreign investors who run various ventures in Saudi Arabia, and Zakat is imposed on the populace of Saudi Arabia who run varied corporations in the kingdom, Zakat is imposed at a fixed yearly rate of 2.5%, the inclusion of tax waivers and subsidies by the kingdom has proved to be one of the key strategic innovations in assuring affordability for Saudi Arabia’s populace (Cobb, 2010, p.1).
Insurance and Maintenance Costs
According to the afore mentioned research facts the purchase of a three bedroom single residential house with one storey- on a plot surface of 900 square meters, with a garage, three bathrooms, having electricity and water supply would necessarily need to be accompanied with a secure insurance cover. Insurance services provide an assurance to lending corporations and with such guarantee comes a reduced risk which avails the fiscal strength in securing higher loans at a minimal down payment. The actuarial estimates of the annual premium charges basically rests on the value of the residential unit and all that is within it, not overlooking the various types of potential risks which may befall the residence; for instance such uncertainties as security threats from robbers, fire incidents etcetera (Cobb, 2010, p.1). In effect therefore, it is of a paramount importance that one insures not only the standard household assets but also his/her personal belongings to avert situations of a claim being nullified or rejected by the insurance company. The current hi-tech community has also simplified the whole process of insurance, for one can gather relevant data concerning the most effective service provider of insurance services via on-line databases, otherwise, one can always network with online insurance brokers who would provide readily counsel on the optimal insurance providers at reduced prices (Ravi, 2011, p.1).
The maintenance and repair expenses on the other hand, would be addressed by forming Homeowners’ Associations with the residents in my neighborhood. The homeowner’s association would be mandated with the responsibility of seeing to it that title deed restrictions, conditions and agreements are adhered to in a bid to sustaining decent residential services. It is compulsory for members of a particular neighborhood to join its homeowners’ association; such membership is basically associated with varied annual charges for meeting the multi-dimensional aspects of the estates needs (Ravi, 2011, p.1). Some of the services offered by homeowners’ association are the payment of joint insurance premium, carrying out repair and maintenance services, ensure conducive community landscaping, and provide recreational activities, security, social institutions for general social functions, ensure constant arrangement of street lighting at the expense of the revenue generated from the minimal annual charges of each member. It is also within the domain of homeowners’ mandate to ensure a timely supply of such utilities as water, gas and electricity, including also proper garbage disposal and sewer systems for its members. In view of the diverse multi-faceted functions of the home owners’ association it is advisable that they maintain an enormous reserve base with good reputation, this would ensure that they maintain a sustainable strength in meeting the varied issues for the neighborhood.
Real Estate Capital; Sources
Raising the much needed finances for such a project as the acquisition of residential house has to some measure proved to be challenging, nonetheless, the corporate division has collaborated with scholars in reaching the intended audience; investors and the citizenry of Saudi Arabia’s kingdom. Fresh initiatives and strategies are being formulated to sensitize and enlighten the whole society on the most effective ways of securing financial help from the corporate lending entities (Ravi, 2011, p.1).
Although the financial institutions providing lending services are not limited to financing residential developments but also provide a wide spectrum of financial services to real estate sector; for instance in corporate office, retail, warehouse development, land acquisition and shopping mall development- they have greatly eased the financial burden off the shoulders of a vast majority of Saudi Arabia’s populace (Ravi, 2011, p.1). As such, Saudi Arabia’s real estate market has realized an increase in the number of credit facilities offered to its citizenry, the repayment interest rates of which are tentatively monitored by the financial regulatory authorities across the kingdom.
In Saudi Arabia it is critical that one establishes and validates the credibility of the financial institution prior to securing a loan, key among the principles of inquiry are such concerns as to whether the financial institution does meet all the prescribed Sharia rules for the corporate division and whether the financial institution adheres to the Capital Market Authority’s stipulated guiding policies on corporate lending services. This would guarantee the client of receiving the best service from an accredited institution, and in effect, cushion the client against unforeseen risks of hiked interest rates.
It goes without saying that the credit institutions have their fair share of uncertainties and challenges, this arises from the overall complexity of real estate initiatives; for real estate initiatives are loaded with various risks. These risks can be categorized into three broad perspectives; industry, developer and project risks (Ravi, 2011, p.1).The industrial risks are primarily governed by the afore mentioned cyclic real estate dynamics involving the tentative balance of demand and supply forces. The developer’s risk questions the developer’s proficiency in undertaking real estate enterprises; this comprise of but not limited to his ability to meet the threshold legal demands, past experience and his reputation in real estate development. The risks accompanying the project involve probable time overrun, financial shortfall, surplus expenses involved in after-sales settlement
Presentation
Bearing into considerations the afore named variables in the Saudi Arabian Real Estate market, and taking note of the applicable assumptions, for me to purchase a three bedroom single residential house with one storey – on a plot surface of 900 square meters, with a garage, three bathrooms, having electricity and water supply I would value the needed expenses at:
SERVICE PRICE (SR)
Purchase of the single residence 650,000
Annual insurance premium 5,000
Taxes and related fees 12,500
Annual utility expenses (water, gas, 10,000
Electricity and sewer)
Homeowners’ Association fee (annual) 4,000
Legal fee on title deed transfer 3,500
Total 685,000
Therefore, according to the design of my preferred one storey residential unit, on a plot area of 900 square meters, with three bathrooms, a garage and having electricity and water supply, in light of the assigned value based on research I would secure a SR 700,000 loan at a fixed annual interest rate of 4.25% running for a period of 4 years payable in equal monthly installments. This would sum up the total expenses in carrying out the project to approximately SR 820,000. Consequently, each monthly loan repayment installment would be about SR 17,000.
Preparation of Legal Documents Regarding the Purchase
As my case study warrants, the purchase of a single family residence would follow after establishing the values of the residence, whereby after due considerations one identifies the seller and does invite witnesses, business personnel, law enforcement personnel to the purchase and transfer deal of the housing unit (Ravi, 2011, p.1). Some of the key personalities who must be present during the purchase are lawyers and land brokers who are always on the lookout about private land sales. Upon negotiating and settling at a fair agreement, I – the buyer accompanied by the seller would seek to establish from the local Sharia Court whether the seller truly owns the plot of land in question, where we also sign the documentary transfer of the plot of land in form of a title deed. The local Sharia Court embosses and stamps the title deed to authenticate a lawful transfer of ownership.
The other front of legal settlements in the sale of single residential house is the formal mutual consensus on the rights, privileges and duties of both the real estate developer and the client which must of necessity be pinned down. The formal document should clearly define the nature of the contract that is, whether the settlement should be of a fixed price or whether it would be subject to fluctuations in material, manpower and miscellaneous costs.
Assumptions
The purchase of the single residential unit described above required several assumptions:
- The residential density approximated approach a mean residential unit quantity of 900 square feet, which is in sync with the current neighborhood inclinations.
- Employment density has been approximated at 360 square feet per worker.
- A single parking garage is assumed to be included in the residential structure.
- The community landscape is assumed to be a combination of both the residential and commercial real estate units in the ratio of 60% to 40% respectively (Ravi, 2011, p.1).
- The annual utility expense estimate is subject to change within the course of the year due to the flexibility of market control which is subject to the prevailing economic climate. In this case, such fluctuations have been assumed to have a minimal impact on the projected value.
- Assuming that all other real estate variables are invariant and within the limits of financial accuracy, I would purchase the single residential unit at SR 685,000 as established from the foregoing research.
References
Cobb, Michael. Saudi Arabia’s New Private Sector Investment Strategies (2010). Web.
Lang, Jones. Top Trends for Saudi Arabia’s Real Estate in 2011. Web.
Ravi, Dhushyanthi. Gulf Construction. (2011). Web.
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