Introduction
Saudi Arabia has always been one of the highest economically growing country in the world and this factor has been fuelled by the presence of petroleum. This has brought about an influx of foreign investment into the region. One of the benefactors of this influx has been the real estate market which has seen double digit growth each year (Oxford 67). This has necessitated the development of laws and regulations that are to govern the developments around the country.
Over the last two years we have seen the real estate sector around the World being badly hit as the recession and economic downturn that followed wreck havoc and destruction in markets everywhere. One of the markets that dodged this madness was the Saudi Arabia real estate market that escaped without any problems (Oxford, 101). On the contrary, growth in the Saudi real estate sector has been experienced unlike contraction in other markets. The Saudi Kingdom real estate market is the biggest among its neighbors and with enactment of a new law regulating the sector, it is bound to grow in leaps and bounds.
The laws and regulations will also lead to an increase in investments that are highly needed and this in turn will fuel economic growth. Citizens from low and middle income class will benefit from the boom that will follow afterwards.
Saudi Arabia
In Geographic terms, Saudi Arabia is the largest country in the Middle East peninsula and it neighbors with Jordan, Iraq, Kuwait, Qatar, UAE, Oman and Yemen. It is made up of 28 million native citizens and international laborers. When it comes to oil production, the country is the biggest exporter of petroleum products. Apart from petroleum products, the country also benefits from the influx of tourists especially during Hajj as the Muslims normally commit to the pilgrimage to Mecca and Medina (Presley, 67).
Present Real Estate Market
At present times the only way that Saudi Nationals can get financing in order to buy a house is through getting loans that are interest free from the Saudi Real Estate Development Fund. Apart from this, financing options have remained rather unavailable and lack of financing through mortgage also continues hinder the real estate market (Newell 211). This situation has been brought about by a population that is quite sensitive to the prices that are being offered in exchange for real estate property. Despite of the trickle down effect of the economy, not many people have had the opportunity to own and buy shelter. Another factor that has led to this situation is the continued lack of available space to develop housing communities. As much as the Economy continues to increase on a yearly basis, the national average disposable income has failed to increase in the same level as the level of real estate prices. It has been found out that only one in five Saudis own a home. The hike in prices has been fuelled by the rising construction expenses. People wanting to engage in the property market at present are paying as much as 45% of their income on the rental cost (Newell, 208). This has really affected the young investors who want to own their first homes. With the population growing at 3% per year and the continued rise in petroleum products, the real estate market will most likely grow in the same rate.
At present only 19% of the Saudi population live in their own house. This is due to the high number of expatriates who rent out the accommodation as the y work for the petroleum companies and the Hospitality industry. The expatriates have been flocking Kingdom since early 1980 due to the high living standards that are present. The Government has tried to diversify the economy away from the traditional petroleum Industry by introducing tourist attractions, hence bringing in more people from outside who end occupying the houses. A new report t compiled by the state owned Kuwait Financial Center gives a recommendation that reforms into the Real estate sector is badly needed as the number of younger generation citizens living with their parents are still high.
The Saudi Kingdom is divided into provinces, each having their own challenges when it comes to addressing the issue of Real estate. We are going to discuss briefly about them.
Western Province
Demand in this part of the kingdom is driven by three categories namely, expatriate rentals that are in the mid class to low income class, Saudi nationals who are in the mid and low income class and finally high income class who concentrate in buying second homes in Riyadh. The western province has witnessed a boom in the real estate market but this has not been translated into ownership by majority of the population. Estimates put it that the developers in the region are currently developing over 5000 units in Jeddah. This also includes around 3000 apartments in the greater western province(Oxford, 89). Commercial and office developments have also cropped up, giving rise to competition between homes and commercial space on the available land. The offices have cropped up due to international service providers basing their regional hubs in the Saudi Kingdom. Examples of such International these providers include banks, financial organizations, Telecommunication companies, News providers among others. Riyadh is well equipped with infrastructure to support businesses. In fact the city is a well defined business hub having road and telecommunication networks, with quality office spaces. However in Jeddah, space is becoming scarce hence forcing the developers in the area to convert the villas in order to feed the high demand for office space. Following a new Government directive, this practice has been banned. Developers are targeting to come up with around 35,000 square meters of office space which will at least cover the high demand for space. Office rental rates in Jeddah lag behind Riyadh by about 5%. In areas such as Medina, rates fall behind by 80% when compared to Riyadh thus indicating that office rental rates are controlled by the quality of space within an area. The situation in Al Khobar is also different as the region has low quality space and the cost of land is cheap. This condition makes the region have low rental rates than Riyadh or Jeddah. The economic activity in the area has done little in driving demand towards the region (Oxford, 36).
Central Province
The central province was up to the recent period, mainly undersupplied when it came to both homes and office space. This state of affairs has however changed as now, the region is oversupplied with both office and residential developments. The new space is being put under category B, under International standards. This means that much of the developments in the Central province command higher premiums in office space leading to higher cost in rental costs. The province has generally enjoyed high occupancy rates in both residential and office developments.
Foreign Real Estate Investment
Property purchase is difficult when it comes to foreigners as the current law forbids foreigners from investing into the market unless permission is granted by the Saudi Arabian General Investment Authority. Requirements before being granted permission are also strict as a development project must be valued at more than thirty million Saudi Riyals. Foreigners cannot purchase property in the Holy city of Mecca and Medina.
Foreigners can purchase land as long as it is to do their business. International co operations can buy houses for employees from projects that have already been licensed. It is these strict policies that has chased away real estate investors and developers and painted Saudi Arabia as a hard nut to crack. Real estate speculation is taken care of by making sure that properties cannot be sold until five years have elapsed from the date of purchase.
Saudi Mortgage Law
The Government has strived to come up with new laws that seek to encourage the majority of young investors to buy homes. At the moment, the youth are finding it difficult to get financing when wanting to purchase property within the Saudi Kingdom. Research conducted by the Government has forecasted that the laws will drive up demand into the Real estate sector which is currently waning. The law is said to go a long way in the protection of assets as it will give the citizens a state of stability thus increasing Investments into the real estate Sector. The Government is committed to this step and forecasts put it that by 2013, between 500,000 and 800,000 units will be constructed. Rising investments into the real estate sector is also forecasted as big players are beginning to take positions ahead of enactment of the law. The law also seeks to attract big banks and mortgage lenders who in turn will turn around the economy by developing property all around the Kingdom. The law comes in at a time where the house prices have been falling sharply due to the recent economic recession that has plagued the world. The recession led to development freeze which saw most constructions projects halted or postponed (Newell, 56). The recession caused the Kingdom a massive Dh24 Billion in bad home loans alone. The figure could be higher when other factors are added into the calculation. Banks in the Saudi kingdom have been especially hit by the credit crunch that followed the recession as foreign investors pulled back their capital away from the kingdom. This action has prompted the banks to merge in order to have a stronger capital base (Newell, 67).
The law is to be enacted before the end of 2009 and is to increase home ownership to around 50%. Around 73,000 hosing units are set to be developed before the end of the year. The situation as we speak is whereby; the developments are much less than $50 million. With the enactment things are bound to change as the laws will drive construction projects from housing communities to mega cities that will have enough infrastructure to compete against developed cities such as Riyadh, Jeddah, Al khobar and others (Oxford, 27).
Mortgage Finance Institutions in Saudi Arabia
Home finance institutions in Saudi Arabia include, the Arab National Bank, Saudi Home loans, which are backed by a real estate Company known as Dar al Arkan Real Estate Development. The Company is the largest in the Real Estate market. There are also players such as SABB, who are quoted as saying how their business objectives are to match with the enactment of the law. We also have Al Rajhi Bank who are also keen to lend to the Saudi nationals to enable them own property. (Presley, 34)
The enactment of the law is also being anticipated by lenders and other mortgage finance providers in the neighboring UAE, who see the Kingdom as a promising business venture and are also want a piece of the action. The lenders are keen to cover their losses after a drop in the housing sector that has severely affected the Middle East region. These players include, the prime Islamic home lender, Amlak, which seeks to merge with its competitor Tamweel, we also have the Islamic Noor Bank which was started in the year 2008.The banks wishes to extend its services to Property insurance once the law is enacted (Presley, 45).
Analyst forecasts of a boom in the property market and the big players are bracing for any opportunities that may arise. About 200 billion Dollars will be spent by the Government in the construction of new homes and office complexes. Apart from the lenders, developers have already started acquiring land in preparation of enactment of the new law (Newell, 90). Developers like, Emaar Middlle East have stated how they are willing to increase investments into the Kingdom.The firm has already developed a few projects in Al Khobar region.
Factors Driving Demand in Real Estate Property
A major factor that is driving demand in the Kingdom is the presence of young people with disposable incomes. This segment of the population has not been addressed when it comes to real estate matters. The youth have been found to be having a huge appetite for home ownership but sadly, it is not possible as liquidity in the real estate sector is missing. Another factor driving demand into the kingdom is the largely untapped mortgage market that has been present up to this point. It is this reason that key stake holders in the Government want to use in order to increase investments into the Kingdom. The Government is pumping money into the financial system in anticipation that there will be high demand for home financing when the law is enacted. There is also population boom in the region as it is expected that there will be an extra 33 million persons by the year 2020, this will put a strain to housing if the problem is not sorted out now. The kingdom is experiencing a trend where the population is moving from rural areas and shifting to urban areas, this is creating demand for housing in the cities and urban areas (Oxford, 67).
Demand into the real estate sector is seen as being driven by the speculative nature of international players , this will lead to a situation where the property market might be overpriced hence locking out the local citizens who may want to own home. This is where the new law will be greatly tested as the Government may not want to introduce price controls but also at the same time may want to protect the Bank lenders who may want to own homes within the Kingdom. Current estimates put it that there is a shortfall of about 2 million housing units and about the same numbers of houses are needed within the next ten years. This will need all the stakeholders to unite and come with a modified plan on how to tackle this problem.
Distribution of Funds
In conjunction with the Government, Local and International banks have lined up to get a share and have formed partnerships that will enable to get a share of the funds being pumped into the system. A good example of this would be how Amlak Finance has partnered with the Saudi Investment Bank in order to be given $100 million of Government funds. Another example is how the third biggest bank in order of capitalization, SABB, will obtain $150 million (Presley, 89).
The International Finance Cooperation in partnership with Public Investment Fund and other International financial bodies signed a memorandum of understanding in February this year, whereby each of the parties will contribute $100 million each bringing the total to $400 million towards the program, whereby the local banks will benefit for a period of 12 years. The loans given by banks to citizens or other persons wanting to own homes in the Kingdom will have a six year grace period, which is considered reasonable time for any person to repay back any money they are being owed (Presley 78).
The new law will seek to shift focus away from the Government in a transitional manner and leave the real estate sector in the hands of the private sector which has been absent due to regulations. In the past the Government used to be the custodian of every thing regarding natural resources.
Conclusion
Owning a home is the dream of any person and unfortunately for the citizens of Saudi Arabia, this has not turned out to be a reality. The Government is taking steps to ensure that this situation is reversed. With the enactment of the new law, the Government will likely open up opportunities that for a long time seem to have evaded the Kingdom. Apart from the citizens other benefactors will be the Saudi economy, real estate developers, mortgage lenders and construction companies. With the rise of the construction sector, employment opportunities will emerge. Also businesses that provide construction materials will expand. The law will bring about a chain effect that will most likely lead to expansion of the economy. This growth is likely to extend to its neighbors. As witnessed by the players from the neighboring UAE who are bracing to enter the market in Saudi Arabia. In an economy that is highly reliant on the export of petroleum products, the Government is trying to widen and diversify its revenue base by coming up with new concepts and ratifying those that are found to be in need of reforms. The new law will signal the beginning of a new era whereby all players will need to be actively involved in cooperating with each other in order to see that real estate development takes off and is successful. The Government is taking an active role in securing its future as oil is a non renewable source of energy and could soon run out given the high demand for it ion a global scale basis. This would mean that the steady flow of foreign exchange that the region enjoys would disappear unless the leaders diversify the economy to include, tourism and real estate as major sources of revenue.
With about 50% of the population comprising of the youth, the Kingdom needs to come up with steps to address the demand facing the real estate sector. Easy access to mortgage facilities for all, by the banks and lenders will boost home ownership for the locals. Lending facilities will also encourage the finance sector as the rate of borrowing money in the kingdom is low and this is not good when you are operating banking facilities. This situation has been brought about by the presence of money that has been flooding the region.
Investors of all around the world are looking for minimal risk opportunities in real estate sector. The rising demand for oil is driving demand into the region and we should not be surprised to see the region surviving another impact on the scale that we saw this year.
References
Newell,Graeme and Sieracki, Karen. “Global Trends in Real Estate Finance.” New York: John Wiley and Sons, 2009.
Oxford Business Group. “The Report: Saudi Arabia 09.” London: Oxford Business Group, 2009.
Presley, R. John. “A guide to the Saudi Arabian economy.” New York: Macmillan, 2008.