Observers are voicing their concerns over housing supply and financing opportunities, as Saudi Arabia’s population continues to expand at a rapid pace. And so, on January 16, the public and private sector joined together to discuss ways of tackling the pressing issue of housing finance in the kingdom.
Saudi Arabia has a rapidly expanding population with annual growth rates in the region of 2.2% to 2.5%. Riyadh alone is estimated to need 270,000 housing units. Officials estimate that the kingdom needs to build more than 1.5 million units by 2015 if it is to keep up with demographic change.
The kingdom’s residential property development has not attracted investment levels seen in other Gulf countries. It is widely accepted that the root of this lies in issues relating to financing. John Sfakianakis, SABB’s chief economist, told a two-day Saudi Arabia housing finance conference that housing represented just 7% of the kingdom’s real estate market.
With a population that the UN warns could double by 2050, the economic and social implications of failing to address this situation are alarming.
For his part, Minister of Finance Ibrahim Abdulaziz al-Assaf explained at the Euromoney event that the government’s intervention in housing provision dates to the mid-1970s with the formation of the Real Estate Development Fund (REDF), which he said by 2006 had provided financing for some 613,000 housing units. In 2004, the fund was running low on capital and received a further $2.4 billion from the Saudi Arabia Monetary Agency. Another injection of the same amount was made in 2006, as the situation became more pressing. The REDF’s current capital base stands at $25 billion. Al-Assaf said 53,000 loans had resulted from the cash boost to the fund.
Delinquent loans weakening fund
However, the fund is designed to be self-sustaining and relies on the regular repayment of loan installments. By 2004, about 30% of outstanding loans were delinquent. This resulted in the number of loans on offer being considerably reduced—and the government’s subsequent intervention to bolster the capital. Prior to this, no more than 10,000 loans were made in any single year, with the annual average about 6,500. Meanwhile, applications have been averaging 30,000 per annum.
The minister explained that this situation prompted the government to rethink its housing provision strategy and the ideal of a property for every Saudi family. While measures have been taken to increase collection rates—awareness campaigns and the participation in an electronic transfer system known as Saree whereby repayments are deducted straight from an individual’s account—he indicated the situation is ultimately unsustainable given the demand.
His message and that reiterated by subsequent speakers was for an increase in private sector involvement, via investment funds and the formation new residential real estate development companies. Traditionally deemed unattractive because of an ambiguous legal framework, relatively low rental rates, the high level of default on payments and lack of stock market-linked financing vehicles, it is now being focussed on as a solution.
Many analysts feel that Saudi Arabia could eventually develop a strong sukuk market (sharia-compliant bonds) to underpin the sector as in Western markets. Some of the speakers argued that for real estate investment funds to flourish, they needed to be linked to the stock market and particularly a bond market, which in the kingdom remains immature. However, the stock market has fallen out of popularity with investors, given its continuing weak performance. Indeed, some observers have mentioned that this could be a reason why some investors have turned their attention toward real estate.
Another important tool for the development of the sector is the availability of mortgages. Again, this is an area with much potential but dogged by restrictive laws, particularly relating to title deeds. The law has been under review for some time and the banks have been awaiting new legislation.
Yousef al-Shelash, the chairman of Dar Al-Arkan, the kingdom’s largest private real estate company with a capital of $1.5 billion, outlined his company’s fund specifically intended for this type of investment. However, he explained that the decision to increase his company’s involvement with the residential sector was not easy given the obvious attractions of more mature real estate markets elsewhere in the Gulf. He said the Saudi sector has the demand but considerable obstacles, the root of which was the lack of a sound legal infrastructure which leads to low levels of competitive financing.
Dubai based KM Properties, the real estate arm of KM Holdings, announced its entry into the Saudi market establishing three offices in Riyadh, Jeddah and Dammam. The company recently launched a $2.3 billion Islamic real estate investment fund covering the GCC.
