With a new mortgage law in the works and government plans to spend nearly $70 billion on low-income housing, Saudi Arabia's real estate market appears on track for a period of expansion, according to OBG According to a report issued in early June by property consultancy Jones Lang LaSalle, the Saudi real estate sector should see strong growth through the rest of this year, with momentum continuing into 2012 and beyond. This comes on the back of improved economic conditions, with real GDP projected to increase by 5.7 percent in 2011. The residential segment is expected to be especially strong. With a young and growing population, housing supply has often lagged behind demand. This in turn has pushed up prices of residential units, often beyond the reach of potential homeowners. The housing shortage may soon be eased, however. In March, King Abdullah announced a government program to build 500,000 low-cost housing units. This SR250bn ($67 billion) scheme would not only put roofs over many heads, it may also create demand for retail and commercial facilities to serve new residential developments. Even with 500,000 new units, this housing stock expansion may not be sufficient to meet demand, at least according to some estimates. A recent report by Banque Saudi Fransi said that 1.65 million new residential units would be required by 2015, with the burgeoning middle class generating much of that demand. The residential segment should be given a further boost when a new legal framework governing the mortgage market comes into effect, although it is as yet unclear when exactly that will be. The new mortgage law, which has already been approved by the Shura Council, will cover five topics: mortgage registration, real estate funding, finance companies, financial leasing and enforcement. The law will still need to be approved by the Council of Ministers, before it can be implemented, however. The mortgage market could be sizable, which would be welcome news for Saudi banks. According to research by financial services firm Credit Suisse, some 52 percent of Saudi households meet the affordability threshold for purchasing residential property, and 17 percent would be potential mortgage seekers. The overall size of the mortgage sector could potentially amount to as much as $240bn, or 23 percent of GDP, in a decade. The outlook is not quite as rosy in some other segments, however. For example, in the office segment, a substantial amount of new space has come onto the market recently, reducing the appeal of older properties. According to Jones Lang LaSalle, total office stock in Riyadh (across all locations and grades) is about 3m sq meters, with approximately 70,000 sq meters having been added during the first quarter of this year. Moreover, there are plans for an additional 630,000 sq meters of office space over the next two years. This excess of space may discourage investors from putting capital into new commercial developments, although given the expected growth in the economy in the coming years, fueled in part by the government's investment program, any oversupply will likely be absorbed in the medium term. BM
