Building it is selling it
Construction is booming in KSA. Universities, hospitals, hotels, shopping malls and entire smart cities – now seem as ubiquitous as oil wells, sprouting up everywhere you look. The country's traditional panorama is changing too, as high-rise building becomes more common, changing the cities' skylines. The residential sector, however, is still lagging behind, although an extraordinarily high demand for affordable housing and the government's recently acquired awareness of the need to house the fast-growing population seems set to change this. In all, the Saudi real estate sector is only beginning to develop – but it is doing so in typically explosive fashion. And by virtue of starting ten years later than its neighbours, the country is in the enviable position where it can benefit from the mistakes they made.
The dream of a lifetime
Real estate in Saudi Arabia is moreover a fairly stable and constant affair. Contrary to the spectacular boom-and-bust cycles plaguing its smaller and trendier neighbour Dubai, prices in the Kingdom have remained relatively stable throughout the recent financial crisis. This salubrious situation can partly be ascribed to a prudent regulation of the Saudi financial sector in general, but is also due to an ever-growing demand, especially for residential properties, which keeps outstripping the supply. There is not much of the speculative building here that is so common in the Emirates.
The second highest rate of population growth in the world and new living patterns emerging within the young population are driving a demand for housing units accommodating nuclear rather than extended families. Saudi Arabia is experiencing a shortage in this field estimated to reach 1.5 million units by 2013. With figures such as these, it is no wonder that the relatively young real estate sector is booming in the kingdom even while in most of the outside world it is declining.
According to figures released by Bank Saudi Fransi, 36.8 percent of the total Saudi population was 14 years of age or younger in 2008, while 43.3 percent was between the ages of 15 and 39. In other words, an astonishing 80 percent of the population is under 40. In addition to an urbanization rate of 88% and a very high living density (on average six people per household), this makes for a very strong demand for entry-level housing. Moreover, traditional norms and patterns are changing: whereas the extended family living together under one roof was the norm as recently as 20 years ago, the pattern today is increasingly focused on the nuclear family. Young Saudis long to escape the protective embrace of their parents and grandparents and establish their own home, housing husband, wife and kids only.
In fact, only 30% of the population are homeowners, and the government is keen to get the other 70% to own their homes as well. “Real estate is a growing sector in Saudi Arabia,” confirms Mohammed Al Khalil, managing director and CEO of Akwaan Properties. “We have only marginally been affected by the financial crisis – lending and financing are down slightly, but not by much. The market slowed down in 2009, but in the last few months, we have seen hopeful signs of it picking up again. There is still a large gap between supply and demand in the residential sector, we see serious investment in hotel construction and other targeted developments, and government spending remains high and consistent.”
New homes for new lifestyles
“You are building people’s lifelong dream”, says Majd Al Hogail, CEO of Rafal, the first developer to offer the kingdom's home buyers gated compounds set up as complete self-contained communities. “Building homes is a passion. It is a fascinating and gratifying process that you repeat in cycles of 2 to 3 years, from conception to completion. When designing the house, I imagine how people will live in it and make it their home. That is how you bring lifestyle and passion into it.”
Lifestyle is definitely one of the trends that directly affect the real estate business. “Lifestyles in the kingdom have changed dramatically over the past five years and will change even more over the next five years”, says Al Hogail. He sees two major changes that have taken place in families' lifestyles in the Kingdom. “The first change is that family size has decreased - with the size of housing units moving in the same direction. This is also related to the affordability factor – the modern house is much more expensive to build than the traditional homes. The second change has occurred inside the home. Especially in the big cities, people spend much more time outside the house. People work longer hours; women are starting to work outside of the home too. There is not so much time left to receive many guests, so kitchens are now built smaller and guest rooms are disappearing.'
Dr. Nazih H. Hamad, general manager of Affordable House, delves further into the roots of society. “Up until twenty years ago, people still customarily bought a piece of land and built their own house, but now this is no longer common. Both the rising cost of modern housing and the trend for nuclear families to live on their own have made this mode of living impossible for the average Saudi. Now real estate companies build large housing projects and sell individual units to end users, which reduces the cost of housing units through the increased quantity. Additionally, in our own case, we don't use big names as contractors, we work with standardized designs and we build on pieces of land that are not very expensive, which allows us to keep the price down,” says Dr. Nazih H. Hamad, explaining the company's success in tackling the shortage of mid-income housing projects.
“The real estate sector is second only to oil and petrochemicals in terms of size. Real estate players contribute around 7% of KSA’s GDP. Yet there is still a huge potential, as only 20% of the demand is actually being supplied. The problem is that supply and demand is not matched to each other. Developers build expensive luxury homes, while Saudi citizens need affordable, reliable housing within the city zones. We are working with developers to change this,” says Abdallah Al Howaish, CEO and Managing Director of Amlak International, one of the few mortgage providers in the Kingdom.
A long awaited mortgage law
A recent estimate by US-based consultants Clayton Holdings indicates a shortage of no less than 2 million housing units, growing by an average of 200,000 per year. The government has recognized this pressing need and made affordable housing the focus of the 2010 Jeddah Cityscape exhibition, the country's main real estate investment and development fair. As Deep Marwaha, Director of Cityscape Saudi Arabia, explains: “There is a growing urgency to balance residential developments so that everyone has the opportunity to buy a house that fits their needs and their budgets. Fortunately, the government has taken the lead to ensure that housing will be accessible for all, and so we can expect affordable housing to occupy a greater share in upcoming property projects.”
The enormous opportunities this situation creates for project developers and construction companies alike need no further elaboration. Yet the government, although supportive of investment in the low and middle-income market segment and indeed incorporating it in several of the gigantic new development projects it is planning, has yet to approve the long-awaited mortgage finance law. This leaves property developers and real estate companies to their own devices - and those of private financial institutions - to find formulas suited to their customers' limited means.
Emaar, for example, offers the possibility to buy homes in two years of instalments under the structure of paying as they build. At 50% of construction the client has paid 50%. But not everybody can afford to do this and real 20 to 30 years mortgages are still impossible in KSA.
Although the sector has benefited since 1975 from a dedicated government-funded Real Estate Development Fund, the moment a long-awaited comprehensive mortgage law will be implemented; it is set to receive a major boost. The law is expected to clear out the current legal ambiguities surrounding home ownership and to create – for the first time - a solid mortgage-financing market. “The REDF gave out some 650,000 loans and was very important to the sector earlier, when people also used to take out personal loans over ten years to finance their house, building it on their own land. In the current situation, however, this is not sufficient anymore,” says Al Howaish.
Saudi developers are expecting the mortgage law to be instituted in the second quarter of 2011. It takes long because the Saudi government does not take quick decisions and there are many obstacles to overcome in order to allow the law to come into being, including finding a sharia-compliant way to justify interest, for example. But when it comes it will be a big catalyst.
The issue of land ownership and transfer of title deeds to buyer also bugs developers: Each housing unit in any master planned project needs a deed, which is very time-consuming to obtain. Breaking up the land or building into units is a long process, and finding a shortcut for this process is one of my challenges. Developers and notably Emaar Middle East are actually more or less creating this procedure because they were the first ones confronted with this problem in the kingdom.”
Saudization of the workforce, de-Saudization of home ownership
In 2004, a new law gave expatriates holding residence permits the right to buy and own property in the kingdom. Major players in the sector seized this opportunity with projects like Rafal´s 'Blncyah' (or in English, Valencia), a newly built gated residential community inhabited by people of seventeen different nationalities - next to a majority of Saudi home owners. “This also shows the general level of globalization in the country,” says CEO Majd Al Hogail.
Another challenge for the sector is the shortage of trained Saudi personnel, which can make it hard to meet the government-imposed saudization rates. But this is changing, as at EME KSA for instance 60% of the staff is Saudi working in sales, marketing, administration or management. At Emaar Middle East they attach a lot of importance to personnel training. As they are proud to say, they don't just build, they educate too – any one who has worked for Emaar can work anywhere in the world afterwards. Rafal claims even higher figures: “We have now achieved a saudization rate of 85%, even though we are working in a new industry and so have a number of foreign experts bringing knowledge in. But with every project, we employ more trained Saudis.”
At Amlak International too, education of the workforce is taken seriously: “We had no choice but to educate our sales team first. We sell complicated and new products with many aspects – including forward leasing and financing for incomplete houses – which is a new concept to this country. We also sell to a varied public with different needs, from expats to government employees to corporate customers, we also finance land sales and home equity... So we basically developed our own training manual which all new employees have to study and pass exams on.”
The power of building entire new cities
As for government spending, the various new economic cities announced by king Abdullah alone boast levels of investment that almost beg belief. The Knowledge Economic City, for example, which is scheduled for completion in 2020, promises a total investment value of SR30bn (US$8bn) to develop some 4.8 million square metres of land near the Holy City of Medina. The scheme will include around 30,000 residential units, as well as a range of supporting infrastructure and transport facilities aimed at attracting technology, health care and educational companies. KEC is estimated to have signed contracts worth SR700m in 2010.
Another gigantic public real estate investment, King Abdullah Economic City (KAEC) will be the country's first freehold area, as Saudi Arabia seeks to tap into the potentially lucrative foreign real estate investment market. The urban area - which is expected to cost in the region of $27 billion to build - is currently being constructed and is scheduled to be completed by 2025. It is situated near Jeddah and will be about as large as Brussels. KAEC is intended to house around two million people and it is estimated that it will generate approximately one million new jobs.
King Abdullah Financial District (KAFD) in Riyadh is another USS10 billion real estate development currently under construction. When completed, in 2012, it will house most of the financial institutions of the country around residential buildings, conference centres, malls, hotels, etc… Built in an extension of 1,6 million sqm, KAFD is the first green project in the Kingdom.
A new sector seeking professionalism
This is all good news for the kingdom's real estate companies and project developers, who also offer many opportunities for the foreign investors that are already spotting the market as underdeveloped. While the boom is set to start and there are no worries of overexposure any time soon given the continuous rise of demand, there are nevertheless some worries in the sector.
“The KSA lacks institutional developers – large organizations with sustainable output – so this will lengthen the time it takes to get to overexposure. At the same time, there have also been no major international developers entering the Saudi market yet, because they are still trying to understand the structure of the local products, precise figures on income distribution, the pre-sale and after-sale issue, the lifestyle aspect, … It is difficult for them to calculate costs and take account of all the local circumstances, specifically because there are no institutional players to work with”, says Al Hogail.
Real estate everywhere is a locally determined business, but in KSA it seem to be even harder to get into. GCC players – from Dubai and Qatar – were set to enter the market when they started experiencing liquidity problems at home, so their contribution is still very limited too.
There are also concerns about staffing and recruitment, and companies still have to rely on foreign personnel as expertise among nationals is only beginning to develop. However, national education has improved in recent times with a growing number of universities and business schools in the Kingdom as well as almost 100,000 boys and girls sent to study abroad on government grants who in a few years will return with international expertise.
“There is a skill gap now, but that will be solved in the longer run,” says Al Khalil, manager of Akwaan Properties. In the meantime, “companies need to start joint ventures for specific projects to minimise staff requirements. Recruiting foreigners has also become less cumbersome: restrictions on working permits and visas have been eased – we are no longer experiencing the problems of the past.”
Lacking behind the green-fashion
With most of the problems solved or on the way there, the international trend of green building has also reached Saudi Arabia. Al-Khalil, an enthusiast of green building, waxes lyrical as he goes into Akwaan's plans to diversify into smart green offices: “We have so much natural energy in this country, both wind and solar power, that we really need to exploit. For larger projects such as residential compounds and office buildings especially, an increased initial investment offers a large return in reduced expenses in the mid to long-term. For solar energy, there are still some problems with sand and dust, but the King Abdullah University for Science and Technology (KAUST) is working to solve these, and several experimental green projects are being set up in the country right now.”
But he agrees that the real sure-fire development in the near future remains affordable homes for the average Saudi: “I think the first challenge is for engineers, contractors and developers to come together and develop a cost-effective and cheap construction method for low and middle-income housing. The average income in Saudi Arabia is not that high, and family savings are at 20 to 25% maximum. For individuals, this is not sufficient to buy a one-time house and consequently most people are still renting. There is still too little financing for individual housing – although the new mortgage law should remedy this situation.”
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