Infrastructure boom in Saudi

About 80% of the metro network will be underground, and will be served by 34 stations. The capacity of Riyadh’s international airport is anticipated to triple to 25 million passengers a year by 2015 as part of the first phase of planned aviation-sector expenditure totalling $53bn.

Saudi Arabia currently has around 53,000 branded hotel rooms, about the same as Dubai, although 32,000 of these are in Makkah and Madinah. In 2011, the Kingdom hosted 15.4 million foreign visitors, of which 10.6 million were travelling as religious pilgrims.

The number of new branded beds planned to enter the market is significant, amounting to an increase of around 60% over the next few years, according to STR Global.

This is partly in response to the increased capacity of the religious centres in Makkah and Madinah, but is also due to the increased demand from business visitors and the push to develop domestic tourism.

There has been renewed talk that there may be some movement on one or more of the long-awaited mortgage laws that may, or may not, address the key issue of mortgage security and, in particular, repossession of properties for non-payment. There is no indication to date that this key issue has, or will, be resolved, notes CB Richard Ellis.

Instead, talk has focused on the potential for mortgage portfolios to be packaged up as derivative products that may be traded between banks. Reports indicate that the central bank of Saudi Arabia (SAMA) will publish the new rules on mortgage financing in order to receive feedback before implementation.

In an effort to combat persistent unemployment among the Saudi youth, the government has embarked on massive infrastructure spending in both the education and office sectors, naturally hoping that, in time, one will satisfy the needs of the other.

In Riyadh this translates into numerous office developments generally located in the rapidly-expanding northern parts of the city, and anchored by the King Abdullah Financial District (KAFD), which is likely to add about 1.2 million square metres of prime office space on its own.

The city currently has about three million square metres of office space in all categories, with about 600,000m2 of this space being in the local or international ‘Class A’ category.

At present, office space in this quality category in central areas is operating at vacancy rates of around 15%. However, the sheer volume of new quality space due to enter the market at KAFD alone seems likely to overwhelm this category in supply terms, notes CB Richard Ellis.

With over 800,000m2 of quality office space due to enter the Riyadh office market in the next two years, the short-term future for this sector remains challenging. However, well-positioned projects in good locations with high visibility and good access have performed well.

Riyadh Business Gate, in particular, has been successful in attracting tenants, largely due to a well-conceived concept that offers quality office space in a low-rise, business-park environment, with close proximity to upper-income residential compounds and the airport, good access, ample parking, security and on-site retail and food and beverage outlets.

Office space in Jeddah continues to be widely distributed, with most construction activity taking place along major roads in the northern areas of the city.

Levels of construction activity are significant, with the volume of local ‘Class A’ office space likely to double over the next two years. Rental rates have therefore declined slightly in H1 2012, although this is more typically from new properties entering the market at a slightly lower rental rate than existing properties reducing their rental rates.

In broad terms, average ‘Class A’ rental rates are 20% down on those in Riyadh, with no space that would fall into the category of ‘International Class A’, partly due to the disparate nature of office development in Jeddah, which means there is no clearly-defined CBD.

Although there has been much press comment on the new ‘mortgage law’ in recent months, it is not absolutely clear what progress has been made in reality. The Saudi Government’s cabinet revealed that it had approved new legislation on the topic, but has not yet divulged details as to what issues had been specifically addressed in its new regulations.

The ongoing uncertainty over whether, or how, this will be addressed continues to affect the market with the result that a law intended ultimately to protect the population from unscrupulous lenders, is in fact preventing them from gaining access to mortgage finance and ultimately, buying their own home.

Even if a law specifically addressing and ‘resolving’ this issue is constructed, it is likely to take some time before it is fully implemented and tested for real enforceability by the legal system. Indeed, it is quite possible that lenders will be extremely wary of testing a law that is potentially at odds with Sharia law.

At present, mortgages comprise around 2% of GDP compared to around 70% in the US or UK, and this is likely to change little in the short term. In Egypt for example, where a similar situation existed and a ‘mortgage law’ addressing this point was passed over a decade ago, mortgages still only equate to less than 1% of GDP.

According to recent USAID research, only 37% of adults in Egypt have heard of mortgage finance. Consequently, housing needs remain a pressing issue.

The challenges faced by Dar Al Arkan, for example, in selling price-sensitive accommodation at the Al Qasr project in Riyadh shows the contradictions between demand, the ability of Saudi nationals to purchase housing and the mismatch between expectations and reality in terms of scale and quality.

This is partly driven by the absence of a secondary housing market, which means that a Saudi national’s first purchased home is likely to be the only home they ever purchase. The issue of build quality is key in this issue, with traditional building techniques and quality leaving houses virtually obsolete over a 30-year period.

Apartments are much less popular due to their limitations in terms of expansion, but also privacy, build quality, management and maintenance of common areas and a number of other core issues are central demotivators. Land price-speculation, which occurs often in Saudi Arabia, typically means that villa or townhouse projects are unable to meet the critical price constraints of the market.

These factors have resulted in a housing shortage environment into which the government has had to step in. Under the Ninth Development Plan, it has allocated up to $66bn for social housing projects alone. The government is widely reported to be planning the construction of approximately 500,000 housing units across the Kingdom, but has not published a national housing strategy through which such policy can be implemented.

The process of compiling such a strategy is underway, however, and the Ministry of Housing has reported that it has prepared a first draft that has been circulated among other relevant ministries, with over 340 ‘suggestions’ received in response. It is not known when a final version will be delivered.

As part of its media push to raise the profile of its efforts in the housing sector, the Real Estate Development Fund (REDF) recently announced it had approved 11,666 housing loans worth $1.5bn for the construction of 14,000 housing units.

This was the third round of approvals under the 2012 budget and, while significant, still falls well short of the 1.7 million applications that the REDF has on its books.

In Jeddah, intense demand pressure for low-cost housing, as yet unmet by the private sector, has forced the government to step in, with the Saudi Pension Fund announcing plans to develop a giant housing project of 10,000 units in northern Jeddah.

The project will comprise a mix of apartments and villas on a site measuring 2.6km2 in total, although it is unclear as to when the project will be completed, and contractors have yet to be appointed.