Markaz study sees more potential in Saudi Arabia real estate backed by improving regulations

Being the largest country in the GCC region enjoying high population growth and advantageous demographic structure (over 70% of the population is under age 30), the residential segment is expected to experience under supply situation for some time to come states Markaz study. Weak mortgage law has restricted the growth of this segment so far forcing individuals to fund housing purchase mostly through own means. Introduction of new mortgage law will see banks and financial institutions playing an increased role towards housing finance. Housing market will also see entry of new companies geared towards providing finance.

An estimated 150,000 new housing units are expected to be in demand annually with 70% of that coming from Riyadh, Jeddah and Mecca alone. Only about 70% of that demand is being currently met. Increased life expectancy, reducing unemployment, decreasing family sizes, increasing personal disposable income, new avenues for funding with affordable interest rates can all come together as strong triggers for a structural growth in the residential segment.

The unexpected increase in oil price and its re-rating to a higher level than what was budgeted is triggering an economic and liquidity boom leading to increased spending levels by government. Expenditure allocation for 2007 at over SAR 100 billion is the highest ever in the history of the Kingdom. This augurs well for infrastructure and commercial segments. The launch of "economic cities" with a targeted investment of more than SAR 280 billion will provide the stimulus for growth for this segment. Other segments like retail and hospitality are also experience strong demand triggers like changing consumer behavior and KSA as a destination for religious tourism.

The report notes that that some of these positive drivers are already in the price. Property prices are believed to have increased at the rate of 10% to 15% p.a. while land prices have increased by 17% to 20% p.a. during the last 3 years. Similarly rental rates have also increased by an estimated 20%-25% p.a in major cities. However, these price increases did not seep through the economy in the form of increased inflation as is the case with Qatar and UAE. While prices are increasing, when benchmarked with other cities in the region (like Dubai and Doha), KSA still offers potential for further growth backed by improving regulations.

Only an unexpected economic contraction and/or geopolitical development may derail this estimate. Other potential risks to the sector would be a further stock market correction as Saudi investors are equally exposed to these two major asset classes.