Saudi Arabian residential projects need $20bn cash injection

The Saudi real estate market is no longer focused around villas and luxurious palaces; today it has to adapt to the changing real estate landscape. Where until recently people could afford to buy villas or land, now, with rising prices, apartments are becoming more popular.

The economy looks promising, with the oil prices continuing to rise and Saudi's youth (which constitutes the biggest percentage of the population) increasingly preferring to move from villas to apartments. Currently, demand for homes in the kingdom exceeds supply, mainly because 70 per cent of the population is below the age of 30.

Increased costs

Land prices rose between 20 and 40 per cent in 2006. In Riyadh alone, the price per square metre has hit anywhere between SR400 and SR1500 ($106 - $340). To that can be added construction costs, which range from SR800 to SR2500 ($213 - $666) per meter square.

There are many reasons for this rise in prices. First, there's the sudden rise in the construction material prices, followed by the short supply versus high demand, and the fact that with most investments now being made in the real estate sector, prices have been forced up.

However, experts believe the current rises are just the early stages of a boom that will really take off next year and continue for many years. What is needed now are measures to prepare for the boom, such as establishing companies that can address the needs of those on low incomes.

Rising investments, rising prices

A report, issued recently by financial company Samba, stated that the value of the construction operations will reach SR484bn ($192.1bn) by 2010. Until then, the kingdom will need to build 2.6 million residential units, or 163,750 units per year. And this means that some SR1.2 trillion ($0.3 trillion) needs to be invested by 2020.

Property prices have grown 13.7 per cent annually between 2002-2005, while land prices increased 16.5 per cent and commercial buildings by 12.5 per cent. In addition, rent has increased by six per cent during the last year. But investors claim that the current industry regulations are not encouraging for the rental market, especially when it comes to solving disputes between owners and tenants.

In this respect, houses and office rents will remain the major source of price inflation during the coming years, unless the government starts encouraging investors to increase their commitments in these two fields.

Developers and contractors are expected to receive fixed cash amounts by the time the Saudi property industry moves towards focusing on big projects. But experts have warned that investment in new buildings will decrease as a result of contractors' manipulation of building descriptions and government regulations, which causes more delays when such manipulation is subsequently discovered and needs to be fixed.

More investment expected

According to the Inter-Arab Investment Guarantee Corporation Investments, an estimated SR82bn ($21.8bn) will be ploughed into the real estate sector over the coming three years. Preferred areas for investors are Mecca, Al Madina, Al Monawara and Jeddah, in addition to the economic cities which carry significant importance for the Saudi Arabian economy, since they create vast employment opportunities for both individuals and contracting companies.

The Eastern Province Chamber of Commerce and Industry hopes that November's Saudi Investment Forum 2007 will attract more than 1,000 participants from different regional and global institutions, companies and investment funds. And this is probably going to happen, as huge projects in Saudi Arabia will be worth more than $690bn in the coming years.

See also:
Saudi property boom takes off
$30bn Jizan mega project joins others to create new economy

By Medhat Shahidi