Lack of regulatory framework weighs on Saudi property market
- Saudi Arabia: Tuesday, March 19 - 2013 at 12:07
The lack of a regulatory framework in Saudi Arabia's property market continues to be a major factor contributing to the affordable housing problem in the kingdom, according to a new report by CBRE.
At the root of the problem is the fact that high net worth Saudis continue to favour land as a long-term investment vehicle, vastly inflating residential land prices and consequently excluding low-cost housing from vast areas of the kingdom. Compounding the issue is the fact that there is virtually no regulatory framework provided by the government to govern land trading, and the participants typically take little account of the actual economic value of the land when making their investment decisions, the report added.
While pointing out many of the key obstacles that the Saudi property market faces, the report also challenges some of the assumptions that are made by analysts. For example, one widely held belief is that the kingdom faces a shortage of over 500,000 homes, based on an assumption of an average household size of five people. However, data from high-end economies such as Qatar and Abu Dhabi show that household sizes for nationals in these places are around 8 and 6.5 respectively.
"In these economies there is no shortage of housing for nationals and maybe we should start to reconsider whether the shortages calculated by analysts are actually as significant as they are assumed to be," the report said, noting that while there have been some sharp rises in rental rates in particularly popular 'emerging' areas of both Riyadh and Jeddah, there are also areas in both cities that saw very little changes in rental rates during 2012.
"There is no doubt that much of the existing housing in Saudi Arabia is in poor condition and needs to be refurbished or rebuilt, but there is significantly less time pressure on this process as the housing units do actually exist at present and do actually perform the function of housing," the report said. "Other housing requirements are in some respects self-inflicted. For example, the large-scale demolition of housing in Makkah has resulted in a need to replace a significant number of units in the city."
The report also takes issue with what it call analysts' 'fixation' on the 60% of non-home owners, 'as though this should figure should be nil'. It said there is always a need for rental accommodation, such as to allow for temporary circumstances, employment mobility, social norms and so on. "The propensity to buy homes can also vary widely, in Europe for example, the UK has a home-ownership rate of around 70%, while in Germany the figure is only 42%," the report noted.
Therefore, CBRE concludes, the main issue to be addressed is not one of the aggregate supply of housing for sale, but a mixture of issues concerning the right type and price of housing, in the right locations, with the preferred tenure. It points out that large numbers of low-cost housing units have gone unsold, particularly in large-scale masterplanned communities in Southern Riyadh and these were eventually offered for lease after failing to sell.
"Expectations in terms of unit sizes and prices will also need to be moderated over time, and a secondary trading market needs to be established to enable mobility in the market," the report said.
CBRE believes the ability of all sectors of Saudi society to access mortgage finance would stimulate the market significantly, injecting much needed capital into the sector, noting that at present, less than 5% of house purchases are made using mortgage-style financial products.
The reason for the lack of products has its roots in the lack of security for lenders in the event of mortgage defaults, which means that risk is priced into such products, making them unaffordable to all but a few. The long-awaited 'mortgage law' published in H2 2012 does not fully address the key issue of foreclosures, and as a consequence is likely to have little impact on the mortgage sector.
"At present, only three new laws have been published, but it is hoped that the two laws still under consideration; the 'Execution Law' and the 'Registered Real Estate Mortgage Law', will fully address this topic," the report said.
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