A long-term winner: Understanding the dynamics of Saudi Arabia’s real estate market
As it works towards its ambitions of becoming one of the Gulf’s leading commercial property markets, how is Saudi Arabia attracting new investment to its residential real estate sector and adapting to the challenges of the country’s changing demographics?
Long-term growth and international success are central to the aspirations of Saudi Arabia’s real estate market. In part, this is because Saudi Arabian authorities have long recognized the importance of real estate to fulfilling the country’s Vision 2030 national development plan – which seeks to increase private sector contributions to the residential housing market – and ensuring the continued growth of its economy.
Vision 2030 states that the: “Real estate industry plays a substantial role in promoting sustainable development in Saudi Arabia; it is a strategic production factor for all vital sectors. It is also a vital incentive for income-based, job-creating investment, in addition to being a basis for launching investment projects in miscellaneous economic and social fields.”
While recent performance has not met expectations – the Real Estate Price Index for Q1 of 2019 declined 0.4% compared to Q4 of 2018 and 4.9% compared to Q1 of 2018 – industry experts are confident that Saudi Arabian real estate is a long-term winner.
“Despite the struggles it has gone through in the last two years, the real estate market in Saudi Arabia maintains an overall positive outlook due to the multiple reforms that are being currently planned and executed by the Saudi Arabian government.”
Several initiatives have been instigated to ensure the market’s enduring success, helping Saudi Arabia’s young and ambitious population increasingly move into home ownership and prompting experienced observers to forecast imminent growth across the sector.
In 2018, the maximum loan-to-value mortgage rate was raised across Saudi Arabia, with applicants now able to raise 90% of a property’s value through a mortgage instead of the previous limit of 85%. This move was designed to stimulate activity across the residential market. Saudi Arabia’s Ministry of Housing wants the mortgage market to reach a total value of US$ 134 billion by 2020, up from US$ 80 billion in 2018.
By 2020, the Saudi Arabian government also hopes to reduce the average ratio between house price and per capita income to five times and increase the percentage of home ownership among Saudi citizens to 60%. Under the National Transformation Plan, it aims to raise real estate’s contribution to GDP from 5% in 2016 to 10% in 2020. By 2030, its ambition is to see nationwide home ownership levels at 70%.
An injection of multibillion-dollar state support is expected to be at the heart of the residential sector’s revival across Saudi Arabia. The introduction of the white land tax in 2017, has also been noted as a clear intent from the government to engage with the issues facing the residential market in the country. Other moves, such as the approval of regulations around Real Estate Investment Trusts (REITs) in Saudi Arabia, as well as various urban regeneration and infrastructure projects, such as the US$ 22.5 billion Riyadh Metro (where, according to global real estate consultants JLL, the value of properties in close proximity to the transit system is expected to increase), are also expected to positively contribute to the overall real estate market. As stated by property consultancy Knight Frank in its recent report on the Saudi Arabian real estate sector: “We remain optimistic for the longer term due to the various government initiatives aimed at stimulating the real estate market whilst encouraging the private sector to take a key role in this process, as part of the recently introduced strategic reforms,”
In 2018, the Ministry of Housing partnered with Saudi Arabia’s Real Estate Development Fund (REDF) to launch Sakani II, a program designed to deliver 300,000 residential units across the country. Experts at JLL believe that the first impact of these initiatives will soon start to be felt:
“2019 is expected to witness ongoing activity on the back of strong reform momentum and increased government spending as outlined in the 2019 budget announcement… We expect this to reflect positively on the real estate sector as commercial activity picks up and foreign investment increases. As the biggest economy in the Middle East, we are also likely to see private demand play a large role in the real estate and construction sectors.”
It is certainly true that a significant number of new homes are being added to Saudi Arabia’s residential market. In February 2019, there were 5,200 real estate projects under construction across Saudi Arabia. In 2018, 29,000 new residential units became available in Riyadh, taking the city’s total supply to more than 1.3 million units. By the end of 2020, 60,000 more units are set to be completed. It is anticipated that “the affordable housing sector will continue to drive construction activity and the overall real estate market”.
In Jeddah, just under 5,000 residential units were completed in 2018, taking the city’s total supply to 817,000 units. Another 23,000 units are set to be completed by the end of 2020.
Among the units entering the Jeddah market in 2018 were 242 one, two, three and four-bedroom contemporary family apartments at the new J|ONE complex in the Al Salamah district – the first residential project completed by Abdul Latif Jameel Land.
The residential development division of Abdul Latif Jameel Land is passionate about developing contemporary, high-quality homes tailored to the needs of urban individuals and families. By completing the 64,000m2 development, with facilities including outdoor pools, a health club, home theatre, café, gaming room, day-care nursery and mini-market, J│ONE made an immediate impact.
The entire project was completed in just 19.5 months and earned instant recognition, winning a prestigious global award in the Residential Development in Saudi Arabia category at the 2019-2020 Arabia Property Awards.
Fady M. Jameel, Deputy President and Vice Chairman of Abdul Latif Jameel, said: “As a pioneering project for both Abdul Latif Jameel Land and Saudi Arabia, this award is testament to our future potential in delivering upon the residential development and housing ownership goals identified in Saudi Vision 2030. Our focus on the community element of residential living is what will set J/ONE apart in the Jeddah market.”
The success of J|ONE was quickly followed by Gallery N, Abdul Latif Jameel Land’s second residential project. Announced in Autumn 2017, it added a further 21 contemporary apartments to the Jeddah stock when it was completed one year later. Located in the city’s Al Nadah district, it proved to be another award-winning addition to the company’s portfolio.