THE price of property has soared since Sept. 11: It is up 13 percent in Jeddah. Such is the demand that it has left developers almost breathless. Mohamed El-Khereiji, a prominent west coast developer, reckons that he could have pre-sold half of his new 500-apartment complex in Makkah within a matter of days, even though he has not yet begun to market them. The reason for the boom, he and other businessmen say, is that Saudi investors are looking for a safe haven for their investments overseas and have decided that the safest place is back home. People are now "focusing" on real estate, says El-Khereiji. However, the boom in fact started, they point out, prior to the terrorist attacks on America. The horror of Sept. 11 and the effects it had on the global economy, particularly by tipping the US economy into recession, simply accelerated the trend.
The value of Saudi investments abroad is estimated by the Saudi business community to be around $500 billion but was assessed by US bankers Merrill Lynch at $750 billion in a report published last spring. If there is concern about these investments it is not surprising. What with the collapse of the Asian markets two years ago, then the IT sector and now the international recession, Saudi investors, like those everywhere else, have seen the value of their wealth slide. But they are not exactly overwhelmed with investment opportunities back home. The business opportunities in the Kingdom are "limited" says El-Khereiji. Investors are not going to bring money home just to park it in a current account. Property represents the most obvious, the most accessible, and the most practical means of investment and if the market is seen to be on a rise, all the more reason to jump in.
The attraction of local property can be seen from the figures. According to El-Khereiji, the return is two to three times better than in the market in the United States and Europe. "People can earn the equivalent of a 6 percent return here compared to 2 percent in the West. Someone buying an apartment like the ones I’m building and selling in Makkah can rent them out to Umrah and Haj visitors and make 6-7 percent a year on their investment. That is attractive."
It is unclear, though, whether the money going into the property market is repatriated foreign investments or more simply reinvestment within the Saudi market.
Saudi Arabian Monetary Agency (SAMA) figures for the third quarter of the year give no indication that money levels have changed in Saudi Arabia and this suggests no significant repatriation of funds. However, those figures only go to the end of September. On the other hand, if investors were going to repatriate funds, it seems logical that they would have started to do so in the immediate aftermath of the WTC attacks when nervousness was at its height: Movements would have therefore shown up in the September 2001 figures. They do not. Moreover, Saudi bankers indicate that in their conversations with counterparts in the United States and Europe, the latter indicate no major movement of funds back to the Kingdom. Since Sept. 11, there has been reallocation of assets into different sectors, they report, but the movement has still been within the global market. Lastly, Saudi bankers say that they have had talks with high net worth clients about the market, both here and abroad, but to their knowledge those clients have not brought anything back to the Kingdom.
An alternative answer is that the funding for the property boom has come from within. This would seem to be backed up by El-Khereiji. Liquidity, he says, has been released from the Saudi stock market. It dropped in the aftermath of Sept. 11, but by then many investors had, he says, made "huge gains." Many stocks rose 50 percent over the year; "cement rose 100 percent." Investors, nervous after Sept. 11, pulled out and are simply reinvesting their profits.
Nonetheless, he too does not believe that the boom is purely funded from within. People have started bringing money back from the United States and Europe, he says. "I can feel the movement going on." Whatever the source of the funding, there is no doubt there is a boom. "There is a roller-coaster in property," says a smiling El-Khereiji. He and other developers are convinced it is the spark that will ignite a new economic take-off.
Because of his maps, the name Zaki Farsi is well known throughout the Kingdom. In Jeddah and on the west coast, he is also a major real estate developer. His recently-opened Farsi Center in the city’s fast developing commercial hub on lower Wali Al-Ahd Street, is one of Jeddah’s prime office developments and has put his name on the block. His new twin-tower Corniche Gardens apartment complex at the end of Sari Street is another high profile development and is nearly sold out. Farsi also believes that money is coming back to Saudi Arabia in the wake of Sept. 11 — although he is not so sure that it will immediately translate into new projects. People, he says, are simply buying up property, whether apartments, villas or empty sites, as an investment: There is no sign that they are planning to develop the sites.
Real estate development is Farsi’s passion and he is a man of strong views when the subject is raised. He is convinced that it can be the "engine" of fresh economic growth in the Kingdom. A construction boom is waiting to happen, he says. People need homes not as investments but as places to live in: Population growth is the driving force. El-Khereiji makes the same point. Regardless of what happens to the Saudi economy, "We have no alternative but to construct," he says. "The population is growing and it needs homes. It needs affordable housing."
In Farsi’s view, what is holding things back is the lack of a mortgage law, something which the authorities are currently working on. It was a great mistake, Farsi says, not to realize that real estate can provide the wheels to move the economy and make it grow. He points to the US where he says real estate loans are a major factor in keeping the economy growing. "With one of the highest birth rates in the world, Saudi Arabia should have seen years ago that there would be a constant need for new homes plus the need for the means to acquire them," he says. Not everyone, he points out, can afford to spend SR2 million on a villa, or several hundred thousands on an apartment. The need for a legally binding mortgage law is now all the more necessary with the price and sales of oil fluctuating. If there were such a law, he is convinced there would be "hundreds of Zaki Farsis building homes and meeting market needs." And at prices people could afford. Tens of thousands of Saudis would buy if offered the chance of "reasonable" monthly mortgage repayments which are standard in the rest of the world.
As if to drive home an argument that several planners appear not to have understood — that economic diversification is about more than building factories or setting up new service companies — Farsi says that a building boom would create thousands upon thousands of jobs. "All those empty lots in Jeddah and in Riyadh, would be busy with builders, being developed," he asserted. A mortgage law would result in extra work for contractors and subcontractors, for showrooms, for factories producing materials, for importers and warehouses. "It would mean more jobs in maintenance, more real estate agents, more carpenters, more architects, more work all round."
And it would be good news for both banks and investors: Money would be moving within the country. The fact that many of the new jobs created would not necessarily be filled by Saudis does not particularly worry him. Plenty would. Moreover, "imagine the wealth that would already have been created if we had had such a law a few years ago." How many more young people, he asked, who at present simply do not have the money for a cash purchase of an apartment would now have an investment rather than spending their hard earned income on rent?
El-Khereiji likewise believes that a mortgage law is a must. He is convinced that it will happen. As to the effects: "You’ll see a massive boom in the construction industry." That and the knock-on effect would add billions to the economy, he believed. Eighty percent of the services sector is linked in one way or another to the construction sector, he claimed. Sales of food, equipment, vehicles, and apartment rentals all would benefit. Such a law would have a great impact on the whole economy, he said, putting heavy emphasis on the word "great." And it would give people confidence to invest in the wider construction business, he added. "So much industry in Saudi Arabia is based on construction — factories producing cement, tiles, bricks, doors and windows."
Developers such as Farsi and El-Khereiji might be expected to be enthusiasts on the subject of a mortgage law, but they are far from the only ones who say that it is a must and that it has to happen. In the chambers of commerce across the country, the benefits from such a law are well appreciated. How soon is another matter. It is a matter of drafting a law that can operate within the bounds of the Shariah. The Jeddah Chamber of Commerce’s Secretary-General, Dr. Majed Al-Kasabi, is one of a team looking into how such a law might be framed. Recommendations should be made within a year, he says. Thereafter these will have to go to the Shoura Council for approval and that might take another year. "Two years would be a good time frame," is El-Khereiji’s comment. "But it has to fit in with Shariah law before implementation." He is, however, confident that the law will come. "The government is listening to what the private sector is saying. We are talking the same language." A mechanism to recover loans in case of default will be refined and improved.