Kingdom’s spending on nonoil projects set to rise 7% this year

JEDDAH: The Kingdom’s policy through 2012 remains focused on infrastructure and social programs. The 2012 budget has allocated $45 billion for the education sector, $23 billion for healthcare and $9.4 billion for transport. Together with numerous other initiatives, government spending on nonoil infrastructure is likely to be around 7 percent higher than in 2011, according to a report by CBRE.
About $67 billion has been set aside for the construction of 500,000 housing units. These housing units, which are intended to meet the needs of the lower income sector, will be located around the Kingdom with the first of them currently being masterplanned on various sites totaling 32 square kilometers.
In addition to a trans-Saudi Arabian railway line, the Council of Ministers agreed to implement a massive public transport system for all the major cities. The transport solutions will include both buses and trains and will be first implemented in Riyadh, where phase 1 completion is expected in 2017. Around 80 percent of the metro network will be underground and will be served by 34 stations.
The capacity of Riyadh's international airport is anticipated to triple to 25 million per annum by 2015 as part of the first phase of planned aviation sector expenditure totaling $53 billion.
Saudi Arabia currently has around 53,000 branded hotel rooms (about the same as Dubai), although 32,000 of these are in Makkah and Madinah. In 2011, the Kingdom hosted 15.4 million foreign visitors, of which 10.6 million were traveling as pilgrims.
The number of new branded beds planned to enter the market is however significant, amounting to an increase of around 60 percent over the next few years according to STR Global. This is in part a response to the increased capacity of the religious centers in Makkah and Madinah, but also to the increased demand from business visitors and the push to develop domestic tourism.
There has been renewed talk that there may be some movement on one or more of the long-awaited “mortgage laws” that may, or may not, address the key issue of mortgage security and in particular repossession of properties for non-payment.
In an effort to tackle the persistent unemployment problem among Saudi Arabia's young people, the government has embarked on massive infrastructure spending on both the education sector and the office sector, naturally hoping that, in time, one will satisfy the needs of the other.
In Riyadh this translates into numerous office developments generally located in the rapidly expanding northern parts of the city and anchored by King Abdullah Financial District (KAFD) which is likely to add approximately 1.2 million square meters of prime office space on its own.
The city currently has approximately three million square meters of office space in all categories with approximately 600,000 square meters of this space being in the local or international “Class A” category. At present, office space in this quality category in central areas is operating at vacancy rates of around 15 percent but the sheer volume of new quality space due to enter the market at KAFD alone seems likely to overwhelm this category in supply terms.
With over 800,000 square meters of quality office space due to enter the Riyadh office market in the next two years, the short term future for this sector is likely to be challenging.
As a consequence, rental rates have been in slight decline during the first half of 2012 although this is more typically from new properties entering the market at a slightly lower rental rate than existing properties reducing their rental rates.
Although there has been much press comment on the new “mortgage law” in recent months, it is not absolutely clear what progress has been made in reality.
Consequently, housing needs remain a pressing issue. Under the Ninth Development Plan, the government has allocated up to SR250 billion ($66 billion) for social housing projects alone. The government is widely reported to be planning the construction of approximately 500,000 housing units across the Kingdom, but has not published a national housing strategy through which such policy can be implemented.
Despite the well-documented difficulties in obtaining mortgage finance, average villa prices increased across all parts of Riyadh in the first half of 2012 as strong macroeconomic conditions, increased employment and generous pay rises amongst public sector staff created buoyant market conditions for middle-income Saudi nationals.
Compound occupancy and rental rates have also been strong as employment opportunities have been created for middle and upper-income expatriates and increases in supply have lagged behind the rapid increase in demand.
Average villa prices have risen by a rate of around 10 percent per annum in all northern and western parts of Jeddah over the first half of 2012, although price increases have been less significant in the lower-income southern areas of Jeddah, the CBRE report said.