JEDDAH, 6 August 2007 — Saudi Arabia’s housing market is all set to boom as the Kingdom has geared up to introduce the long-awaited mortgage financing law by the end of this year or early next year. The availability of housing finance will add momentum to rising demand growth, which over the past few years, has been driven by robust economic performance, increasing personal income and Kingdom’s population dynamics and demographic trends.
According to a review by the Jeddah-based National Commercial Bank (NCB) about Kingdom’s housing sector, the Saudi housing finance market is currently nonexistent, mainly due to the absence of a mortgage system governing property ownership, specifically property repossession, enforced eviction and assets liquidation in the case of delinquency.
The Ministry of Finance (MOF) has already announced that a draft mortgage law is in place and is expected to be approved by the end of this year or early next year. In anticipation to the long-awaited mortgage law, a number of banks in the Kingdom have started offering Shariah-compliant home financing credit, with tenors extending up to 25 years. According to the NCB estimate, the size of outstanding housing credit is likely to rise from SR4.0 billion in 2007 to about SR46 billion by the end of the decade, assuming a gradual rise in the share of new residential units purchased through housing loans from 10 percent in 2007 to 55 percent by 2010.
In this connection NCB senior economist Mazen A. Tammar said: “While government programs have provided some relief to the already tight housing market, through the Saudi Real Estate Development Fund (REDF) and various other initiatives, the significant pent-up demand for housing represents huge potential for mortgage financing in the Kingdom, creating a new market segment for Saudi banks.”
The NCB report said that since its inception in 1974, the REDF has financed over 613,000 housing units through interest-free, easy-term loans granted to Saudi citizens. So far REDF’s cumulative disbursements have exceeded SR71 billion, nearly SR2.2 billion on an annual basis.
Nearly 44.2 percent of the aggregate stock of housing units in the Kingdom, estimated at 4.2 million units by 2006, is occupied on a rental basis. The rental market is facilitating accommodations to nearly 37.5 percent of the country’s total population of which 14.7 percent are Saudi nationals. This roughly represents around 670,000 rented dwelling units, and in turn will generate potential demand for home ownership, which Saudi nationals will most likely attain through mortgage financing.
The report added that the average Saudi household size to gradually converge to 5.21 persons per occupied housing unit by 2020, down from 5.62 in 2006. This implies an aggregate housing stock of 6.5 million units, roughly 2.2 million new housing units over the forecast period 2007-2010, in order to accommodate the projected population.
The NCB report said about 648,000 Saudi nationals will join the Saudi labor market between 2006-2010, bringing Saudi participation in the total work force to 46.7 percent by 2010, up from 40.4 percent in 1995 and 44.9 percent in 2002. Thus, the changing characteristics of the Saudi labor force, in addition to faster job creation, will constitute a main determinant of housing market growth moving forward.
On a full occupancy basis, the total number of housing units in the Kingdom increased by 1.4 million units between 1992-2006, bringing the total of occupied housing units to 4.2 million. This illustrates the construction of nearly 95,000 new units per annum over the same period.
The report said the property owner occupies 44.5 percent of the aggregate stocks of housing units in the Kingdom, while a similar proportion is occupied on a rental basis. The Saudi residential rental market facilitates accommodations to nearly 37.5 percent of the country’s total population The expatriate community comprises 27 percent of the Saudi population of which 22.8 percent lives in rented houses by virtue of law, which still prohibits foreign ownership of property in the Kingdom. The remaining 4.3 percent of expatriates fall under the “others” category, where the employer provides housing.
A sizable segment of Saudi nationals, about 14.7 percent of the total population, also lives in rented units. This roughly translates to 670,000 rented dwelling units, constituting potential demand for home ownership, which Saudis will most likely attain through mortgage financing.
“The current investment drive in residential projects is expected to continue over the medium-term, undertaken by both the government and the private sector. The investment needed to develop the estimated 2.2 million new housing units at SR1.12 trillion over the forecast period, representing an average outlay of SR80 billion per annum,” Tammar said.
Due to surging oil prices and exports the earning power of the Saudi nationals has substantially improved over the past five years. Between 2002-2006, GDP per capita increased by 168 percent from SR32,900 to a staggering SR55,198, its highest level since 1981.
The NCB report said residential building expenditures in 2006 to have reached SR39 billion. This will continue to fuel growth in the sector through the end of the decade, where residential spending is projected to rise from SR47 billion in 2007 to SR65 billion in 2010. Given an average construction cost of SR500,000 per housing unit, the projected investment outlays are expected to fall short of the required investment levels to meet potential demand.
