The capital city Riyadh has witnessed the biggest gains in apartment and villa prices so far this year, although property values in areas of Jeddah hit hard by last November's flash floods have come off sharply.
Over the course of 2009, residential and commercial real estate prices in Saudi Arabia faced slight downward pressure as the Kingdom contended with a slowdown in demand during the global financial crisis, which weighed on property sectors across the region and around the world.
Cash hoarding, weaker access to bank credit, lower building material prices and subdued risk appetite were factors behind the modest decline in property and land prices in the Kingdom. The declines were, however, much more muted and isolated than elsewhere in the Gulf.
Saudi Arabia's property sector has been driven by domestic demand, without exhibiting excesses that led to the formation of asset price bubbles elsewhere in the Gulf. But while residential property prices are strengthening again, the asking price for plots of residential and commercial land is still falling, according to the survey, which draws on real estate price data collected on six Saudi cities: Riyadh, Jeddah, Dammam, Khobar, Dhahran and Makkah. Rents, meanwhile, have moderated in most neighborhoods. Rising rents have been a key driver of historically high inflation rates in the Kingdom over the past two years.
In most areas, a shortfall in housing units persists and the prospects for expanding property ownership are vast as the Kingdom is expected to pass legislation this year to govern mortgages for the first time.
The housing demand is expected to continue in the Middle East's biggest economy, steered by a large population comprising about 65 percent of the Gulf total and growing 2 percent per year. Unlike neighbors such as the UAE and Qatar, where real estate markets have plunged recently, Saudi Arabia's comparatively large population of 25 million, including an estimated 18.5 million citizens, underpins the stability of domestic property demand.
The survey was compiled using asking price data collected from 30 real estate agencies across Saudi Arabia, with a particular emphasis on Riyadh, Jeddah, and the Eastern Province cities Dammam, Alkhobar and Dhahran. Commercial and residential land prices were also collected for the holy city of Makkah. Given the lack of reliable data on the Saudi real estate market, these data should be taken as an indication of the direction and level of prices, understanding that great discrepancies exist even within the same neighborhoods.
Agencies were asked to provide average asking prices for apartments of 120-135 sq m in size and 135-190 sq m in size, as well as smaller villas (300-400 sq m) and larger villas (400-700 sq m). Respondents were also asked to provide average advertised prices for empty residential and commercial plots of land by neighborhood. The bank further gathered data on average office rents charged per sq m, in addition to rental rates for apartments and villas of the same size ranges measured for sale prices. Data for the current survey were collected between Feb. 28 and March 20. Previous surveys were conducted on a half-yearly basis for the past 18 months.
Saudi Arabia's residential real estate sector has held up strongly in the face of sharp price corrections in neighboring Gulf Arab countries, especially the UAE, where house prices in the emirate of Dubai have slumped by half or more in the past 18 months. By comparison, pressure on Saudi real estate prices was slight last year, with apartment and villa prices falling an average of about 5 percent in the second half of 2009 from a year earlier. The biggest drops, surpassing 10 percent, were recorded in east Riyadh. H1 2010 survey data show Riyadh, the hardest hit among Saudi cities by price declines during 2009, has witnessed the most buoyant recovery in sale prices of residential properties this year, largely resulting from a general pick up in the economy, demand and capital concentration.
In Jeddah, which showed greater resilience in prices last year, apartment prices have fallen sharply in H1 compared with the second half of 2009 (H2/09), dropping 9 percent in southern Jeddah, a district that was hard hit by flash floods that killed more than 120 people and damaged thousands of homes in late November.
While prices in affected areas suffered, those in less- afflicted districts of Jeddah have spiked, especially in the north. Residential property prices in the Eastern Province, meanwhile, were mixed.
Compared with levels in H2/09, the average cost of a large apartment (135-190 sq m) in the Saudi cities tracked by the survey rose as much as 11.9 percent in south Riyadh to SR369,167 and fell as much as 9 percent in south Jeddah to SR455,000. The average price for large apartments in the 12 Saudi districts surveyed was SR488,056, up 2.4 percent from H2/09. According to brokers, Saudis favor larger apartments (135-190 sq m) and smaller villas (300-400 sq m), although most would opt to live in villas if they can afford it.
In the four Riyadh districts tracked by the survey, situated in the east, west, north and south parts of the capital, the median price for a large apartment (135-190 sq m) stood at SR536,667 in H1, up almost 6 percent compared with H2/09. The average smaller apartment (120-135 sq m) also gained 6 percent in value in H1 to a median asking price of SR442,100. Apartment prices in Riyadh have, therefore, fully recovered the value they lost last year.
Home to about 6.1 million people, or a quarter of the kingdom's population, Riyadh is the financial and business capital of the country, and thus a key yardstick for the real estate sector. The biggest gain in prices was recorded in lower-income south Riyadh, where the average price of a large apartment advanced 11.9 percent in H1 to SR369,167 compared with SR330,000 in H2/09. Average apartment prices of all four Riyadh districts rose in the first half; prices in south Riyadh are the lowest in the city, and those in more upscale neighborhoods of north Riyadh averaged as high as SR671,667.
For villas (300-400 sq m), prices also rose as much as 12.3 percent in parts of north Riyadh from H2/09 levels. The average cost of a villa of this size in Riyadh climbed 3.9 percent in H1 compared with late last year, with prices strengthening in upmarket east and north Riyadh, and declining in the south and west areas of the city. Villas of this size ranged in average asking price from a low of SR635,000 in the south to a high of SR1.4 million in the north.
The cost of larger villas (400-700 sq m), on the other hand, fell in most areas of Riyadh in H1, declining as much as 11.8 percent in one district of north Riyadh, where list prices are more than double those of west and south Riyadh. Larger villas in Riyadh ranged in price from SR791,667 in the south to SR2.57 million in one locality in north Riyadh.
In Jeddah, which withstood the downward pressure on prices better than Riyadh last year, villa and apartment prices were affected by November floods, which caused the most damage to localities in the south and east regions of the city. Real estate in Jeddah, located on the coast of the Red Sea in western Saudi Arabia, is among the priciest in the country. As the second-largest city after Riyadh, Jeddah contains Saudi Arabia's main port, while acting as an important commercial centre and, due to its proximity to the holy cities of Makkah and Madinah, as a gateway for religious tourism.
The median price of large apartments (135-190 sq m) in the city fell 4 percent in H1 compared with the H2/09 survey, which was conducted before the floods took place. Substantial changes in prices ensued in the months following the floods, whose impact was made worse by poor sewerage systems in some lower-income neighborhoods. Large apartments in the poorer neighborhoods of south Jeddah fell in price by an average 9 percent in H1 compared with levels prior to the floods, averaging SR455,000. The asking price of the same apartment was SR500,000 a year ago - a level that held steady throughout 2009, prior to the floods, despite the economic downturn that afflicted the region.
In central Jeddah, also hit by flood damage, the equivalent apartment cost an average of SR585,833 in H1, down 4 percent from prices before the floods, while in north Jeddah, where flooding did minimal damage, a large apartment rose almost 3 percent in price to an average SR738,333. The trend was opposite for smaller apartments (120-135 sq m), with prices rising in south and central Jeddah and falling in the north.
The cost of prime villas in more-trendy north Jeddah also accelerated quickly following the floods, before which prices were mostly unchanged in 2009. Villa prices rose an average of 18.3 percent to SR2.37 million for smaller villas (300- 400 sq m) and 11.8 percent to SR3.47 million for larger villas (400-700 sq m), compared with H2/09. North Jeddah is among the most expensive neighborhoods in Saudi Arabia tracked by the survey.
Villa prices in central and south Jeddah also came under pressure after the flooding, the average price of a small villa in central Jeddah dropping 9.2 percent to SR1.32 million and those in south Jeddah easing 2 percent to SR881,667.
For cities of the Eastern Province, where residential real estate prices had remained mainly unchanged during 2009, sale prices for apartments and villas were mixed in H1. In Dammam, the average asking price of a large apartment (135-190 sq m) rose 2.3 percent in H1 compared with last year to SR296,667, but the cost of smaller units (120-135 sq m) dropped more than 4 percent. Real estate in Alkhobar - the most expensive of the Eastern Province - advanced in price by 3.4 percent in H1 to SR351,667 for a large apartment and 3.7 percent to SR259,167 for a smaller apartment. Dhahran apartment prices were mostly steady after easing slightly last year.
Going rates for villas were similarly mixed in the three cities, although larger villas (400-700 sq m) fell in price across the board, by as much as 9.2 percent compared with last year in Khobar to an average price of SR1.82 million. Villas are cheaper in Damman and Dhahran, the average price of a large villa standing at SR858,3000 and SR951,667, respectively, in H1. Smaller villas (300-400 sq m), meanwhile, declined in price in Dammam by 4.4 percent, extending their drop to 5.7 percent from H1/09. Villas of an equivalent size in Alkhobar and Dhahran were more expensive in H1 than last year.
The sale price of empty commercial land has been falling across the country, reflecting a slowdown in private sector expansion in the past year. The average decline in commercial land plot prices in the six cities surveyed was 8.3 percent in first half compared with second half of 2009, and 11 percent from a year ago. In Riyadh, average commercial land plot prices fell an average of 0.6 percent in H1 compared with H2/09, while other areas of Saudi Arabia posted steeper drops over the same period, of as much as 14 percent in Alkhobar and Dhahran.
In some neighborhoods of the capital city, commercial land prices are picking up after the asking price of a prime commercial plot fell 12.2 percent, on average, in the year to H2/09, including a slump of as much as 30 percent in some neighborhoods of east Riyadh.
The trend has shifted to a large extent this year, with prime commercial land in 10 of the 50 Riyadh neighborhoods tracked by the survey moving up in value compared with the H2/09. Most of the gains happened in east Riyadh, where the average cost of commercial plots rose 5.6 percent from H2/09.
Land plot prices elsewhere in Riyadh continued to fall, including in the less-expensive south and west districts, where average prices fell 11.5 percent and 9.2 percent, respectively. The cost of commercial land in Riyadh ranges from SR1,125 per sq m in south Riyadh to more than SR5,000 per sq m in parts of north and east Riyadh. Land in the pricier northern districts fell an average of 9.2 percent in H1 over the end of last year.
Jeddah commercial plot prices dropped to an average price per sq m of SR6,682 in H1, down 7.5 percent from SR7,221 in H2/09. Commercial land prices in Jeddah are 12 percent lower than they were in the second half of 2008 and 9 percent down on a year ago. The decline in prices exceeded 15% in Corniche South Obhor and 24 percent in the Al-Rodah district of north Jeddah, where commercial plots are almost a third cheaper than they were in the second half of 2008.
The cost of commercial land in prime locations, such as King Abdulaziz Road and Corniche, also fell 3.6 percent and 11 percent in H1, respectively, compared with H2/09. The average price per sq m on King Abdulaziz Road stands at SR14,467 and on the Corniche (waterfront) at SR19,583 - the highest going rate for commercial land in Saudi Arabia. Prices were as low as SR3,000 per sq m in other areas of Jeddah.
In the holy city of Makkah, meanwhile, commercial plot prices fell to an average price per sq m of SR2,156 in H1 from SR2,280 in H2 and SR2,367 in H1/09, a year- on-year decline of 9 percent. Land prices vary substantially in Makkah, where there are a lot of rundown neighborhoods adjacent to posh new developments, including high rises, surrounding the Holy Mosque. The cost of commercial land per sq m ranges from below SR700 in south Makkah to a peak of SR6,367 in east Makkah district Bat-ha Quraish, where prices have fallen 15 percent since H2 and more than 20 percent from a year ago.
In Dammam, commercial land list prices also retreated by an average of 8 percent from H2/09 to SR3,302 per sq m, having fallen slightly last year, while prices in Alkhobar and Dhahran slumped 14 percent from H2.
A downturn in commercial land prices coincides with an overall slowdown in expansion of the Saudi private sector. Growth in the nonoil private sector fell to 2.5 percent in 2009 from 4.7 percent in 2008 and more than 5 percent in each year between 2004-2007. The slowdown coincided with an early-year slump in oil prices as global demand for energy dampened as global financial turmoil escalated. Curtailed private investment and weaker domestic demand have weighed on real estate prices, although declines are subdued compared with other Gulf countries. We foresee a comeback in private sector appetite for investment this year, although the revival will be gradual.
The sluggish business climate and oversupply in commercial real estate have also taken a toll on office rental rates in many regions, according to the survey, which showed the average advertised rental rate for Saudi office space fell to SR409.3 per sq m, down 8.3 percent from H2/09 and 10 percent from a year ago.
H1 average office rents in north Riyadh fell 7.9 percent to SR504 per square meter from H2/09 levels of SR550, while office rents in east Riyadh declined 3.1 percent to SR349 per sq m. Office rents in south Riyadh, which had fallen the most in the capital since mid-2008, edged 3.3 percent higher in H1 to SR155 per sq m, still 8.8 percent lower than a year earlier.
The sharpest slump in office rents was recorded in the Eastern Province. Office rents in Dammam, Alkhobar and Dhahran, which were steady last year, fell 14 percent, 30 percent and 23 percent, respectively, in H1 compared with the year earlier. Average office space now costs SR300 per sq m in Dammam, SR337 in Alkhobar and SR302 in Dhahran.
The most-expensive place to operate a business continues to be north Jeddah, where the average rate for office space stood at SR690 per sq m, 2.8 percent lower than H2/09 levels. Rents rose in south and central Jeddah by 7 percent and 3 percent, respectively, likely the result of upward pressure on demand following the floods.
Residential land costs have taken a similar path as commercial plots this year, although to a smaller extent, falling an average of 2.3 percent in H1 from levels in H2/09. Land prices extended declines in Riyadh, Makkah, Alkhobar and Dhahran, while they rose slightly in Jeddah and Dammam. Residential land is subject to some speculative activity among individual Saudi investors, who often turn to real estate investments when riskier stock market investments fall out of favor. Real estate has an element of low-risk perception among Saudi businessmen.
The average price of residential land in Makkah fell 3 percent in H1 compared with the year earlier and prices fluctuated depending on location in the holy city. Plots of land in the south Makkah districts of Al-Obaid dropped an average of 11-13 percent, while in north Makkah prices were down 15 percent. On the other hand, the cost of land in east Makkah rose as much as 11.3 percent.
On the whole, average residential land prices in Riyadh fell 4.8 percent year on year in the first half. Prices fell most in the north of the city, where residential plots averaged SR1,744 per sq m, off 9.8 percent from the year earlier. Average prices in the district had been unchanged all of last year. Elsewhere in the capital, the average cost of residential land in west Riyadh fell as much as 13.5 percent from H2/09 to SR1,125 per sq m, while in the Qortoba district of East Riyadh, prices rose between 6-11 percent to between SR887-SR1,275 per sq m.
In the Eastern Province, where land prices were relatively constant last year, residential land plots posted year-on-year declines averaging 9.3 percent in Alkhobar and 3.2 percent in Dhahran. In Dammam, prices were up 1.1 percent on the year. Land was most expensive in Jeddah, with an average price of SR2,534 in H1, up 0.9 percent compared with H2/09. The next-highest residential land plot prices were in Alkhobar, where the average price was SR1,962.5 per sq m in H1, while the lowest land costs were in Makkah at SR798 per sq m, on average.
In compiling the survey, the respondents were asked to provide average rental rates for apartments and villas in the cities covered by the survey. The results showed that rents across Saudi Arabia are trending downward after staying virtually constant during 2009.
There is some inconsistency between these finding and trends in official housing price inflation data released by the Central Department of Statistics (CDSI), which has shown a continuation of increases in rents this year. While rental inflation has slowed to its lowest in more than two years, it was still a steep 12.6 percent year on year in February, according to CDSI. The BSF survey shows rents have barely moved in the areas covered since H2 2008, and this year, they have started to fall.
The average cost of renting an apartment (135-190 sq m) fell almost 3 percent in Riyadh in H1 compared with last year, including the northern parts of the city, with the steepest year-on-year declines in east Riyadh at 8.8 percent. Rents in all districts of the Saudi capital are decreasing, according to the survey. Apartments (135-190 sq m) are renting for SR32,800 per year, on average, in east Riyadh, compared with about SR36,000 a year ago. The same unit in north Riyadh would cost SR40,000, and SR26,500 in the west and south. In Jeddah, average annual rents for the equivalent apartment also fell in H1 compared with last year, ranging from SR24,833 in south Jeddah (a decline of 0.7 percent from last year) to SR47,833 in north Jeddah (down 4.3 percent on the year), the survey showed.
Eastern Province rents, however, are on the rise. In Dhahran, the cost of renting a large apartment rose to SR23,167 per year, on average, in H1 from SR21,000 a year earlier. Meanwhile, prices in Dammam and Alkhobar rose about 2.5 percent to SR21,500 and SR26,667, respectively, over the same period.
Renting smaller villas (300-400 sq m) has also become cheaper, with prices in east Riyadh falling 14.2 percent year-on- year in H1 to SR45,500. Jeddah villa prices are lower in the south and central districts of the city. In the south, a small villa costs SR42,833 per year (down from SR50,000 in H1/09) and SR69,833 in central Jeddah (down from SR80,000 in H1/09). Northern Jeddah prices firmed after the floods, rising 10 percent since H2/09 to an average price of SR99,000, up from SR90,000 just prior to the floods.
The Saudi real estate sector has been supported by domestic demand fundamentals in recent years, not by speculation - a key factor that had boosted prices elsewhere in the Gulf in the years leading up to a property market crash beginning in late 2008 in much of the region.
Real estate prices in Saudi Arabia rose about 20 percent during 2007 and 2008, according to our estimates, mainly spurred by growing demand and abundant bank credit availability. The Saudi population has been growing at upward of 2 percent per year and is likely to hit 26 million this year, rising to 29 million by 2015 and 32 million by 2020, according to our estimates.
In 2008, 36.8 percent of the total Saudi population was 14 years of age or younger, while 43.3 percent were between the age of 15 and 39. The younger population is likely to be a big catalyst of housing demand in the coming years. Importantly, there is a trend toward smaller families as young Saudis opt to improve their quality of life. This should affect the housing sector and wider consumer demand sector, including demand for consumer durables and personal vehicles. The average size of a Saudi household fell from 7.4 people in 1987 to an estimated 5.65 people in 2008. The government is also moving to create a viable mortgage market, which will make owning a home accessible and easier for Saudis, who account for about 73 percent of the total population.
Saudi Arabia's real estate market remains undersupplied, particularly for middle and lower income communities, shielding it from selling pressures that have dragged down other Gulf real estate markets in the past year. The stabilization and rise of prices in many parts of Saudi Arabia could signal real estate prices will continue to strengthen into 2010, although any pick up in real estate demand will be muted and gradual.
This year promises to witness firmer prices for properties, although rents could continue to fall as more supply reaches the market, filling gaps in demand. In 2009, home financing accounted for only 9.9 percent of total consumer loans and 2.4 percent of total loans, reflecting the upward growth potential. Home loans of SR17.86 billion last year reflected a jump of 19.8 percent from the year earlier, despite an overall stagnation in bank credit, according to central bank data. Meanwhile, the Real Estate Development Fund, set up in the 1970s to support real estate finance, is estimated to have dispersed SR5.2 billion through to 2009. But property financing still accounts for only 1.3 percent of GDP in Saudi Arabia. In terms of economic contribution, the construction sector accounted for 7.2 percent of real GDP in 2009, and the finance, insurance and real estate sectors 12.8.
One likely catalyst for Saudi Arabia's real estate sector will be the approval and enactment of an imminent mortgage law, probably sometime this year. The mortgage law could act as a key trigger for Saudi Arabia's home finance industry in the longer term, although the short-term implications of its passage will be minimal unless the government increases the availability of land, pushing down prices to levels that are more affordable for common people. Even if land is made available at more affordable rates on the periphery of major cities, there are currently no public transport alternatives to accommodate for this suburban expansion. Still, some landowners are selling plots in anticipation that the mortgage law's enactment could prompt prices to fall further.
Banks, under the guidance of SAMA (Saudi Arabian Monetary Agency), will exhibit prudence in mortgage lending, as they would need to avoid the creation of a Saudi-styled subprime crisis. Developing a safety ratio should help prevent lenders from giving financing beyond the means of the home buyer.
The quality of housing should also be addressed in order to comply with energy efficiency requirements and green building codes, rather than continuing the current trend of energy inefficient construction. The sector should develop new building codes that can be implemented to support energy and cost-efficiency. Quality housing would enable the eventual creation of a secondary market. Still, credit risk appetite remains weak among Saudi banks and any uptake in new consumer loan risk will happen slowly.
— John Sfakianakis is group general manager and chief economist at Banque Saudi Fransi, Riyadh.
