Hit by rising labor costs following a shortage of construction workers, the real estate sector in the Kingdom is considering raising the prices of residential units.

The labor shortage is the result of the amnesty announced by the Ministry of Labor for illegal workers to leave the country or change their job status.

Prices start at SR900,000 depending on location and area of the unit.

Bari’ Ajaj, a real estate marketing expert, told Asharq Al-Awsat that many real estate companies had suspended construction activity, particularly in the case of partially completed projects, to facilitate the revision of prices following the rising labor costs.

The property market and particularly the residential units segment, is waiting for the issuance of a mortgage law and the entry of property financiers and lenders into the market.

“The current situation makes it very difficult for developers to agree on property prices. They have to wait before putting up residential units for sale, although many companies are in a rush to sell the units they have,” he said.

Saudi Arabia is the largest property market in the Arabian Gulf region. Annual demand for new residential units is currently pegged at around 200,000.

The government, through the Ministry of Housing, is working on a scheme to build half a million residential units at a cost of $66.6 billion. Many property developers also entered the market last year.

Abdullah Al-Bluwi, a former realtor in Jeddah, said it is essential to incorporate rising labor costs in the final pricing of housing units and that it is not feasible to sell at current prices.

“These property developers outsource most of the work to subcontractors, who have already raised construction prices in many projects, especially newer projects,” he said.

The current prices are for units that had been built much earlier and they are based on construction costs at the time, which makes sense. The move by some developers to suspend construction is prompted by concerns about increasing costs and an unresponsive market, especially since there is ample supply in the market.”

The local housing market in Saudi Arabia needs around 4.5 million residential units within the next five years to meet rising demand. The annual cost of developing houses is about $31.2 billion on an area of 110 million square meters of land fit for housing investment.

Mike Williams, chief of research at CBRE, the world’s largest commercial real estate services firm, said: “In practice, there is no regulatory framework offered by the government for the regulation of land trading. The participants usually do not take into account the actual economic cost of land when they make their investment decisions.”