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Property Developers Ride Saudi Wave of Stimulus, Shortage

A sense of optimism prevails among players in the real estate market of the world’s top oil exporter. For good reason: In less than two years, several key developments in Saudi Arabia have come together, which will create a wealth of opportunities for years to come, analysts have told CNBC.

Main roads in Riyadh are decorated with national flags and portraits of King Abdullah bin Abdul Aziz of Saudi Arabia on February 21, 2011 amid preparations to welcome the Saudi royal back as he is expected to return home later this week after convalescing in Morocco from operations in New York, according to a source close to the oil-rich Gulf monarchy. AFP PHOTO/FAYEZ NURELDINE (Photo credit should read FAYEZ NURELDINE/AFP/Getty Images)
Fayez Nureldine
Main roads in Riyadh are decorated with national flags and portraits of King Abdullah bin Abdul Aziz of Saudi Arabia on February 21, 2011 amid preparations to welcome the Saudi royal back as he is expected to return home later this week after convalescing in Morocco from operations in New York, according to a source close to the oil-rich Gulf monarchy. AFP PHOTO/FAYEZ NURELDINE (Photo credit should read FAYEZ NURELDINE/AFP/Getty Images)

In February 2011, as the Arab Spring took the region by storm, King Abdullah announced a massive social spending package totaling $130 billion, equivalent to a quarter of annual economic output. This amount is being fed into the system through a variety of channels, from direct bonuses for government employees to improved social safety mechanisms.

As part of the stimulus, $67 billion was earmarked to construct 500,000 new homes. But authorities have put the number of additional units needed at 1.25 million by 2014. The lack of supply in housing is especially grave when it comes to affordable units.

Further fueling demand is the passage of an eagerly-anticipated mortgage law in July aimed at providing a regulatory framework for issues ranging from foreclosure to oversight. But experts have been divided as to how swiftly the measure would provide a boost for housing and related sectors. The chairman of the largest listed property developer in the Kingdom, Youssef Al Shelash, told CNBC's “Access: Middle East” that he expects a steady acceleration in lending over the coming year.

“The most difficult issue for us as a developer in Saudi was the regulation, the legal structure,” he pointed out. “The impact of this law already started.”

His claim is supported by recent figures by the Saudi Arabian Monetary Agency (SAMA), the country’s central bank, reflecting an over 50 percent increase in mortgage lending to $12.8 billion in the second quarter.

A September review of the housing market by National Commercial Bank (NCB) Capital estimated that close to $346 billion in investments would be needed to construct 2.4 million housing units between 2011 and 2020, predicated on the fact that the mortgage law would also help feed an active secondary market and boost effective capital utilization by lenders. This in turn would mean more opportunities for commercial banks and real estate developers “to take on more active roles.”

Home prices have been rising for almost a decade in the Kingdom, according to the Global Property Guide. From 2002 to 2005, prices rose 13.7 percent annually according to NCB.

Some stocks have already been rallying on expectations of a new home building boom. Dar Al-Arkan’s shares, for example, have gained around 20 percent this year and close to 50 percent over the past year, outperforming Saudi Arabia’s benchmark index.

“The government is willing to spend a lot of money here…in this sector. We are really in the right spot,” Al Shelash explained.

“If you were going regionally where would you be looking at? Looking at the situation in the UAE and Kuwait, there is oversupply. It’s much better in Saudi Arabia, where there is demand and the competition is much less in terms of other players that are there,” Saleem Khokhar, head of equities at the National Bank of Abu Dhabi (NBAD), told CNBC.

There are other characteristics that could boost housing demand in the country. According to NCB Capital, “cultural changes coupled with rising per capita income” will cause a drop in the average household size to 5.28 persons per occupied housing unit by the end of the decade.

But it is not only the real estate market that is witnessing change. Gaining access to the region’s largest economy with a political future that is vague at best has always been bit tricky, and often arduous, for foreign investors. Al Shelash for one felt the country’s attitude as a whole was shifting.

“I think now there is a serious plan to open this country to the market. But as usual, the Saudi government takes these steps slowly. I hope it will not take that much time”.

This week on Access: Middle East”: An exclusive interview with Youssef Al Shelash, the chairman of Saudi Arabia largest listed property developer, Dar Al Arkan. Find out more about how he feels about life in the world’s top oil exporter, the struggles of foreign investors and why he is keen on building really big malls.

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