The Saudi Arabian real estate sector is witnessing a phase of rapid growth that will continue for the next few years. Total real estate investments more than doubled by the end of 2007, with 115.9 percent annual growth reaching SR100.4 billion, according to a study of Kuwait-based Global Investment House. The increase was backed by increased prices and demand within the sector. It is a market that is driven by demand fundamentals where demand surpasses supply for almost all segments. The trend is expected to continue for the coming years thus, prices and rentals are likely to remain buoyant. Factors supporting buoyant activities in the sector are well documented. A major contributor to the well-being of the real estate market is the availability of sustainable demand. Saudi real estate market is a demand-driven market rather than speculative in almost all segments. Residential market is suffering supply shortage especially for affordable low and middle income housing class mainly due to the continuously growing population marked by internal migration and the influx of expatriates. This increased demand and short supply scenario has driven housing prices high over the last period. Commercial segment as well is facing a period of increased demand surpassing supply for both retail and office space due to increased business and investments activities in the country in addition to high population growth rates and increased per-capita income. The sector has been buoyant driven by hiking demand and other fundamentals as in the rest of GCC countries. Prices continued to increase over the period 2002-2005 but not at a level that dissuades both developers and consumers. However, it is important to note that, real estate prices in the Kingdom are very difficult to track since there is no price registry body. However, on average it could be included that prices hiked by 10 percent per year for residential and commercial segments over the period 2002-2005. Undersupply backed price hikes. Similarly, the office segment continued to suffer undersupply over the period with vacancy rates in prime locations such as Riyadh and Jeddah around 2 percent to 5 percent. As a result, rentals in primary locations ranged between $250 to $300 per square meter. Looking forward, it is important to note that, the undersupply scenario underlies a major challenge especially for the affordable low income housing segment. Such under supply scenario is expected to continue for the short to medium term until new supply is delivered. Supporting the scenario will be demographic fundamentals combined with the strong performance of the overall economy that will sustain the growth in the real estate sector. A major solution for such challenge would be the introduction of mortgage products that are expected to add impetus to the growing sector. Both retail and office segments will continue their increased demand scenario. This is a result of the increasing population as well higher standard of living and consequently the increased demand for leisure and commercial needs. Similarly, office demand will continue to witness an increasing demand due to the increased number of newly established companies and the expansion of existing ones. Such trend is expected to continue as a result of the opening of the Saudi economy and new investment laws attracting more foreign investments in the Kingdom. Generally, population demographics, economic and social factors are the most important determinants that will depict demand over years. Economic expansion and increased investment opportunities in the country will continue to encourage the influx of expatriates at increasing rates, consequently demand will continue picking up. Likewise, population in the Kingdom is forecast to continue growing at an average annual rate of 2.5 percent reaching 25.66 million by the end of 2009. Moreover, average household size is estimated to decline from 5.5 to 5.2 persons over the period 2005-2009. Such decline in household size will be mirrored by a proportionate increase in demand for housing. Based on these assumptions, the 8th Development Plan (2005-2009) estimated future housing demand to stand at 1 million units over the period up to 2009. This implies an average increase of 200,000 units per year. Satisfying such demand requires sufficient residential land plots with a total area of 280 million square meters and SR500 billion of investments to construct 1 million housing units. Another contributor would be the availability of sufficient financing mechanisms to quench the thirst of the increased demand for funds. With local banks expanding their credit portfolios at a CAGR of 21.5 percent over the period from 2001-2006, coupled with abundant liquidity in the local economy. Government financing, in the form of facilities provided by the REDF has helped support the increased activity in both the real estate and construction sectors. Since its inception in 1974 and up to the end of 2006, REDF has financed over 613,000 housing units at cumulative disbursements exceeding SR71 billion through interest-free, easy-term loans to Saudis. Moreover, in anticipation to the long-awaited mortgage law, a number of banks have started offering Shariah-compliant home financing credit with tenors extending up to 25 years. As a result market professionals estimate the size of outstanding housing credit is likely to rise from SR4 billion during 2007 to reach SR46 billion by the end of this decade, assuming a gradual rise in the share of new residential units purchased through housing loans from 10 percent to 55 percent by 2010. Construction activity was brisk starting 2000 and up to 2007. Building permits as a proxy for construction activity in the economy reported 11.1 percent CAGR over the period 2000-2005 as a result of the huge increase in total building permits issued during the year 2005 that reached 55,369 permits. By the end of 2007 issued permits stood at 36,214 permits. Residential permits continued to account for almost 90 percent of issued permits. By administrative area, generally three areas accounted for more than 60 percent of total issued permits over years, namely Al-Riyadh, Makkah Al- Mokarramah, and Eastern Region. By the end of 2007 they accounted for 34.1 percent, 18.9 percent and 12.5 percent respectively. Moreover, the increased immigration from rural to urban areas has contributed a lot in changing the demographic map for Saudi Arabia over the last period. __
