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Demand for housing units in Kingdom to surge
By Querubin J. Minas Saudi Gazette
Published in The Saudi Gazette on 09 - 06 - 2009

The demand for housing units in Saudi Arabia will grow in the range of 500,000 to 800,000 units as the economy gets back on growth track from 2010 driven by recovery in oil prices, Kuwait Financial Centre (Markaz) said in its latest study on the residential real estate sector of the Kingdom.
The report forecast that the passing of mortgage law will cause a trend shift in demand leading to levels 50 percent higher than the level without it.
The report has shown that poor lending scenario has resulted in the dismal levels of investment in residential real estate in the past decade which has contracted from the high 20 percent levels as a percentage of total capital investment in the country earlier in the decade to 13 percent in 2008.
Though this has been the contention of many analysts, the report backs them with credible official data as the report shows that financing residential real estate as a percentage of total credit has contracted by 100 bps in the last three years alone, the data by Saudi Arabian Monetary Agency showed.
The report also has conducted a study on the housing affordability, a key determinant of the demand for housing units as it affects the average household size.
The report showed, backed by data published by the labor ministry and market data on rentals and prices, that the current income levels leads to larger average household size and the explanation behind villas being the preferred building type among Saudi nationals.
Rental cost account for 30 percent of a family with a current average household size of 6.4 compared to 45 percent for a single person earning smaller family of 5. Ownership affordability is 1.5 times tougher for the smaller family compared to the larger family discussed above. The mortgage lending scenario worsens the affordability by pegging the monthly installments at 41 percent of income for the smaller family, compared to 28 percent for the larger family.
The report argues that, if and once in force, the mortgage law will go about to turn the above trends around and would lead to a 50 percent upward shift in the demand from the levels that we can estimate without it as it doubles the target market by going up in the population glass to include younger generations by providing them with affordable mortgages and thereby lowering the average household size.
The report focused on the cities of Riyadh, Jeddah, Makkah, Al-Khobar and Dammam by studying official statistics on the three regions encompassing these cities. The report comments that these cities will be the centre of activity for the next five years until the mega cities gets the attraction as it gets completed in phases and forecasts the demand for residential real estate in these regions to be well ahead of the supply that is provided by currently planned major projects.
The report noted that the supply, which is currently dominated by smaller projects worth less than $50 million, is slowly drifting towards more organized supply with the planned mega cities.
However, completions of these mega cities will happen in a phased manner with major completions planned during the middle of next decade and argues that this scenario provides attractive opportunities for developers of smaller size projects and also for planning other bigger sized projects in these cities, the study noted.
The report pointed out that the contraction in rentals and prices averaging 10 percent in the present crisis is mainly on account of fall in risk appetite and forecasts that the rentals and prices would bounce back following economic recovery and reemergence of risk seeking with the cities of Makkah and Jeddah to experience higher growth mainly due to the current pent up demand.
The trend shift in demand caused by the mortgage law, once in force, should boost the rentals and prices much higher. __


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