With the prevailing record-high oil prices in the global markets, the economy of Saudi Arabia - the largest economy in the Middle East and the biggest oil producer - will keep its overall luster, with the real estate sector, among others, standing to benefit. In the latest study of the Kuwait-based Global Investment House, it said the Kingdom's real estate sector is witnessing a phase of rapid growth that will continue for the next years. Total real estate investments more than doubled by the end of 2007 reporting 115.9 percent annual growth to stand at SR100.4 billion. “Such increase was backed by increased prices and demand within the sector. It is a market that is driven with demand fundamentals where demand surpasses supply for almost all segments. Such trend is expected to continue for the coming years thus, prices and rentals are likely to remain buoyant,” it said. In 2007, real estate activity witnessed impressive performance especially in terms of volume. Total deals concluded reported a new record level of 114 million sqm up from 50.6 million sqm recorded for 2006. On the prices front, average monthly price stood at SR623/sqm for residential segment, SR14,700/sqm for commercial and investment activities and SR15,300/ sqm for office segment, the report said. Analyzing the demand supply dynamics within the Saudi market revealed that 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 GIH report said. Construction activities also exhibited strong performance as a compound annual growth rate (CAGR) of 7.2 percent was posted by the sector during 2002-06 and its contribution to the nominal GDP stood at 4.5 percent. “The sector is well supported by a number of projects entering the implementation stage. These include petrochemical and infrastructure projects, the development of new residential, industrial and services facilities in the Kingdom,” the report said. The Kingdom's nominal GDP grew by 10.6 percent (SR1.3 trillion) in 2006 against 26 percent in 2005 (SR1.18 trillion) and real GDP rose by 4.3 percent (SR798.9 billion) in 2006 as against 6.1 percent (SR766 billion) in 2005. By sector, crude petroleum and natural gas sector continued to dominate the GDP as it reported a CAGR of 29 percent during 2002-06. Construction activity was brisk since 2000 and up to 2007. Building permits as a proxy for construction activity in the economy reported 11.1 percent CAGR over the period 2000-05. This was a direct result of the huge increase in total building permits issued in 2005 reaching a peak of 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. Three areas accounted for more than 60 percent of total issued permits over years, namely; 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, due primarily to the increased activity and investments in those areas. “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,” GIH said. 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 2005-09, GIH said. Such decline in household size will be mirrored by a proportionate increase in demand for housing. Based on these assumptions, the 8th developmental plan estimated future housing demand to stand at 1 million units over the period 2005-09, implying an average increase of 200,000 units per year. “Satisfying such demand requires sufficient residential land plots with a total area of 280 million sqm and SR500 billion of investments to construct 1 million housing units,” the report further said. Another contributor in the healthy state of the sector is the availability of sufficient financing mechanisms, with local banks expanding their credit portfolios at a CAGR of 21.5 percent over the period from 2001-06, 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, the GIH report noted. Moreover, in anticipation of the long-awaited mortgage law, a number of banks have started offering Shariah-compliant home financing credit with terms 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. __
