FEBRUARY 2013

“HOUSING THE GROWING POPULATION OF THE KINGDOM OF SAUDI ARABIA”

Prepared by KCORP for the Jeddah Economic Gateway

www.jeg.org.sa

SPECIAL REPORT

www.kcorp.net

30% of Saudi population own homes,

global average 70%, UAE home ownership 45%

0.4 Million Shortage of households

Demand 2.7 Million; Supply 2.3 Million

1.0 Million homes to be created by 2015,

young and fast growing population, rapid urbanization and rising

personal income driving the demand

Challenges in Provision of Affordable Housing

• Lack of mortgage system and low financing penetration

• Lack of affordable housing

• Shortage of arable land for affordable housing construction

• Supply – Demand gap

• Rising land prices

• Cultural and Infrastructural considerations

Resolving Housing Woes

• Providing stimulus for affordable housing construction

– Ninth 5-year Development Plan aims at investing SAR 1.4 trillion on physical and social infrastructure between 2010 and 2014

– In 2011, royal decree announced allocation of SAR 250 billion, to build 500,000 housing units

– Package of spending measures amounting to SAR 458 billion

– Ministry of Housing plans implementation of program to construct 200,000 housing units

• Private financing

– Mortgage market expected to reach SAR 86.7 billion within 3 years of law being enacted

– REDF, which provides low-cost loans to Saudis for home purchases, had its capital boosted by SAR 40 billion, thereby speeding up its loan approval process

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Riyadh

Najran

Hail

Asir

Makkah

Madinah

Tabuk

EasternProvince

Al Bahah

Jizan

Qasim

NorthernBorder

JoufAl Qurayyat

DammamJubail

Taif

Buraydah

Hofuf

Arar

Yanbu

Jeddah

Abha

Sakaka

Key Indicators KSA

Population in Million (2010) 27.1

Population between 16 to 64 years of age 66%

Area (Sq. Km.) 2,149,690

Nominal GDP 2010 ($ B) 448

Nominal GDP 2015E ($ B) 696

GDP CAGR (2010–15E) 9.2%

Per Capita Income (PPP)($) 23,701

Average Inflation (2010–15E) 4.6%

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Fuelling demand for affordable housing

Economic growth and growing population will trigger the need for affordable housing

Expected GDP Growth at Current Prices in KSA (2010–15E)

Population & Age Group Composition (2005–15E)1

Rate of Urbanization1

Rate of Urbanization1

1. Source: UN population division, http://esa.un.org/unpd/wpp/unpp/Panel_profiles.htm

The housing market in the Kingdom of Saudi Arabia (KSA) continues to expand on the back of high economic growth, favorable population demographics, and increasing urbanization.

448

560 582 621

658 696

-

100

200

300

400

500

600

700

800

2010 2011 2012 2013 2014 2015

$ Bi

llion

GDP per Capita Growth 16,267 19,890 20,214 21,101 21,920 22,725

CAGR: 9.2%

05

101520253035

2005 2010 2015E

Popu

latio

n (M

)

0-15 16-64 65 and above

63.5% 66.6% 67.7%

24.427.4

30.5CAGR 2.3%

CAGR 2.2%

82%

83.8

%

85.6

%

87.5

%

89.4

%

91.4

%

2010 2011 2012 2013 2014 2015

CAGR: 2.2%

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Housing Ownership Scenario in KSA

Only 30% of the Saudi population own homes

~66 % of the nation’s residents are clustered in three regions

Home Ownership Rate by Resident Population2

Key Demand Centers for Housing

Total Polulation by Provinces (million)3

KSA has been benchmarked with similar countries in terms of GDP, population and income levels. Based on this comparison, only 30% of the Saudi population own homes, a ratio well below that of most developed and many emerging economies, while the global average stands at 70%

98%75% 70% 66%

30%

70%

Singapore Brazil Turkey US Saudi Arabia Global Average

6.9 6.8 4.1

1.9 1.8 1.4 1.2 0.8 0.6 0.5 0.4 0.4 0.3

Jedd

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Riy

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Dam

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Ase

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Mad

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Jaza

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Qas

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Tabu

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Hai

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Naj

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Al J

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Al B

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Real estate consultancy Colliers International believes the home ownership market is

hampered by affordability constraints, ongoing increases in selling prices, and the shortage

in supply of new residential units aimed at the lower and

middle income segments

2. Source: Zawya3. Source: http://www.cdsi.gov.sa/english/

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House ownership is still at a very low level in these three cities.

Riyadh and Jeddah registered a house-hold ownership of 33% and 34% respectively, for the total number of house-holds in those provinces. Household owner-ship for Dammam was higher at 40%.

RIyADH

Supply The total inventory across Riyadh is roughly 900,000 housing units. Data from the Min-istry of Economy and Planning and Ministry of Municipal and Rural Affairs suggests an-nual residential completions in Riyadh will be around 30,000 units across all sectors (villa, apartment, social, compound etc.). Many of the projects announced in 2008 (such as Al Wasl, Ajmakan and Shams Ar-Riyadh) have still not delivered any units and many are now being restructured.Small builders continue to drive the residen-tial sector. There are a handful of professional developers, but these do not account for de-veloping more than 10% of Riyadh’s annual housing requirement.

The Government is taking action to increase the supply of housing for Saudis falling in the lower income bracket. In 2006 the Ministry of Social affairs initiated a housing scheme to build 66,000 units in different regions of the Kingdom.

Demand While most professional developers have been providing houses priced at over SAR 1 mil-lion, the demand remains in the SAR 500,000 to SAR 750,000 range.Expatriate residents now make up a substan-tial portion of the buying population in Ri-yadh, representing up to 30% of purchasers at some new developments.Foreign residents are typically allowed to buy for their own occupation in locations approved by the Ministry of Interior. There are some re-strictions on reselling though.

According to the Ministry of Economy and Planning, Riyadh, Jeddah and Khobar account for approximately 71% of total new

housing demand and are expected to suffer from undersupply

% of Owned Households of the Total Households in Three Major Cities4

6.8 6.9 4.1

Riyadh province Jeddah (Mecca province) Dammam (Eastern province)

Total residing population Total number of households

33% 34% 40%

0%10%20%30%40%50%

% of owned households

1.2 1.3 0.6

4. Source: http://www.cdsi.gov.sa/english/

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JEDDAH

SupplyThe Jeddah residential market remains dominated by small developers and individual owners, with the larg-er developers delivering just 2,010 additional units to the residential market in 2010. Future housing supply is likely to be reduced as applications for planning permission and building permits are being reviewed with extra scrutiny after the impact of the record rainfall and floods in Jeddah in November 2009. Development of two gated communities targeting the expatriate sector have been announced in the Rawdah and Zahra districts.

Majority of New Housing Supply is in Luxury Villas

Majority of New Housing Supply is in Luxury Apartments

Key Residential Projects (Completion year) Type Housing Units

Blncyah (2010) Residential villa 144

Canary Villas (2010) Residential villa 82

Sindad (2010) – 384

Al Bayt 32 (2012) Affordable 400 housing apartment

Al Ghorub (2012) Multi residential units. 300 Apartment and villa

Shams Al Riyadh (2013) All luxury villas 3,189

Nismat Riyadh (2013) 450 villas, rest affordable housing 4,200

Al Dar (2013) 20% for large multi units for middle 135 income, rest for low cost housing

Manzel Qurtaba (2014) – 1,400

Key Residential Projects (Completion year) Type Housing Units

Lamaar Towers (2012) Luxury apartments and offices 550

Jeddah Gate (2013) Affordable apartments for low 6,000 and mid income group and offices

Afsan Phase 1 (2014) – 2,500

Diamond (2015) – 300

Al Mada Tower (2015) High rise luxury apartments 998

Shams Al Arous (2016) Residential villas, apartment, offices and parks 10,000

Awaan Project (2016) – 2,500

Home finance is an important tool for enabling affordability. For new community developments

‘mortgages’ are used to finance up to 40% of sales. According to the notary public office in Riyadh, between 3,000 and 4,000 ‘mortgage’

instruments are registered annually.

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At King Abdullah Economic City, the Bay La Sun apartments developed by Emaar have opened bookings this year, most units priced at over SAR 1 million/unit. The next residential development within this pro-ject ‘Hawadi’ is much more affordable, offering a range of apartments and duplexes targeted at the middle income bracket, priced between SAR 250,000 and SAR 750,000. Large districts in the south east of Jeddah have been set aside by the municipality for development of low-income housing. These areas will be needed to accommodate the population that will eventually be resettled from the Khozama and Ruwais districts that are to be redeveloped by public-private consortiums.

DemandKSA’s Ministry of Commerce estimates that formation of new households will result in demand for around 40,000 new housing units per annum over the next few years.

Supply

The most dominant markets in the Eastern province are Dammam, Dhahran and Al Khobar. The importance of these cities is underscored by the fact that Dammam is the third largest city in Saudi Arabia, and ARAMCO, the state-owned oil company, is based in Dhahran.

Dammam, Dhahran and Al Khobar are increasingly being seen as one major unified city that is connected by new residential and commercial developments, rather than three individual cities.

Dhahran is also expanding its residential developments near major thoroughfares such as the Prince Mo-hammad Bin Fahd Road in new districts such as Al Qusoor. Unlike Dammam which is dominated by large developers, Dhahran is characterized by the presence of medium-sized developers. Khobar is expanding mostly towards the south near Azizia Beach with medium-sized developers delivering most of the stock

Stark contrasts are observed between mid-scale developers operating in Dammam and Khobar and those in Riyadh and Jeddah. Developers in Dammam and Khobar are more active with multiple ongoing projects and have a higher number of units per project.

Key Residential Projects (Completion year) Type Housing Units

Murcia Apartments (2012) – 78

Murjana (2014) Luxury villas 400

Masaken Homes (2014) – 250

Dammam Hills (2015) Villas for mid to high segment 700

Abraj Al Salam (2015) 12 luxury villas, rest are 850 apartments for mid to low segment

Khobar Lakes (2016) – 2,100

EASTERN PROVINCE – DAMMAM�e quality of residential stock (recently added or under

construction) in Dammam and Al Khobar is higher than that of

other cities in the country, due to a higher standard of construction, improved finishing, and better periodic maintenance. – Colliers’ Research

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DemandThere is a preference for quality apartment developments in Dammam and Al Khobar. A fitting example would be the Al Hamraa District (also commonly known as Shobily High Rise) in Al Khobar, which is a prime location for quality apartments. Most home buyers in the district believe in the investment potential of their purchases, particularly with the expected forthcoming completion of the Shobily Masterplan, which has been on hold for several years.

Lack of mortgage system and low financ-ing penetrationInadequate housing finance constitutes a major challenge for the provision of affordable housing in the country. Housing finance includes plot dis-tribution, land servicing, and the provision of loan and mortgage facilities through the banking system: The much-debated Saudi mortgage law has been in the pipeline for almost a decade. Market demand is suppressed by limited mortgage availability. The law aims to provide:

• Better lending access to home ownershipseekers

• Widerfundingoptionsforlowandmiddleincome groups

The law has been recently approved and is await-ing ratification. This law also includes articles on

property repossession and asset liquidation in the case of delinquencies. An extremely low percentage of Saudi home purchases are financed by mortgag-es. Experts estimate that Saudi Arabia has only a 2% mortgage penetration in its real estate market. Mortgages are difficult to obtain for those on low monthly salaries due to the limitations of the mort-gage market. Other obstacles include the restriction of mortgage information, a dearth of innovative so-lutions, and an inadequate regulatory framework. Moreover, borrowers have tended to treat extended loans as charity and default on payments is high.

Bank financing is still relatively limited and out of reach for a significant proportion of the population. Real estate and construction loans accounted for 7.1 % of total bank credit in 2010 while home loans were only 2.8% of total bank credits. This is very low in comparison to other GCC countries.

Challenges in provision of affordable housingSTRUCTURAL FACTORS

KSA has Very Low Housing Loan Penetration Compared to Other Middle East Countries

Access to housing finance has been tightly constrained with very little mort-gage financing available. Some subsidized loans were available through the Real Estate Development Fund (REDF), a state-funded entity. But they had a very long waiting list, and loan amounts were not necessarily sufficient to cover construction costs, says David O. Robinson, IMF mission chief

Housing loan as % of GDP (2010)

0.5% 1% 2% 3.4%7.2% 7.9%

12.2%15% 15.5% 15.9%

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The Real Estate Development Fund (REDF), es-tablished in 1974, was set up to meet the needs and aspirations of the Kingdom’s citizens by helping to raise the quality of life in society through the devel-opment of high quality housing.

In its first five years, the Fund fulfilled its major objective by solving the housing crisis of the time engendered by the Kingdom’s extraordinary pace of development.

The total loans disbursed by the Real Estate Devel-opment Fund (REDF) since its inception until the end of 2006 amounted to SAR 134.1 billion.

Due to the absence of a mortgage law, the Real Es-tate Development Fund (REDF) is the main pro-vider of home financing. REDF is not able to meet the demand, which is increasing exponentially; there are more than 650,000 applications pending since the end of 2009, up from 450,000 in 2006, mainly due to obstacles faced by REDF in collec-tion of debts. This leaves an average earning house-hold individual with no option but to live on rent instead of buying his own property.

Supply–Demand Gap In 2010, total demand for household units in the KSA market was 2,700,000; but the total sup-ply was 2,300,000, implying a shortage of 400,000 household units in the country.

However there is an oversupply of luxury houses and villas. While most professional developers have been providing houses priced at over SAR 1 million, the demand remains in the SAR 500,000 to SAR 750,000 range. According to the Government’s 9th 5-Year Development Plan, 1.2 million units are needed over the next five years, (250,000 units every year). NCB Capital estimates less aggressive figures, predicting that the country will need an additional 973,000 units over 2010–15 and a total of 2.1 mil-lion units over the coming decade (215,000 units per year).

The major driver of housing demand is the young and fast growing population base, with an estimated 1,000,000 new households expected to be created across KSA by 2015, which will further exacerbate the current shortage.

Additional Demand of 1 Million Homes by 2015

Housing market size vs. Total population6

3,99

1

4,20

8

4,64

3

5,71

8

7,08

0

22,6

74

23,9

81

27,1

37

31,8

74

37,5

51

2004 2007 2010 2015 2020Total Housing Stock Total Population

6. Source: CDSI, NCB Estimates10

Exorbitantly high prices for housingArtificially high-priced land plots are increasingly sought as a long-term investment option by high net worth Saudis, making these plots inaccessible to Saudi citizens and home developers. Though there is a shortage of affordable housing, there is an over-supply of high end developments. Most developers seek profitable luxurious projects to serve the high income class.

Lack of available land for affordable housing construction

Arable land is scarce due to drought, desertification and land degradation due to which agricultural pro-ductivity and rural subsistence are threatened. Saudi Arabia occupies four-fifths of the Arabian Penin-sula but the majority of its land is desert. According to the World Bank (2009), the percentage of land that is arable in Saudi Arabia is only 1.5 percent of the total land area. In such conditions, a land owner

prefers to hold on to his land instead of turning it into an af-fo rdab l e hous ing develop-m e n t . Moreo-ver, the a b s e n c e of fees on land owners motivates owners to hold on more to those assets. However, it is expected that regulations on imposing fees on empty plots of land are expected to take effect soon. Many realtors in the Kingdom believe that such regulations would help reduce the prices of real estate units.

Incremental Housing Demand vs. Investment Required6

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Annual New Demand

-20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000

Estimated Annual Investment

Units SAR Millions

6. Source: CDSI, NCB Estimates

Because of the strength in the market for serviced plots, land development (rather than full

residential development) became a popular phenomenon in recent years.

�is trend is, however, expected to be curbed by the efforts of the Riyadh

Municipality and ArRiyadh Development Authority to control

land prices by increasing the supply of land in the city – Colliers Research

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Rising land prices

While government stimulus has helped launch the sector into gear, rising land prices have slowed down the momentum of building affordable housing units. In fact, land prices are rising at a much higher rate than property prices.

Cultural and infrastructural considerationsSaudi nationals prefer to live in houses rather than apartments. Social requirements such as privacy, social cohesion of family members within the same housing unit, and independence from residential density are main factors considered for affordable housing.

Location and public transport systems represent another challenge for affordable housing. Most projects are usually built outside the boundaries of the city where land is cheaper and these places lack an adequate public urban transportation system. The absence of transport disadvantages residents needing to travel to work or school as not everyone has access to private cars.

Government Stimulus MeasuresCreation of new growth centers

Government is focusing on creating new growth centers, away from Riyadh, Mecca and Dammam. The Economic Cities Authority, a government body, plans to develop Rabigh, Jizan, Madinah and Hail as the new growth centers or emerging cit-ies of KSA. Rabigh and Jizan are being developed with infrastructure projects worth USD 27 billion, Madinah and Hail are USD 7 billion and 8 billion respectively. The KSA Government also supported Emaar Economic City, the developer of the King Abdullah Economic City in Rabigh, with an invest-ment of USD 1.3 billion in 2011. By 2020 these 4 cities are forecasted to contribute USD 150 billion to GDP and house about 4.5 million people.

KSA’s growing economy, on the back of high oil prices, has led to heavy investment in infrastruc-ture including housing over the period 2005–2010. The 9th Development Plan aims at investing SAR 1.4 trillion on physical and social infrastructure be-tween 2010 and 2014.

In 2011, a royal decree was announced to allocate SAR 250 billion to build 500,000 housing units under the newly estab-lished Minis-try of Hous-ing. This will a c c e l e r a t e the supply of housing units, especially to the low and middle in-come groups

Saudi authorities have unveiled a package of spend-ing measures amounting to SAR 458 billion that is set to have a significant impact on economic perfor-mance this year and in the future. The extra-budget-ary spending, announced by King Abdullah in Feb-ruary and March, is primarily aimed at improving living conditions, particularly for those in the lower income category.

Prices of developable land have been increasing at roughly 15% per annum, compared to a 5–6% increase in prices for housing units, says John Harris of Jones Lang LaSalle

Initiatives to mitigate housing woes of population

King AbdullahEconomic City in Rabigh has currently created 12,000 jobs – Fahd al Rasheed, Chief executive, King Abdullah Economic City

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Construction of new Housing The biggest single element of the spending is SAR 250 billion to fund the construction of 500,000 new housing units over an unspecified time period. In order to construct this number of units in a reason-able timeframe, the authorities will need to use pri-vate sector developers.

In terms of providing affordable financing, REDF will have a key role to play. REDF, which provides low cost loans to Saudis for home purchases, had its capital boosted by SAR 40 billion and has been instructed to speed up its loan approval process

Arab News reported that the Ministry of Housing plans to implement a program that will result in the construction of 200,000 housing units. The ministry said that 17,600 units are currently being imple-mented.

Private financing

In view of the cramped demand for housing and the scale of the Government’s plans, private financing will also be necessary in addition to REDF’s recapi-talization. The mortgage market is expected to reach SAR 86.7 billion within the next three years of the mortgage law being enacted.

Mortgages customized for low income nationals

The aim is to provide mortgages to modest income nationals who are currently locked out of the mort-gage market due to low incomes and perceived sus-tainability of those incomes. This endeavor would be structured as a hybrid between traditional charity and a marketplace mortgage company that would generally not consider lower income nationals as a target market or would charge very high interest to justify this perceived higher risk exposure.

Access the pool of high net worth Saudis

Route it through the mortgage company to provide lower income nationals with long-term mortgages.

Solar power mud houses

This concept focuses on changing the types of houses offered in the market by making home development more economically scalable. The aim is to build tra-ditional mud houses from cost-effective materials using natural resources and modern technology for energy. These houses can be handmade and work-shops can be provided. For over a thousand years in

the Arabian Peninsula, Arabs have built houses out of a mixture of natural resources with mud being used instead of cement.

Reducing the block sizeGiven the constraints of high land values, a strategy to reduce the area of individual villa blocks presents a potential tool to increase the supply of affordable housing.

Affordable housing models by govern-ments in other countriesGovernments in other countries facing the issue of affordable housing for a growing population have initiated a range of workable models. In Morocco, government and private developers are working to-gether to address the need for affordable housing. To reduce housing shortages, the Moroccan Gov-ernment gave away 3,800 hectares of land at re-duced prices to developers for constructing 200,000 housing units. To qualify for the subsidized land, developers were asked to agree to sell flats at below 140,000 Moroccan dirhams on one third of the al-located land, at 200,000 dirham or below, on the other third, and they could build properties of their choice on the final third.

ALTERNATIVE SOLUTIONS

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The Turkish Government has utilized a form of public private partnership to deliver mass housing projects through TOKI (Housing Development Administration of Turkey). TOKI issues tenders for disposal of Government-owned land to private developers. Developers are asked to submit plans as to how many housing units they are willing to build on the amount of land awarded and out of that how much land are they willing to return to TOKI so that it can be used for affordable hous-ing by Government for low income groups. This ap-proach avoids purchasing of the land by the devel-oper, thereby improving the cash flow situation.

In UAE, reduction in block size for villa plots is a new emerging solution by private developers. Hous-ing preference of high net worth Emirati families

can be satisfied by delivering attractive, livable villas in a standard villa block of 600 to 650 square meters. This represents a saving of around 40% in land area, compared to the current standard of villa block size of 1050 square meters

A Canadian government body, Canada Mortgage and Housing Corporation (CMHC) provides a range of mortgage loan insurance products for owned and rented housing. CMHC provides seed funding and proposal development funding to pri-vate developers, in order to help with some of the upfront expenses for developing a housing project. CMHC facilitates the production of new affordable housing by providing knowledge and expertise as well as interest-free loans to groups from the pri-vate, non-profit, and public sector.

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Sources:l Colliers Internationall Deloitte report – Living in the KSAl Jeddah City Profile, Riyadh City Profile – Jones Lang LaSallel http://www.cdsi.gov.sa/english/l U.S. Census Bureau, International Databasel https://www.cia.gov/library/publications/the-world-factbook/geos/sa.htmll http://www.joneslanglasalle-mena.com/ResearchLevel1/JLLMENA_Affordable%20Hous-

ing_2011.pdfl http://www.sagia.gov.sa/Documents/Laws/Real_Estate_by_Foreigners.pdfl http://www.lw.com/upload/pubcontent/_pdf/pub3507_1.pdfl http://www.euromoneyconferences.com/downloads/Saudi10/Colliers_International_MENA_

Real_Estate_Overview_Q1_2010.pdfl http://www.cdsi.gov.sa/english/l http://www.ft.com/cms/s/0/6c25a83c-ae25-11e1-b842-00144feabdc0.html#axzz2LGNRZli5l http://www.zawya.com/story/ZAWYA20120206044503/l http://www.zawya.com/story/Saudi_Arabia_needs_SR13trn_housing_investment_by_2020-ZAW-

YA20121203031051/l http://www.zawya.com/story/Saudi_developers_focus_on_affordable_housing_sector-ZAW-

YA20120419090923/l http://www.ewaan.com.sa/en/pressrelease/media-center/press-releases/saudi-arabian-real-estate-

sector-is-all-set-for-exponential-growth.htmll http://www.imf.org/external/pubs/ft/survey/so/2011/int092111b.html http://english.alarabiya.net/articles/2012/01/01/185769.htmll http://www.numbeo.com/cost-of-living/country_result.jsp?country=Saudi+Arabia

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