The news on 9 April that China North Industries Corporation (Norinco) was the low bidder for Saudi Arabia’s National Guard housing scheme was more than an announcement of one of the largest construction contracts in the Gulf. It signified the scale of the challenge Riyadh faces in implementing a successful housing policy, and indicated the government’s willingness to address the kingdom’s lack of affordable housing, which is becoming increasingly pressing because of its growing population.

Norinco’s bid of SR17bn ($4.5bn) for the National Guard project beat bids of SR23bn submitted by Saudi Binladin Group and SR24bn from Saudi Oger. These three firms were the only contractors to bid for the entire construction project in all 11 locations.

However, building 17,000 units in such disparate locations as Khashm al-Aan west of Riyadh, Al-Qassim in central Saudi Arabia or Taif near the Red Sea coast is merely the start.

If Riyadh is to alleviate pressure to provide more housing, it needs more than just the National Guard scheme. It requires a concerted effort from private developers as well as the government to fill the gap in the supply of affordable homes.

Rising demand

The Economy & Planning Ministry estimates that the kingdom’s population will reach 33 million by 2020, up from 27.5 million today, leading to pressure for housing in Riyadh and Jeddah in particular (see chart, page 43).

An anticipated 65 per cent of the population will be of working age, between 15 and 64, in 2020, placing an intense strain on the housing supply. Some 32 per cent of the population will be under the age of 15, and just 3 per cent over the age of 64.

The kingdom’s housing shortage is expected to double by 2012 to 1 million units, according to a November 2008 report - The Gulf’s Powerhouse: Saudi Arabia’s Real Estate Market - by UK real estate adviser Jones Lang LaSalle. Saudi freehold prices increased by an estimated 30 per cent in 2008, according to the UK’s Standard Chartered Bank, while the absence of a mortgage law and limited access to financing mean property ownership is currently restricted to 35 per cent of the population.

Uncertainty over the timescale for the implementation of the proposed mortgage law is ensuring developers continue to target high-end projects, says Imad Dumrah, country director for consultancy and valuation for Saudi Arabia at US real estate adviser Colliers International.

“Developers in the kingdom continue to show bias on high and mid-end residential developments that target buyers that have cash-in-hand purchasing power, despite clear indications that a larger proportion of demand for housing units stems from the mid-to-low-income brackets,” he says.

The Arriyadh Development Authority forecasts annual demand for 30,000 residential units by 2023. Despite the kingdom’s 2009 budget earmarking $6bn for the Real Estate Development Fund (REDF) over the next five years, this investment is not expected to meet demand. The REDF was set up in 1974 to develop high-quality housing for all Saudi citizens by offering personal loans for house building.

Slow progress

Despite the announcement of a series of key masterplanned developments surrounding the Saudi capital, the financial slowdown and developers’ limited access to finance has had an impact on delivery. Progress is being made, but more slowly than predicted.

“Although a number of masterplanned developments in the country aim to answer this demand, there has been a delay in the delivery of these developments due to market conditions and a tendency by developers to build high-end developments,” says Damrah.

This trend can be seen in the regeneration projects under way in the holy cities of Mecca and Medina. Far from offering low-cost housing, the major of schemes, such as Saudi Binladin’s Abraj al-Bait, a new complex in Mecca that will house 100,000 people in residential towers, will feature some of the world’s most expensive real estate. Land in Mecca can sell for up to $73,000 a square metre, and in Medina for $41,600 a sq m, making it some of the most expensive in the world.

Masterplanned projects that will help meet some of the Saudi middle class’s demand for housing include the $2.3bn Ajmakan project, a gated community being developed on the outskirts of the capital by local developer Land Real Estate Development & Investment Company.

UAE developer Limitless is developing the $12bn, 14-square-kilometre Al-Wasl project, to the north of Riyadh, where earthworks and ground-levelling work are nearing completion.

When completed, the development will comprise 55,000 housing units, as well as offices, hotels, mosques and more than 3 sq km of open space. It is expected to house up to 200,000 people.

Demographic pressure is not the only reason for Gulf developers shifting to more affordable housing. Market forces play a significant role, as is being seen in the UAE.

At MEED’s Arabian World Construction Summit (AWCS) in Abu Dhabi in February, Abu Dhabi developer Aldar Properties announced it was changing strategy for its Al-Raha beach development, placing a greater emphasis on low-cost housing.

The Al-Raha development was originally planned to be a new ‘gateway’ to Abu Dhabi, with a projected 120,000 residents living on the waterfront.

Economic sense

Speaking at the conference in February, Sami Asad, chief operating officer at Aldar, said it was looking at more affordable housing developments, and that the developer “should cater for the middle and lower-middle classes, where there is demand”.

The Al-Raha decision is not a one-off, according to Mohammed al-Mubarak, chief commercial officer at Aldar. “Aldar is proud to play an integral part in contributing to Abu Dhabi Plan 2030, which includes the provision of housing for all income levels” he says. “Regardless of the current economic crisis, demand remains strong for all levels of housing.”

Indeed, Al-Mubarak acknowledges that there is growing interest in less opulent dwellings. “We are seeing demand in the market for a wider selection of housing options within our developments, and we think there is an opportunity for Aldar,” he says.

Al-Mubarak cites one Aldar development as an example. Al-Falah is a masterplanned community, launched on April 19, comprising 5,000 homes for middle-class UAE nationals and located east of Abu Dhabi airport. It will be publicly financed until final buyers can be found.

Such projects “demonstrate commitment to increasing housing availability for middle-income families and creating residential developments”, says Al-Mubarak.

UAE developer Limitless, with a portfolio that covers Dubai, Saudi Arabia, Jordan and Libya, concedes there is a real need to offer a wider range of accommodation.

Saeed Ahmed Saeed, chief executive officer of Limitless, says real estate success in the Middle East and Africa will depend on “what kind of housing [is built]” as opposed to “where should we build [it]”, with more emphasis on which new developments make economic sense.

“Our focus is on delivering our projects - balanced, sustainable, mixed-use developments with accommodation to suit all pockets - in Jordan, the UAE and Saudi Arabia,” says Saeed.

He adds that demand for housing in Jordan, the home of the company’s Sanaya Amman twin-tower project, could benefit from the influx of hundreds of thousands of Iraqi nationals.

It is unsurprising that UAE-based developers are broadening their focus. The latest figures show real estate prices in Dubai, for example, have slumped dramatically in line with market conditions. According to the latest statistics released in April from Dubai-based real estate consultant Landmark Advisory, average prices for a townhouse in the Springs area of Dubai have dropped by 23 per cent over the past 12 months. Prices for one square foot of space are estimated at AED851, down from AED1,100 a year ago. The price of a one-bedroom apartment in the Marina has dropped by 32 per cent to AED1,172 a sq ft from AED1,696 a sq ft last year.

Meanwhile, the Colliers International real estate survey released in April reveals that occupancy levels for housing in Dubai dropped from 93 per cent at the end of December 2008 to 74 per cent in March this year.

Bahrain also has a recognised need for more affordable housing. As an island state, the kingdom faces a severe shortage of land for development, with about 90 per cent of its residential and tourism projects built on reclaimed land.

Several real estate projects are under way in the kingdom, such as Bahrain Bay and Durrat al-Bahrain, but the Diyar al-Muharraq project stands apart for its emphasis on affordable housing. The 12 sq km mixed-use city will add 40 kilometres of coastline to Bahrain when completed. The first phase is scheduled for completion in 2010.

With an investment value of $3.2bn, the project will have 30,000 properties when completed and accommodate 100,000 residents. Plots are being sold in different sizes to ensure there will be small, medium and large properties priced to accommodate all groups. Affordable housing will account for 20-25 per cent of the available accommodation.

But more projects are needed if Manama is to avoid a Saudi-style housing problem. Some 40,000 families are currently registered with the Works & Housing Ministry for low-cost housing loans or state accommodation.

Other countries in the Middle East and North Africa are more advanced in their plans to meet demand for affordable housing. MEED reported in March 2008 that the Moroccan government had committed more than $2bn over the next four years for the construction of affordable homes.

Identifying opportunities

Under the scheme, 130,000 low-cost housing units will be built in both rural and urban areas. Priority will be given to those working for the police or civil service, those living in houses due for demolition and those in the handicraft sector. Mortgages for the properties will be available through the Fonds de Garantie pour les Revenus Irreguliers & Modeste scheme, which was set up in 2005 to help those on low or irregular incomes.

One positive effect of the economic slowdown across the Middle East and North Africa is the strategic rethink that real estate developers have been forced into.

With real estate firms taking a long, hard look at their business models and concluding that the middle and low-end housing market offers a more sensible opportunity, the region’s need for more affordable housing will begin to be met.

Whether it was intended or not, the market that had the greatest need for housing may finally get the attention it deserves.