Housing shortage inflates rents in Saudi Arabia

15 December 2010

Demand for expatriate accommodation in Saudi Arabia far exceeds supply. In particular, companies are struggling to house employees moving to the kingdom with their families

Key fact

When security concerns were an issue, apartments dominated the market. Now villas are in demand.

Source: MEED

Finding accommodation for expatriate workers and their families in Saudi Arabia at the moment is not easy. Of more than 20 compounds in Riyadh contacted by MEED, none had immediate availability and compound managers said an application form had to be completed in order to join a waiting list. The wait is usually about 6-12 months.

In Jeddah, availability is slightly better than in the capital. But only a handful of lower-quality compounds reported immediate availability, with the majority also suggesting that applicants joined a waiting list.

Saudi Arabia’s buoyant projects market and a government-led drive to diversify the economy, which are drawing increasing numbers of expatriates into the kingdom, are the main reasons behind this strong demand for accommodation.

There are so many projects going on here that we are experiencing a boom in demand from professionals

Saudi Arabia-based property director

The slowdown in the economies of neighbouring states is another key factor. “We have had an influx of people from Dubai,” says a Saudi-based property director. “There are so many projects going on here that we are experiencing a boom in demand from professionals, such as project managers and engineers.”

Lucrative leases for landlords in Saudi Arabia

Rampant demand means compound owners can command high prices for accommodation. At the top end of the market in Riyadh is the Al-Hamra Oasis Village accommodation, situated by the eastern ring road, 15 minutes from the airport. Prices vary from $40,000 a year for a one-bedroom apartment of 66 square metres, up to $187,000 for a six-bed executive villa. In total, there are 404 units at the site, but despite the compound being one of the largest and most expensive, there are no vacancies at present.

Expatriate rental prices in Riyadh
(SR a year)Al-Hamra compoundSeder Village compound
One-bed apartment150,00080,000
Two-bed apartment190,000100,000
Three-bed villa300,000115,000
Four-bed villa450,000140,000
Five-bed villa550,000170,000
Source: MEED

“All our units are occupied. We do not expect to have any available units for at least one year from now,” says a manager at the compound.

Other compounds gave a similar response. The more moderately priced Seder Village offers accommodation at $21,330 a year for a one-bed apartment and up to $45,326 a year for a five-bedroom house. Situated in the Al-Khaleej area to the northeast of the city, the compound has a six-month waiting list.

We can’t put all of our eggs in one basket. I would give over 10 properties to one company at the most

Director of a compound in Jeddah

Although MEED found better availability in Jeddah, most compounds, including Al-Basateen, Mura Bustan, Nueve Andalucia and the Arabian Homes compounds of Sierra and Andalus, also asked applicants to join a waiting list. At one of Jeddah’s largest compounds – the 950-unit complex of Sharbatly Village – MEED was told that although it was full, space could be found in February. Property experts say this is usual and that turnover is low between Ramadan and the end of the year as people tend to stay settled in their jobs. Movement is more common from January onwards.

Expatriate rental prices in Jeddah
(SR a year)Nueve Andalucia
One-bed apartment90,000
Two-bed apartment130,000
Three-bed villa170,000
Three-bed luxury200,000
Source: MEED

At the moment, most complexes in Jeddah are fully booked, but demand is less intense than in Riyadh, so prices for a three-bedroom villa are, on average, much lower than in the capital. Prices are often as high as $80,000 a year in Riyadh’s most desirable compounds, such as Al-Hamra and Eid, compared with up to $47,500 for similar properties in Jeddah’s premium compounds. The lease prices usually include furniture and utility rates, and a security deposit is required, ranging from about $1,000 to $2,500, depending on the size and location of the property.

Drip-feeding housing requirements

“In Riyadh, everything is tight,” explains the Saudi-based property director, adding that even companies that have been renting properties in the capital for many years are struggling to meet their requirements. Demand for large numbers of villas have to be ‘drip fed’ over a number of months, as compounds do not have availability, even for their long-term customers. These clients are usually able to negotiate favourable rates, but they are not much below the market average, perhaps just 5-10 per cent lower.

MEED also found that the nationality of the applicant and, in some cases, the identity of the employer can influence how long it takes to secure villas and apartments.

In both Riyadh and Jeddah, waiting lists are shortened considerably if the applicant profile fits with the mix of tenants already living on site. In general, compounds tend to prefer Western expatriates to those from other areas of the world. This often goes back to the origins of the site. For example, the Lotus IV compound in the north of Jeddah was set up for the French community and today hosts French citizens with some Canadian, US and Lebanese tenants.

Several of the compounds contacted by MEED confirmed that applicants from the UK or the US would be able to get accommodation more easily than other nationalities. “It sounds very racist, but we are aware that people want to live in a relaxed environment and so we have to manage our tenant mix to ensure that we can provide that,” says one compound manager.

Villas suitable for families are the most difficult type of accommodation to come by in Saudi Arabia. Previously, these types of properties were in little demand, with one- or two-bedroom apartments dominating the expatriate rental market.

“It is different now; the families are here,” says the director. “In the past, when there were security fears, no one built family accommodation. Everyone opted for apartments and we couldn’t rent out the houses. Now everyone wants a villa.”

Security crackdown in Saudi Arabia

The security situation for expatriates is considered much improved since 2003-04, when a series of terrorist attacks drove Westerners out of the kingdom. The Riyadh compound bombing in May 2003 was the most devastating, with 26 people killed at three central compounds. The attacks continued into 2004 in Jeddah, Yanbu and Riyadh. The Interior Ministry responded with a crackdown on suspected terrorists that continues today. Hundreds of people are arrested every year, with more than 700 arrests in 2009 and 149 arrests in 2010.

Security has also been tightened at the compounds themselves. Property firms employ the Saudi military to guard their complexes at considerable cost. Compound owners tell MEED that local government officials decide on the security requirements and that these have increased considerably over the years.

“Today we pay SR1.2m a year for the National Guard to protect our premises,” says a director at a Jeddah-based compound with more than 200 properties. Such high fees mean that some compounds are now choosing not to open their doors to non-Muslim tenants.

Despite the strong demand for villas in Saudi Arabia, property firms say construction of new housing is unlikely because of the cyclical nature of the market, which is heavily influenced by the health of the economies in the US and the UK. Local experts say the volatility in accommodation demand over the past 30 years, due to economic and security factors, makes the market for apartments much more stable.

“If we decide to build more properties, we will build apartments. We all know that if a bomb goes off, the families [and hence demand for villas] will leave,” says the Jeddah-based director.

The fickle expatriate market means property firms are also loath to give over too much of their stock to a single company. Although most companies, both international and local, make assurances that demand is long term, in reality they will only take annual leases, which can be terminated should business turn bad or the security situation deteriorate. “We can’t put all of our eggs in one basket. I would give over 10 properties to one company at the most,” he adds.

Project delays in Saudi Arabia

Outside the main cities, demand is slower and expatriate accommodation is harder to find. Property companies say developing compounds for medium-term use related to particular projects is not profitable. In some places, demand has slowed as projects have stalled. In Yanbu, for example, slow progress on the $10bn export refinery, which Saudi Aramco is now committed to delivering without former US partner ConocoPhillips, has hit demand for compounds, with owners describing the local market as ‘disastrous’.

On the whole, however, demand for expatriate accommodation in Saudi Arabia is strong, and Riyadh and Jeddah are struggling to satisfy demand from international companies and individuals. Rents have risen over the past three years, as they have in the domestic housing market.

Compound owners say that despite overheads increasing (particularly for security services), the sector remains highly profitable thanks to the rising rents and consistent demand.

“Things are good; having the families and communities back is a positive sign,” says the Saudi-based property director.

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