Rising interest rates have curbed the Saudi mortgage market, which is negatively impacting the real estate market and the construction sector, even though the impact of rising rates has been offset by a sharp increase in contract awards for the kingdom’s gigaprojects and other major developments.
A report in late October by London-based Capital Economics said the drop in the number of new mortgages is affecting the property market.
The report cited data published in October that showed that the overall real estate price index rose by 0.2 per cent during the third quarter. The data also showed that villa prices fell by 0.2 per cent and are now 25 per cent below their 2015 peak.
Capital Economics said the value of new mortgages provided by banks contracted by 44 per cent year-on-year in August, adding that higher interest rates – the Saudi Central Bank has raised rates by 500 basis points since early 2022 – explain this trend.
Capital Economics is the latest firm to publish a report highlighting the impact of interest rates on the real estate market.
In May, property consultancy Knight Frank reported that there has been a significant decrease in residential property activity across Saudi Arabia.
It said the number of residential transactions decreased by 57 per cent in Riyadh and 67 per cent in Jeddah at the end of the first quarter. The firm said the contraction appears to result from shifting affordability circumstances and evolving market dynamics.
The weakness in the housing market is impacting the construction sector. According to Alrajhi Capital, cement volumes declined by 11.2 per cent in August this year, in line with the continuing mortgage decline.
For non-cement companies, Alrajhi Capital expects the pressure on financial performance to continue owing to weak demand and pricing pressure. It forecasts that companies under its coverage will report an 11.6 per cent year-on-year drop in revenues.
The impact of rising interest rates has been offset by a sharp increase in construction activity on Saudi Arabia’s five official gigaprojects and other major development schemes backed by the Public Investment Fund (PIF).
According to MEED’s gigaprojects tracker, Saudi Arabia’s five official gigaprojects have awarded $45bn of construction contracts since they were launched.
The $45bn total for the five gigaprojects represents about 16 per cent of the $290bn of contract awards made across all clients and sectors in Saudi Arabia since the initial gigaproject contracts were awarded in May 2017.
Gigaproject developers say they are planning their projects to be resilient to deal with economic shocks such as rising interest rates.
“I’m of the generation that remembers double-digit interest rates, so I think it is cheap at the moment,” said David Grover, CEO of gigaproject developer Roshn, while speaking on a panel at the Future Investment Initiative (FII) in Riyadh on 25 October.
“The world has had the luxury of 0-2 per cent interest rates for a long time. It is not sustainable. I think we need to be conscious of that, but also, when we do our masterplans, we need to be able to speed up and slow down based on the market.”
*=Year-to-date | Sources: IMF, MEED Projects, MEED
MEED's October 2023 special report on Saudi Arabia includes:
> COMMENT: Riyadh reshapes its global role
> POLITICS: Saudi Arabia looks both east and west
> SPORT: Saudi Arabia’s football vision goes global
> ECONOMY: Riyadh prioritises stability over headline growth
> BANKS: Saudi banks track more modest growth path
> UPSTREAM: Aramco focuses on upstream capacity building
> DOWNSTREAM: Saudi chemical and downstream projects in motion
> POWER: Riyadh rides power projects surge
> WATER: Saudi water projects momentum holds steady
> GIGAPROJECTS: Gigaproject activity enters full swing
> TRANSPORT: Infrastructure projects support Riyadh’s logistics ambitions
> JEDDAH TOWER: Jeddah developer restarts world’s tallest tower
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