New housing ministry faces uphill task in Saudi Arabia

12 April 2011

Riyadh has shown it is taking the lack of affordable housing in the country seriously. But it will require more than a new housing ministry and a $67bn capital injection


It takes 15-18 years for the Real Estate Development Fund to approve a loan application

Source: MEED

There have been many side-effects to the regional uprisings that have shaken the Middle East and North Africa to its collective core. One of these is a new and much needed determination in Saudi Arabia to address its growing housing shortfall.

The lack of low-cost housing is a key cause of discontent in the kingdom, particularly young people. To address this, King Abdullah bin Abdulaziz al-Saud has launched a series of measures aimed at providing more affordable homes, including a $67bn (SR250bn) cash injection to build an additional 500,000 units.

Large contractors don’t always see housing as profitable, preferring to work on airports or universities instead

Colin Morris, EC Harris

The investment will be managed by the newly established Housing Ministry, which takes control of the General Housing Authority (GHA) – previously a part of the Public Works and Housing Ministry. The new ministry will be led by the former governor of the GHA, Shwaish bin Saud al-Dhuwaihi.

Challenging mandate

Al-Dhuwaihi was sworn in to the new position by the king at Riyadh’s Al-Yamamah Palace on 28 March and in doing so he accepted a whole new set of responsibilities. Not only will the ministry be expected to deliver the 500,000 new homes, it will also assume responsibility for the state property lending vehicle, the Real Estate Development Fund (REDF).

If it takes 10 years … it is not going to make a dent. If they build them over five years, then it will have some impact

John Sfakianakis, Banque Saudi Fransi

REDF was previously part of the Finance Ministry and is responsible for providing interest-free loans to low-income borrowers. Established in 1975, its remit was to boost home ownership. In 1990, its mandate was increased to allocating houses constructed by the Public Works and Housing Ministry. Although REDF has loaned out more than $30bn, leading to the construction of more than 555,000 properties, and allocated more than 21,000 government-built homes, its effectiveness is questionable. As an organisation, REDF has serious challenges to overcome, including the fact that it takes 15-18 years to approve a loan application. Loan defaults are also a major issue.

Included in the new measures announced by the king is the decision to allocate an additional $10.7bn to REDF and to increase its lending limits from $80,000 to $133,000.

Saudi house sales prices ($)
 First half 2010Second Half 2010
Small apartment101,949110,105
Small villa293,584326,915
Large apartment130,126134,606
Large villa459,708470,907
Source: Banque Saudi Fransi

Nonetheless, experts say that once loans are adjusted for inflation, they are still likely to cover only a fraction of the cost of building a property and buying land. “I don’t think this kind of money can take you far enough if land prices don’t depreciate substantially,” says John Sfakianakis, chief economist at the local Banque Saudi Fransi.

He says that other issues also need to be addressed if more people on low incomes are to own property, including the time it takes to get a loan. “The bottlenecks within the real-estate development fund are quite extreme and I don’t expect that injecting the capital is fundamentally changing the bottlenecks,” he says.

“You still have a huge amount of people that anticipate loans from the fund – what has changed is the capital. You are giving them a bit more money, but the timeline is still the same.”

Slow construction progress in Saudi Arabia

Bureaucratic delays are also a problem when it comes to getting more houses built. Construction firms say that coordination between the authorities responsible for land availability, water, power and sewage provision is poor, leading to hold-ups even when projects have been given the go ahead.

Saudi Arabia housing requirements by region
Eastern Region166,300
Northern Borders 11,500
Sources: National Development Plan 2010-14; Banque Saudi Fransi

Slow progress is not only a feature of government entities. Consultants say that long lead times for importing construction materials for housing projects is another hurdle that needs to be overcome if new accommodation is to come online as quickly as it is required.

“Equipment availability often dictates a construction programme. Most of this is imported and importing is a slow process,” says Colin Morris, location leader for Saudi Arabia at UK cost consultant EC Harris.

At the same time, the Housing Ministry will need to secure the contracting resources required to deliver the homes and again this will be a challenge, with major contractors already running at full capacity.

“There is a gap. Large contractors don’t always see housing as profitable preferring to work on airports or universities instead, but the next level down would be too small for the scale of the housing projects,” says Morris.

An option that the Housing Ministry might consider is forming a joint venture with a major international contractor to deliver the new properties. “This is certainly something that clients are looking at, particularly working with South Korean and Chinese contractors to augment the supply chain,” says Morris.

Housing details lacking in Saudi Arabia

To date the government has not revealed details of where the new houses will be built, or how they will be delivered, but firms are expecting an announcement by the end of May. Historically, the last phase of low-cost housing was built in the late 1980s and early 1990s and was mostly high-rise. Availability is now severely constrained and young people are increasingly living with parents unable to afford their own property. Population growth, high unemployment among young people, house prices that are unaffordable for money and rising land prices are putting pressure on the housing sector and widening the affordability gap.

Under Riyadh’s ninth development plan for 2010-14, 1 million homes are planned to be built during the five-year period by both public and private organisations. To achieve this, the government says it will make 266 million square metres of land available. However, the plan only allocated $26.8bn for both housing and municipal services, so the $67bn extra injection is certainly a major boost to the sector. The plan details the areas where the need for housing is greatest and predictably urban areas, such as Riyadh and Mecca come out on top. Additional housing may be required in Jeddah as the government is examining the possibility of relocating residents away from the flood prone areas in the south.

For buyers, the cost of housing in the kingdom has spiralled in recent years due to inadequate supply. Private developers have focused on high-end property development, with the aim of collecting higher yields and maximising profits. This has left a major gap in the market for smaller, affordable properties.

In its latest Saudi Real Estate Survey published in November 2010, Banque Saudi Fransi says the price of small villas soared in the second half of the year, including gains of 19 per cent in Riyadh to an average of $327,000, and 17 per cent in Jeddah to $411,000, from the first half of the year. The biggest rise was recorded in north Riyadh at 40.6 per cent.

“Sales prices for apartments and villas are rising across the country, rents for homes and offices have escalated and the cost of commercial and residential land made a comeback, following two years of weakness,” says the report. It also highlights that families are seeking either large apartments or small villas, while demand for large villas has fallen.

That inflation is creeping back into house prices and rents is not surprising given that Banque Saudi Fransi estimates the kingdom needs as many as 275,000 new units a year.

One way that people could be able to afford property more quickly is if the kingdom’s mortgage law was passed. But despite the government prioritising the approval of the long-awaited legislation, it is still not expected until 2012. There is still much uncertainty surrounding the law, with banks saying that although it will give them permission to evict people that do not repay their loans, it remains to be seen how this will be enforced.

“The banks will be cautious and try to test the system first, primarily to see if the ability to repossess due to defaults is actually eventuated by enforcement,” says Sfakianakis.

Delivering on housing promises in Saudi Arabia

Although the mortgage law may boost lending, the onus to deliver the housing will fall on the new Housing Ministry and Al-Dhuwaihi has a major challenge on his hands. All eyes will be on his leadership of the new ministry and success will be dependent on his ability to reduce bureaucracy and get houses built quickly. Time is of the essence as a recovery in property prices and soaring demand is making the affordability gap grow wider than ever.

“If it takes 10 years, then it is not going to make a dent. If they build them over five years, then it will have some impact,” says Sfakianakis of the 500,000 new homes. “But still it doesn’t address the fundamental problem, which is [the need for] a huge amount of housing that is affordable for young Saudis.”

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