Special Report Contents

• Comment: Riyadh tackles housing crisis

• Riyadh’s shrinking reserve base

• Ghawar continues to lead output

• Kingdom rethinks project delivery

Saudi Arabia’s King Salman bin Abdulaziz al-Saud’s main policy focus since assuming the throne in January has been foreign rather than domestic. But the new monarch has also set his sights on addressing the kingdom’s shortage of affordable housing.

King Salman wasted no time in setting out his stall over the housing challenge, giving the go-ahead in January for a tax on undeveloped land in urban areas in recognition of the urgent need to accelerate home building.

The government has asked the Council of Economic & Development Affairs to prepare a mechanism for the proposed tax on so-called “white land” to encourage landowners to release land for development rather than to hold and trade it, as currently happens.

Chronic shortage

The decision to introduce a land tax is an explicit admission of the failure of the late King Abdullah’s 2011 plan to build 500,000 homes, with bureaucracy and the lack of available land stymieing progress. Nonetheless, King Salman wants to deliver on his predecessor’s vision amid estimates that as many as 1.25 million new homes are needed by 2018 to cater for the bulging youth population.

The sacking of housing minister Shuwaish al-Duwaihi in early March, temporarily replacing him with Essam bin Saeed, was another signal of the government’s seriousness about speeding up the low-cost house-building progamme. He has since been replaced by Majid al-Hugail.

As yet, there is no detail on when the new tax will come into force, nor on how it will be calculated and administered. That makes estimating its likely impact on the housing market difficult.

“There was strong optimism when the land tax announcement happened, but because of the length of time it has taken for the regulations to come through, some of that optimism is fading away now,” says Fahad Alturki, chief economist and head of research at the local Jadwa Investment.

The goal of the proposed tax is clear: to break down the monopolies in the market and to free up for development the large areas of land that are off-market and preventing cities from growing. “The tax will help push the prices of land down because of the increase in supply of units, which will solve the shortage we are seeing in the Saudi housing market,” says Alturki.

The problem is that despite the announcement, the mechanism to enforce the regulation is not yet in place. “Developers are unlikely to act before something concrete is in place, or at least a strong signal that something concrete is coming in,” says Alturki.

In the meantime, the situation on the ground is getting worse. According to UK consultancy Knight Frank, demand for residential units continues to outstrip supply in Riyadh, where there is a requirement for about 50,000 new housing units a year over the next five years.

Growing demand

As in other parts of the kingdom, construction delays and the lack of available land have made it increasingly difficult for dealers to bridge the gap between supply and demand. What is more, says Knight Frank, although there are several large housing schemes planned to be completed in the short term, there is unlikely to be enough of a pipeline to satisfy pent-up demand.

There are other consequences from allowing the housing crisis to fester. Housing is now the biggest contributor to inflation in Saudi Arabia. Year-on-year housing inflation accelerated to 3.1 per cent in April, according to Jadwa Investment.

“Inflation in the kingdom is mostly driven by rental price increases, which reflects the shortage of housing units,” says Alturki. “Any delay on the mechanism will push land prices even higher and also contribute to pushing overall inflation upwards.”

In the southwestern city of Jizan – one of the kingdom’s poorer areas – annual rents are estimated to have almost doubled from SR14,000 to SR26,000 ($3,700 to $7,000).

The shake-up at the Housing Ministry has included changes to working practices. Whereas the ministry used to supervise and plan home building itself, under the new minister it is delegating more of the work to the kingdom’s real estate developers. Given the criticism that has been levelled at the ministry’s performance when it was contracting directly, this may be a welcome step.

The restructuring of the Housing Ministry has also seen some younger figures brought in, with a reputation for being proactive on the housing issue.

“The ministry has given some large sites to start housing developments in both Riyadh and Jeddah,” says Craig Plumb, head of research at the Middle East and North Africa arm of US consultancy JLL. “That is a recognition of the scale of the problem and the attention being given to the shortage of affordable housing.”

The [Housing Ministry] has given some large sites to start housing developments in both Riyadh and Jeddah

Craig Plumb, JLL

These measures are designed to increase supply. But there is also a need to do more around the mortgage situation and make it easier to get middle-income families onto the housing ladder. “As well as the physical supply, they have also got to make affordable financing available,” says Plumb.

Financial support

In March 2014, the authorities redoubled their efforts with the launch of the Eskan programme, which seeks to channel financial support to Saudi families through state-subsidised home loans. The Real Estate Development Fund (REDF) was recapitalised three years earlier to target low-income households.

Alturki warns that despite this increase in liquidity, the REDF cannot raise or increase the number of loans it has because it would create too much demand pressure on the construction sector. “This has to be a gradual approach, accompanied by other initiatives such as the land fee,” he says.

A total of 30 developers are reported to be working with the [Saudi] government to execute its construction projects

Developers too have struggled with limited access to finance; this has restricted their capacity to take on large projects in the affordable sector, which is notably sensitive to land pricing. But the developers also have concerns about the impact of the tax on their own finances. When the fee scheme was first mooted, shares in real estate developers dropped amid fears that their land banks would be subject to new taxes.

One of the largest developers, Dar al-Arkan Real Estate Development Company, moved quickly to reassure investors by saying the white land tax was unlikely to be applied to its own land bank.

The truth is that up to now, low-income housing has not been a priority for the larger Saudi developers. For example, Dar al-Arkan generated less than 0.3 per cent of its total revenues from home sales in 2014.

That underlines the different focuses of the private and public sectors when it comes to house building. According to Knight Frank, as land values in Riyadh account for between 45-50 per cent of total development costs, developers have been targeting the middle-to-upper-end of the market in order to achieve their desired development margins.

The delay in bringing out the regulations on the land tax may reflect the government’s sensitivity about burdening developers with additional costs, when these are the same institutions that will actually build the new houses.

Although the government attempted to loosen up the market, with the introduction of offplan sales in 2011, the impact has been blunted due to the time-consuming licensing requirement for each offplan development. Developers are lobbying for moves to make offplan schemes easier, which they argue would speed up house building.

Developers are nonetheless figuring prominently in the Housing Ministry’s plans, with 30 of them reported to be working with the government to execute its construction projects. In Riyadh, five developers are involved in home-building programmes.

Recently announced projects include a new 700,000-square-metre low-cost housing project at Al-Jammom in the west of the country. The project is part of the government’s plan to spend SR250bn on building 500,000 low-cost houses for Saudi nationals across the country.

Other local developers are teaming up with foreign partners. Red Sea Housing Services Company, an affordable housing provider, has signed a joint venture agreement with Brazilian developer Direcional Engenharia to undertake housing projects in Saudi Arabia and other GCC states.

The local affiliate of the US’ Parsons Corporation partnered with the Housing Ministry in 2011 to develop land on 17 separate community sites, totalling nearly 74 million square metres of land and supporting more than 90,000 housing units. The first units under this scheme are being delivered this year.

In April, the government signed contracts with 13 local developers to build more than 14,600 houses in four cities under the Tatweer Eskan 2 project. This will see 6,800 units built in Jeddah, 3,145 houses in Medina, and 4,700 units in Dammam and eastern Qatif.

Growing pressure

Developers will come under growing pressure to do more about affordable housing. Under new rules, they will be forced to submit monthly reports on project execution in order to prevent delays. The ministry has also issued a warning to developers and contractors that it could scrap contracts should they fail to meet a 60-day deadline for launching the infrastructure, according to a report in Saudi daily Al-Youm. Developers and contractors that have been allocated land to build houses must submit reports to the Housing Ministry at the end of each month showing how much has been built.  

The Housing Ministry has a prominent role to play in reshaping the Saudi housing market. If it can organise the changes so that the large developers are fully incentivised to build affordable homes on a big scale through a carrot-and-stick approach, there may be better prospects ahead for lower-income nationals looking to get on the housing ladder.