Riyadh’s explosive population growth is aggravating a housing shortage, forcing prices beyond the means of many of the city’s teachers – just when the kingdom is seeking to roll out large volumes of low-income housing stock.

With year-on-year percentage increases in prices for some properties reaching double figures, King Abdullah bin Abdulaziz al-Saud’s ambition to find a means for ordinary Saudi nationals to house themselves – preferably as owner-occupiers – has hit a stumbling block that is proving difficult to overcome.

One part of the problem is demographic in nature. Riyadh now has 7.5 million inhabitants, meaning one-quarter of the entire Saudi population lives in the capital. The city’s prodigious annual population growth rates – an estimated 2.8 per cent last year – suggest there is no slackening of the pace in sight.

Cramped conditions

Rapid urbanisation, fed by economic growth that has sucked in rising numbers of expatriates, has forced increasingly cramped conditions for many of Riyadh’s inhabitants. The average size of a household in the Riyadh region, at 5.6 people, is higher even than India’s, at 5.3, and twice as high as the US average.

As a result, Riyadh has yet to feel the benefits of King Abdullah’s home-building programme, announced amid fanfair in early 2011, with the promise of 500,000 low-income homes to be built across the country.

Real estate consultants have rung the warning bells. The UK’s Knight Frank, in an assessment of the Riyadh residential market published in November, says demand for residential units continues to outstrip supply. It says the capital has a requirement for about 50,000 housing units a year over the next five years, yet has an estimated housing inventory of just 1.2 million units.

Due to construction delays and the lack of available land, developers have found it increasingly difficult to bridge the gap between supply and demand. And although there are several large housing schemes planned to be completed in the short term, there is unlikely to be enough capacity in the system to deliver the required number of units to satiate current levels of pent-up demand, according to Knight Frank.

Crippling shortages

The capacity issue is a decisive factor here. The raw materials and labour supply needed to develop large-scale housing units are palpably lacking, and the kind of developers that have proved so successful in rolling out housing units in other Gulf states are much thinner on the ground in the kingdom.

“The Saudi developer industry is still quite undeveloped,” says Craig Plumb, head of research at US consultancy JLL. “There are very few major developers that can achieve the economies of scale and put up projects quickly in Riyadh.”

The kingdom’s market is dominated by small and medium-sized developers that are more comfortable with building compounds of 10-20 units. This is unlikely to make an indent, given the volume of housing needed in the capital. “They need projects to be delivering thousands of apartments at a time and the skills levels aren’t there in the industry to do that,” says Plumb.

Construction delays

Lack of developer capacity is one side of the story; the other is the contractor problems that have been made worse by the tighter visa regulations that have followed the government’s crackdown on migrant labour since 2013. 

This has forced construction delays, with developers failing to roll out supply sufficiently quickly. About 13,000 housing units were built in the first six months of 2014 in Riyadh, which is well down on the requirement for 50,000 units a year.

Efforts to stimulate supply include encouraging UAE-style off plan schemes that would allow developers to finance projects with drawdown from payments. But whereas the off plan-dominated markets such as Dubai are comfortable with the speculative flipping of properties, the Riyadh market – where there is a greater need for low-income housing – does not suit that model quite as easily. 

Expensive homes

Perhaps the biggest structural hurdle is that the pent-up demand for housing for nationals has yet to be translated into effective demand. In other words, the affordability level of new housing is still beyond the means of many locals, so that the commercial incentive to invest in house-building is still largely absent. There may be a need for housing, but if many Riyadh citizens are not in a position to afford it, the effective demand is simply not there.

Affordability is the key issue here. Number crunching by Knight Frank suggests average wages for Saudi nationals in Riyadh – standing at almost SR4,900 ($1,306) a month, or close to SR58,500 a year – are low relative to house prices. With an average 130-160-square-metre apartment in the south of Riyadh currently priced around the SR370,000 mark, the average price-to-income ratio is 6.1 – high by international standards, says the consultancy.

Moreover, in the case of a standard-priced villa of SR1.1m, the average mortgage payment would increase to SR5,300 a month, which is higher than the average monthly income. Based on average salaries, an affordable price point for a housing unit appears to be about SR300,000-SR400,000, much lower than current price levels.

Given that more than 60 per cent of nationals do not own their own house, the government has responded to the problem by developing a new home-financing scheme. In March, the Saudi authorities rebooted their efforts with the Housing Ministry’s launch of the so-called Eskan programme, which seeks to channel financial support to local families through state-subsidised home loans. Eskan is intended as a more transparent system for allocating financial support, with a points system for those most in need.

Public initiatives

In addition, the recapitalisation of the Real Estate Development Fund to target low-income households, and the introduction of a mortgage law, have also been framed to help locals become home-owners.

“The government initiatives are laudable and are to be welcomed as an attempt to find a way to translate that demand into effective demand, and get people into these units,” says Stefan Burch, general manager for Saudi Arabia at Knight Frank.

There are challenges, however. Announced in March 2013, the mortgage law is designed to boost home ownership rates from just 40 per cent to 80 per cent in the space of 10 years, giving ordinary nationals the first foot on the property ladder through housing loans. However, questions remain about whether mortgages fully adhere to sharia principles, which is in turn stalling the launch of bank-backed mortgage products. Lenders still need more reassurance on the enforceability of contracts before fully committing to mortgages.   

Until these schemes get under way, there is likely to remain a mismatch between affordability based on suitable financing mechanisms and current residential values in the capital.

Land trading

“The housing is so expensive, people can’t afford it,” says Plumb. “So the real problem is not the volume of supply, it’s the price of supply, and that’s where the issue of land comes in – especially when land prices get to a level where it is no longer economic to develop affordable housing in many parts of Riyadh.”

Tackling high land prices is therefore a key element in ensuring a better matching of residential supply and demand. The Knight Frank report notes that high values have contributed to an escalation in residential sales values. Indeed, with land values in Riyadh accounting for between 45 to 50 per cent of total development costs, developers have inevitably been forced to cater to the middle-to-upper-end of the market in order to achieve their requisite development margins.

One factor behind the high land values is the manner in which land is traded, as a commodity rather than by reference to its economic or development potential.

“It would be good to get to a position where development plots are able to be traded by reference to their economic or development potential rather than as a commodity, which should enable developers to purchase land and develop schemes in a more sustainable manner,” says Burch.

According to Knight Frank, current land values will need to see a correction if they are to align with residual values, in turn enabling developers to undertake schemes that target market demand while also being financially viable. That is a challenge in Riyadh, where much land is in the hands of well-connected individuals who have little interest in seeing their land traded with reference to residual values. They would stand to lose a lot of money if they were to liquidate their holdings.

Despite the slow rollout of housing stock, Riyadh’s urban sprawl will continue, with much of the residential focus leaning towards the city’s northern areas, where sales prices are highest.  

Northern Riyadh’s high prices reflect the area’s better infrastructure and proximity to high-profile developments such as King Abdullah Financial District. In contrast, southern Riyadh has the most low-income families and the lowest sales prices. Eastern Riyadh is considered the most attractive areas for middle-income households, according to US property consultant Colliers. Prices are lower in eastern Riyadh compared with northern Riyadh, but much higher than in southern Riyadh.

No easy solution

Even if the pace of home building does start to pick up, Riyadh’s housing challenge will remain. “The question is, are you going to get people from the south of Riyadh leaving their local communities and relocating to the north of the city?” asks Burch. “Even if 50,000 units were constructed to the north of Riyadh overnight, it wouldn’t necessarily solve the problem.”

All this means the Saudi capital is set for continued increases in rental and sales costs over the next year. Prices for villas in Riyadh jumped by up to 15 per cent in 2013, while apartments experienced 10 per cent growth, according to Colliers.

Some relief may come, with 75,000 housing units expected to enter the market in 2015 and 2016, according to JLL. But the continued population growth and inelasticity of supply means Riyadh’s citizens will struggle to overcome the affordability challenge.