Saudi Arabia has a serious problem. It does not have enough housing for its people. And the situation is getting worse.

According to the Economy & Planning Ministry, the kingdom will face a shortage of two million homes by 2015. In its Eighth Development Plan (2005-2009) the ministry concluded that: “There is a shortage of nearly 0.73 million housing units [in Saudi Arabia] besides the unmet housing demand of 0.27 million housing units by the end of Seventh Development Plan (2000-2004). We expect this demand to double by 2015.”

In more detailed statistics, the Commerce Ministry says that the shortfall equates to 160,000 to 200,000 homes a year.  

The only way PPP could work is if you had big businesses … fronted by the royal family

Riyadh-based financial consultant

The ministries are not the only government bodies to have voiced its concerns. At a more local level Jeddah Municipality claims that there is currently a shortage of 283,000 homes in the city, adding that five million new homes will be needed across the kingdom by 2020.

Some independent research has been more optimistic, but draws the same conclusion, Saudi Arabia needs more homes.

Germany’s Deutsche Bank reported in November last year that Saudi Arabia will face a substantial housing shortage by 2015. It estimated that the country would require 1.2 million homes by 2015, while 900,000 new homes will be built, meaning a shortfall of 300,000 homes.

Supply under stress

Likewise, US-based bank Citigroup warned of an undersupply of residential units ranging from 150,000 to 800,000 by 2012, and US-based property consultant Jones Lang LaSalle expects a shortfall of 1 million homes that year.

While oil price fluctuations are still the most important indicator when considering the health of the kingdom’s economy, the statistic that is fuelling the concerns on housing is population growth.

In 1971, the population of Saudi Arabia was six million. Almost 40 years later, the population is closer to 26 million and the Economy and Planning Ministry expects it to grow to 33 million by 2020. According to a report written by Cairo-based HC Securities & Investment, two-thirds of the current population, more than 17 million people, live in urban centres such as Mecca, Riyadh, Jeddah and Dammam, and despite estimated stocks of four to five million available housing across the kingdom, 10 of its 13 provinces don’t have enough homes.

To make matters worse, the projects planned to alleviate those shortages will not provide the kind of homes the market actually needs.

Investment banks and market researchers commenting on Saudi Arabia’s housing shortfall do not refer to the upmarket homes that will be built as part of the six economic cities planned, such as in Hail, or the other large-scale government-funded mixed-use projects.

Aside from delivery dates that are 15 years into the future, the additional five million luxury townhouses and waterfront villas promised by these developments are of limited use to a population whose gross domestic product (GDP) per capita is $14,871.

In terms of affordable housing, there are two main subsectors that have similar financial constraints but require different types of dwellings. “There is a large section of the population – the very lowest income – who are expatriate labourers. There isn’t much housing for that subsector,” explains John Harris, head of Jones Lang LaSalle in Saudi Arabia.

The other market for affordable housing that is more of a pressing concern for the government is nationals. “At the moment, developers in the market are building homes that cost more than a million riyals. For Saudi nationals who are less well off, that doesn’t help,” adds Harris.

Another property consultant based in Saudi Arabia says the situation has become particularly difficult because half of the local population is aged between 20 and 34 years. “There is a growing discontent among young Saudis. These are well-educated, forward-thinking people who are stuck in their parents’ homes feeling like life is passing them by. The king wants to be seen as a benefactor, but the reality is something different. The government is doing a lot of mega projects that aren’t necessarily helping the people.”

One solution would be for people to help themselves. But to buy homes they cannot pay for in cash, they need access to financing, which means mortgages. Mortgages have been planned for some time, and the kingdom first drafted its mortgage law almost a decade ago. The legislation is designed to guarantee mortgages, which would alleviate risk for lending institutions and allow them legal recourse for foreclosure in the event of default.

If and when it is passed, the law is expected to have a major impact, and Bank of America Merrill Lynch says passage of the law could prove to be a decisive catalyst for both the housing and lending sectors, two markets that are currently underdeveloped in the kingdom.

Current statistics suggest that for housing 76 per cent of Saudi Arabia’s local population remain without homes of their own, and for lending just 2 per cent of national GDP comes from bank borrowing in Saudi Arabia, far lower than the 70 per cent in the UK, 50 per cent in the US and 20 per cent in Malaysia.

Although it would be impossible to confirm, estimates from the National Commercial Bank of Saudi Arabia say that once it is enacted, the mortgage law will result in $17bn of investment in new housing.

Officials insist that the Mortgage Law is complete and a decision is imminent. But those that have followed 10 years of posturing, promising and rewriting remain sceptical and don’t expect a quick decision.

Regardless of when the law is passed though, the accepted consensus is that Shariah, or Islamic compliant, financing will feature heavily in the final version. And this has raised issues such as enforcement on default or non-payment.

“Under Shariah Law, you cannot throw someone out of their house. So if banks try to go down that road, they’re certainly not going to be very popular. If they don’t, however, there’s no guaranteeing the mortgage. Is the government prepared to stand behind all the mortgage companies? From a cultural perspective, I’m not sure if that has been resolved or is resolvable,” says Will Hean, general manager and investment director at Matrix Property Middle East.

As first-time buyers wait, one of the few avenues for the local population is interest-free loans provided by the government’s Real Estate Development Fund (REDF). Although it offers a lifeline of sorts, REDF loans cannot exceed $133,000 and are available only to locals. Put simply, the maximum REDF loan will allow a potential buyer to borrow only enough money to purchase an affordable home. The problem is few homes in this price bracket are being built.

Once the financing issue is resolved, developers and government officials must decide what type of development will best satisfy market needs.

Public-private partnerships

So far high-end or luxury developments seems to have marginalised a large majority of the kingdom’s potential homeowners, and the Dubai model of using off-plan sales to finance large-scale developments prior to construction has proven untenable in 2010 in the GCC and is unacceptable for many local buyers do not want to purchase a home without having seen it.

At the other end of the development spectrum much of the neighbourhood development happening on the ground is small-scale and disorganised as it typically involves large developers buying large plots and dividing or parcelling them off to families acting as micro-builders.

Another possible option is the public-private partnership (PPP) financing option that is now being used in Bahrain. It involves a contract between the government and a private company, in which the private company builds a project, but the financial, technical and operational risks in the project are shared. 

If done carefully, the PPP option could find support in the Saudi Arabian market but it may prove unpopular as well. “In business circles, there’s a lot of antipathy concerning private businesses helping to fund or subsidise projects that the oil-rich Saudi government should do itself,” said one Riyadh-based financial consultant. “PPP is too Westernised … I don’t think Saudi Arabia is ready for it. The only way PPP could work is if you had big businesses that were fronted or financed by members of the royal family.”

Until a decision on mortgages and financing is made, the kingdom’s real estate market will remain an uncertain one for investors. But one thing is clear, Saudi Arabia needs more homes, and its people need them fast.