Sustained high oil prices and record levels of oil production have underpinned a property boom in the kingdom that is entering its fourth year.

The growth has been given extra impetus by the collapse of the stock market over the past 18 months as investors, having lost confidence in the Tadawul, have flown to the trusted real estate sector to invest their oil gains. Real estate now accounts for more than 70 per cent of all investments in the kingdom. The government estimates the sector is worth SR 1.5 trillion ($400,000 million).

And the signs are that the Saudi property boom has a long way to run as demand for property far outstrips supply. Analysts predict that about 4.5 million new housing units are required in the kingdom by 2020. National Commercial Bank (NCB) estimates that between 2006 and 2020, demand will average about 145,000 units a year. Less than a quarter of that number enter the market each year.

It is turning out to be a golden opportunity for developers. 'Demand is extremely high,' says Imad Helwani, an executive at Al-Tajamua International for Real Estate Development Company. 'But the approach is different now. More than 70 per cent of Saudis are under 30 and need accommodation, whereas 15 years ago they were just kids.'

Access to capital and a growing middle class are playing key roles in the boom. 'Developers are offering financial opportunities to customers and the oil boom has created wealth in the market, which means people's affordability has risen,' says Mohammed Younas Malick, senior economist at NCB.

The boom is attracting many newcomers to the sector. Since 2003, Riyadh has issued more than 50 new licences to companies seeking to develop and market real estate. Every day newspapers are filled with eye-catching advertisements from previously unknown companies offering exclusive deals in developments in Riyadh, Jeddah or Mecca.

In previous oil booms, private property development firms were rare. In the early 1980s, there was virtually no property or commercial infrastructure in place. And real estate development was almost exclusively in the hands of the government, which poured billions of dollars into creating urban centres. Private sector investment was limited to a few wealthy trading families or individuals purchasing land, but rarely developing it.

'That is the fundamental difference between then and now,' says Hisham Malaika, general manager at consultant Dar al-Riyadh. 'There never used to be developers. People used to buy a plot of land, sell it off and then it would be left empty. Everybody cottoned on to this as easy money, and eventually people started to recognise the need for a stronger value proposition than just selling land. So those who used to do this are now the developers.'

Changing attitudes

Over the past decade, new players such as Dar al-Arkan and Al-Oula Real Estate have driven the market forward. And while Saudi developers remain more conservative than their counterparts elsewhere in the Gulf particularly those in Dubai, Abu Dhabi and Doha the difference in approach is diminishing. 'That has changed,' says Malaika. '[What has happened elsewhere] has rubbed off on local developers and they have seen how quickly and profitable real estate can be.'

The changing attitudes of the Saudi consumer are also reshaping the way developers approach the market. In the past, Saudi developers focused primarily on apartment buildings for expatriates or isolated villas for wealthy nationals. The expansion of the middle class and its awareness of trends outside the kingdom have increased demand for more modern homes and facilities.

'If you take government workers who earn reasonable salaries, they do not necessarily want all the frills,' says a senior official at contractor Saudi Oger. 'They want town houses that they can pay off monthly and cost between SR 700,000 ($187,000 million) and SR 1 million ($267,000). That is the thrust of these new developers.'

Undermining the new crop of developers is their lack of experience. Just as has been seen elsewhere in the region, poor planning and a failure to conduct detailed feasibility studies have led to problems on many developments. Some have been delayed. Others have been scrapped altogether after developers, unable to sustain their cash flow demands, were forced to sell off the land despite reaching concept stage, and even after beginning construction.

'Very few of the developers have the experience,' says another Riyadh-based consultant. 'A lot of these developers are only on their first or second project. Even if you look at some of the projects that the bigger developers are promising, it is low-income housing. There is a lack of understanding of what constitutes a good project, from the financing to the architectural side right through to the construction.'

Al-Tajamua's Helwani says too many of the new wave of developers are entering the market for the wrong reasons, and rather than actually being concerned about long-term development, their interests are purely short-term. 'They are not professional, not very well organised and not very well financed,' he says. 'They are after a quick profit. All they want is to collect the money.'

Financing is a major problem. Many of the new developers are set up with a small capitalisation and face cash flow problems from an early stage. The problem is so recognised that many leading contractors shy away from private developers, opting instead to stick with secure government contracts.

'Many private companies do not pay on time and often it is difficult to compete on price with smaller contractors,' says Emile Younan an exective at Jeddah-based Almabani General Contractors Company. 'It does not mean the quality is not as good, but there is an element of risk.'

Buyers must also be wary. A common way for developers to raise funds is to sell units off plan. But unlike other Gulf markets, which have strong real estate legislation and use the system effectively, real estate laws in the kingdom are ambiguous. It is relatively easy to establish a property firm. This lack of regulation has been blamed for several notable fraud cases.

'I was a partner in a project and he ran away with the money,' says Helwani. 'It is a common practice and unfortunately it is killing the market. We need stricter laws other-wise investors and financiers will [think twice about] investing in projects.'

Riyadh appears to be taking heed after some high-profile cases. One developer was able to raise SR 2,560 million ($683 million) from 15,000 investors for a proposed coastal development in Jeddah. But the scheme never went ahead and was shut down in March. A government investi-gation into the project concluded: 'Violations include deceptive advertising in various media designed to convince people that the project would be located off the southern corniche in Jeddah, which was not correctOand the developer used his personal bank account to receive money from investors.'

Attempts to clamp down on property fraud have so far failed, with few cases going to court. Riyadh is considering its options and is planning to establish a semi-governmental institute of real estate to regulate the market. The country's leading developers are also seeking to build confidence in the sector by partnering with international players. Dar al-Arkan has set up a strategic partnership agreement with the US' Turner Construction, while Al-Oula has established a 50:50 joint venture with Dubai's Emaar Properties. Emaar Middle East is working on a number of projects in the kingdom, such as the gated residential community Al-Khobar Lakes.

'Emaar's way of doing things is different,' says the Saudi Oger executive. 'It is professional and knows what it wants. If you look at the tendering process for its first projects in King Abdullah Economic City and Jeddah Gate, all the major contractors wanted a piece of the pie. Other developers will learn from it.'

Riyadh's plans to build a series of economic cities are set to create giant playgrounds for local developers. With investments exceeding $150,000 million, the residential components form a large portion of the new cities. NCB's Malick predicts that the economic cities will not only require housing for 1.3 million workers, but will also stimulate intra-regional migration of about 4.5 million people from some of the kingdom's poorer regions.

Lucrative returns

Similarly, the holy cities of Mecca and Medina are creating huge opportunities. While the land may be among the most expensive in the world, the returns so far have been lucrative. A hotel in one of the two holy cities can cost as much as $50 million to build, but within five years a developer can expect to recoup his investment. The equivalent development in Dubai would take as long as 15 years.

'We want the government to facilitate investment not just in the holy cities, but across all the kingdom's towns, especially with the arrival of the economic cities,' says an official at Dar al-Arkan, which is building the Al-Tilal project on the outskirts of Medina. 'But because Mecca and Medina are religious cities, Muslims from across the world visit and the number of visitors rises each year. There will always be demand for property and the returns are enormous compared to Riyadh or Jeddah.'

Ultimately, one of the key factors for the long-term success of the kingdom's new wave of developers will be legislation. The government is beginning to make its mark. The decision to allow high-rise buildings in Jeddah, for example, has given developers an opportunity to maximise the built-up area. A long-awaited mortgage law will stimulate further demand. Once these and further legislation are passed, developers will be able to prove their worth. 'The new developers are still in their infancy,' says Dar al-Riyadh's Malaika. 'It will take time, but they will get there.'