Saudi Arabian market demands affordable housing

28 April 2010

While Saudi Arabia’s Eastern Province has several high-end property projects under way, the growing requirement for low-cost homes is not being met

With household income averaging less than $1,500 a month and most of its population employed by the petroleum industry, the Eastern Province is very much the blue-collar region of Saudi Arabia.

The main cities of Al-Khobar, Dammam and Dhahran rank among the kingdom’s largest and fastest-growing urban centres, but some analysts suggest the real estate projects being built in the province reflect developer dreams more than market requirements.    

Housing demand is now, and will continue to be for decades to come, the key driver of Saudi Arabia’s construction industry, and the Eastern Province is no exception. But while selling prices for residential property in Riyadh rose throughout the first quarter of 2010, prices in the Eastern Province were mixed.

According to a survey by local/French Banque Saudi Fransi, prices for large apartments in Dammam, Dhahran and Al-Khobar increased by about 3 per cent in the first quarter of 2010, but the cost of large villas plummeted by as much as 9 per cent across the board.  

Key Fact: The fifth and sixth phases of the Jubail residential development will provide 536 affordable units at a cost of $200m

Source: MEED

Average annual rate for commercial space (in SAR/sq m)
SectorH1 2009H2 2009H1 2010
Riyadh North A650650572
Riyadh North B550550507
Riyadh North C450450433
Riyadh East370360349
Riyadh South170150155
Jeddah South330310332
Jeddah Central530510525
Jeddah North730710690
Source: Banque Saudi Fransi  

Affordable housing

Canadian real estate services firm Colliers International, says in its latest Mena Real Estate Overview that residential demand in the Eastern Province is not being met, yet among mid- to high-end developments about 13 per cent of units are unoccupied. The market is demanding affordable housing, but these needs are not being met.

Of the many residential projects under way in the Eastern Province, few cater to the low-cost end of the market. The Royal Commission for Jubail & Yanbu – one of the largest employers in the region – is building affordable housing as quickly as it can at the Jubail residential development to meet increased demand, as the industrial city is expanded.

The engineering, procurement and construction (EPC) contracts for the project’s fifth and sixth phases are scheduled to be awarded in the second quarter of 2010.

Developers building these large projects in the Eastern Province are not following the needs of the market

The estimated $100m fifth phase will provide 224 residential units, while phase six – also estimated at $100m – will offer an additional 312 units. Both phases are expected to be complete in the first half of 2012.

But other property developments in the region are targeted at the high-end market. The Al-Murjanah mixed-use development by Kuwait-based Alargan International Real Estate Company is still in the planning stage, but will offer both residential and commercial components. According to a statement from the developer, the 112,288-square-metre project in Dammam will provide “innovative housing solutions with unique designs that complement and enhance the surrounding environment”. 

Contractors expect to be invited to bid on the estimated $100m project in the second quarter of this year with the main construction contract to be awarded in the final quarter. The project is scheduled for completion in 2014 – there is no direct expression of affordable homes being included in the project.

In Al-Khobar, the local Al-Khaleej Development Company is planning to build Dannat Resort, a gated community located on the Half Moon Bay coastline. The $667m project is being designed to include beachfront villas, timeshare apartments, a small marina, commercial centre and a five-star hotel. Again, the project brief for the 1 million-sq-m resort does not include low-cost or affordable housing.

While beachfront villas and timeshare properties obviously offer homes, the upscale development might be out of place in Al-Khobar, despite the city’s status as the commercial centre of the province.

Consultants will be invited to bid on Dannat Resort in the second quarter of this year, with the EPC contract scheduled to be awarded during the third quarter of 2011. The project is due to be completed in 2014.

One of the biggest housing projects in the Eastern Province is Khobar Lakes from the local office of Dubai-based Emaar Properties. While Emaar Properties is the majority owner in the project, the local Al-Oula Development Company is a 40 per cent stakeholder in the $1.5bn project. 

The 4,300-square-kilometre project will include 2,000 private villas in a series of nine villages, designed according to Arabic and Andalusian themes. The local Saudi Binladin Group was contracted to build six show villas and US-based Aecom was appointed as lead consultant for the scheme, but the official EPC award date is not scheduled until the first quarter of 2011. The 2,600-sq-km first phase of Khobar Lakes is scheduled to be completed by the end of 2015. 

The project site is equidistant from Al-Khobar, Dhahran and Dammam but, again, there is no evidence that the development team is planning to provide any level of affordable housing. Given the lack of appetite for high-end real estate, this might prove a costly mistake.

While residential projects such as Khobar Lakes paint idyllic scenes and target mid- to upper-income homeowners, developers are not following the market needs of the Eastern Province. The population in the Eastern Province is about 3.3 million, with the largest growth sector working-class foreigners.

A similar mismatch is also emerging on the commercial real estate side.

Increased business activity in the Eastern Province and the expansion of state-owned companies, including the local hydrocarbon giants Saudi Aramco and Saudi Basic Industries Corporation (Sabic), led to a steady increase in demand for commercial space in 2007 and 2008. That growth encouraged developers to build high-end commercial space right up to the start of the economic crisis, which led to a dramatic slowdown in absorption and an increase in availability in late 2009 and early 2010.

According to Colliers, 78 per cent of available commercial space in the Eastern Province is Grade B quality. Although demand seems to be increasing for more luxurious Grade A surrounds, growth is modest at best.

Commercial space

One government-sponsored commercial office building project in the Eastern Province is the Dhahran Data Centre, which will offer 6,000 sq m of state-of-the-art office space when complete in 2011. Local developer Al-Reziza Trading & Contracting Company also launched its estimated $90m commercial tower in Al-Khobar in the first quarter of this year.

The project is currently in the detailed design phase with UAE-based Dewan Architects & Engineers acting as lead consultant and project architect. Located on the Dammam-Al-Khobar Highway, the 28-storey tower will include commercial and retail space as well as six storeys of parking.

Al-Reziza is hoping to invite contractors to bid on the project in the final quarter of 2010, with bids due in February 2011. The main construction contract is scheduled to be awarded in early-April 2011.   

Introducing new Grade A commercial space into a booming market makes good business sense, but commercial rents in the Eastern Province fell 10 per cent in the first quarter of 2010. Although demand is increasing slowly throughout the province, supply is expected to continue  to outweigh demand. In the midst of the economic crisis, commercial stock grew by more than 166,000 sq m in 2009. This has resulted in an absorption rate of less than 30 per cent for new supply and a 2.5 per cent increase in vacancies in the first quarter of 2010.

Rents are predicted to continue to soften towards the second half of the year and analysts say that due to the nature of business in the Eastern Province, demand for Grade B space will continue to dominate the market.

Construction in the eastern region is not limited to residential and commercial property.

State-owned oil company Saudi Aramco is also developing one of the region’s most highly anticipated cultural projects. The $400m King Abdulaziz Centre for Knowledge and Culture is being planned for a 70,000-sq-m site in Dhahran.

The project will include five interconnected buildings including a 1,500-sq-m exhibition hall, a museum, a 1000-seat auditorium and theatre, a mosque, a library and a 320-seat public cinema. Construction of the centre will be executed in two phases: the first phase will involve pre-construction services and procurement of materials and sub-contracting; the second phase will be a lump-sum contract for the main construction of the project.

While seven consultants have been appointed on the project, nine contractors are vying for the EPC contract on the centre. The local contractors include Al-Latifia Trading and Contracting; El-Seif Engineering & Contracting; Nesma & Partners Contracting; Saudi Binladin Group; and Saudi Oger.

International bidders include Turkey’s Baytur Construction & Contracting; Athens-based Consolidated Contractors Company; UAE-based Gulf Technical Construction Company; and Cyprus-based Joannou & Paraskevaides.

The EPC contract for the King Abdulaziz Centre for Knowledge and Culture is scheduled to be awarded in the second quarter of this year. 

Bolstering tourism

In May 2008, the Saudi Commission for Tourism and Antiquities (SCTA) also launched a $10bn plan to bolster tourism in the Eastern Province district of Al-Uqair. With an estimated 13 million visitors to the kingdom a year – 77 per cent of which are domestic tourists – the initiative is aimed at attracting Saudi nationals and visitors from the GCC to the province.  

Al-Uqair is the kingdom’s highest priority in terms of coastal tourism development. Located on the coast south of Dammam, the 100-sq-km project will be a purpose-built tourist city that will accommodate 200,000 permanent residents and include hotels, marinas, sports facilities and amusement parks.

The project was launched as a public-private partnership whereby the government will provide land while international and local developers would contribute financing and technical expertise. The project is scheduled to be completed in phases over the next 25 years.

Despite reports that Al-Uqair has been put on hold until the first quarter of 2011, several consultants have already been contracted on the project.

US-based Aecom is providing technical advisory and documentation review including selecting the master developer. US-based Brookwood Capital is advising SCTA in the tender process while Germany’s Obermeyer Engineering Consulting is in charge of the masterplan including urban spaces, landscapes, hardscapes and traffic flow. And, South Africa’s Arrol Consultancy is overseeing marina development and all marine works on the project.

But developers and contractors seeking an intelligent investment in the Eastern Province should look no further than affordable housing. Commercial space in the province is at a surplus and hospitality projects have become less of a priority since the economic correction.

While affordable housing may not be the most profitable of projects, if population trends continue, demand for such projects will always be strong and return on investment will always be steady. The alternative is spending hundreds of millions of dollars to develop a project that could draw disappointing demand and low prices because only a small percentage of the population can afford to buy them.

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