With a young and expanding population, Saudi Arabia has the pent-up demand to sustain growth in real estate development for many years.

The kingdom’s need for more housing units is impossible to ignore. Figures from the Economy & Planning Ministry show that 65 per cent of the Saudi population are of working age (15-64), while 32 per cent are under 15. Just 3 per cent are over 64 years old.

Current estimates from the ministry place the population at just over 27 million, and it is expected to reach 33 million by 2020. This rapid growth is expected to put a huge strain on housing supply in the kingdom, which is already suffering a critical shortage.

Major developers are pushing ahead with a series of multi-billion-dollar real estate projects in reaction to this anticipated demand. These include the SR9bn ($2.3bn) Ajmakan project, a gated community being developed in Riyadh, led by the local Land Real Estate Investment & Development Company, and the SR40bn, 14-square-kilometre Al-Wasl project being developed by the UAE’s Limitless, to the north of Riyadh.When finished, the site will house 200,000 people in 55,000 homes, as well as providing offices, hotels, mosques and more than 3 sq km of open space.

With such high-profile developments under way, it is not surprising that there is a noticeable influx of regional, not just local, investment, says Imad Damrah, country director, consultancy and valuation for Saudi Arabia, at global real estate adviser Colliers International. “There is a lot of investment coming from outside,” he says.

Yet Damrah points out that more tangible progress needs to be made and more confidence displayed by financial institutions:“But it is all meetings, plans and talk, no action,” he says. “You can see firms looking for investment – into land, into property – and the deals are happening, [but] it just hasn’t quite taken off yet. The banks are in a good position here in Saudi Arabia. Certainly, they will be selective, but they have to be willing.”

Limited funds

One positive impact of the global economic slowdown is that it has focused developers in the kingdom on more realistic developments, and there is a growing awareness that moderate, affordable housing needs to be built.

This ties in with an acknowledged shift in housing attitudes in the kingdom. Increasingly, there is an emphasis on smaller, less expensive dwellings. The Saudi government’s housing demand forecast for 2009 shows the demand for apartments or one floor in a villa is double the anticipated demand for whole villas.

In Riyadh, the figures show 16,170 extra apartments or self-contained apartments within a villa will be needed this year, compared with 8,396 villas.

“Investors are beginning to recognise they must be conservative, so instead of large, masterplanned sites, they are looking at 200-300 units,” says Damrah.

“Because of the limited access to funds, they wish to stay competitive and ensure work can be finished in a short time. They do not wish to be bogged down in waiting for approval and licences, which can take years.”

However, this limited access to funds is intrinsically linked to the future success of the Saudi housing market. Currently, there are no laws in place for lending against property.

Despite approval from the 150-member Shura Council in July 2008, the much-anticipated mortgage law, which has had a 10-year gestation period, remains with King Abdullah bin Abdulaziz al-Saud and the Council of Ministers awaiting final approval. Until it is ratified, the concern remains that the burgeoning demand for housing will not be met.

Soaring demand

“I think it is important” says Leroy Levy, head of the Saudi practice at UK law firm Trowers & Hamlins. “In order to have that, the mortgage law is crucial. The only practical way to satisfy demand is to have proper regulatory infrastructure in place.

“As far as real estate is concerned, it will outstrip what we have seen in the Gulf to date 10-fold. Demand is enormous, so we need to make sure that the infrastructure is there and a framework is in place.”

On whether the government will step in with an intermediary measure if the law continues to stall at the highest level, Levy says some developers may be keen to offer financing independently, but there will be no half measures from the government.

“Some of the more progressive developers [offer funding], but as far as the government is concerned, it is all or nothing, there is no interim measure,” he says.

“In the meantime, developers can [either] wait, or step in and help investors acquire property.”

The only channel open to low-income groups is financing through the Real Estate Development Fund, which was founded in 1974. However, funds are not extensive and it has not been able to meet increasing demand for loans as house prices have risen.

With a young population poised to drive growth, Saudi Arabia’s real estate market has a healthy outlook. The fundamentals are in place, but it is up to the kingdom to provide the legal infrastructure for the sector to achieve its potential.