Uncertainty over the introduction of Saudi Arabia’s mortgage law has led to a slowdown in the kingdom’s real estate market and has caused overcrowding in urban areas, according to a new report released on Sunday by real estate consultants CB Richard Ellis.
“Despite growing demand for housing, the ongoing and well documented failure to address the legal requirements of the kingdom’s mortgage sector has resulted in a slowdown in both lending and construction,” the CBRE report said.
The law was designed to allow mid to low-income earners to get onto the property ladder, but its implementation has been delayed due to disagreements between the Shura Council and the Cabinet.
This has meant that developers who had been planning projects to cater to this market are now considering other more lucrative high-end developments.
“Given that the issue has been under consideration for more than a decade it is difficult to be optimistic about an early resolution. The consequence of this uncertainty is that developers cannot build the low-cost or ‘affordable’ housing desperately needed by large sections of the population,” the report added.
HSBC forecast that Saudi Arabia will need another one million new homes in the next four years, an increase of 25 percent. “Without the support of the mortgage law, this is simply not going to happen,” the CBRE report said.
In Riyadh, CBRE said rental rates have dropped in the first half of this year, largely due to expatriates tightening their belts in the downturn. However, strong population growth and the decline in the launch of master planned projects are likely to force prices up in Riyadh in the short term, CBRE has forecast.
In Jeddah, the delay in the mortgage law has forced residents into overcrowded and inadequate housing. CBRE estimates Jeddah’s population to be around 3.5m. Total stock is likely to be around 700,000 and Jeddah Municipality has estimated that there is a shortfall of around 300,000 units.
“As a result, the situation is becoming more dire each year and looks set to worsen significantly before it improves. The shortage of housing and increasing land costs have forced housing costs up over the last twelve months despite the lack of available finance,” said the report.
In the east of the country, rental prices have remained stable as expatriates move here to avail of cheaper rental rates, however sales prices have fallen by around 10 percent since mid 2009.
In the office sector, Riyadh is the only city where there is any proper international standard space and the construction of much-needed business parks is finally underway.
The King Abdullah Financial Centre is also expected to increase supply by around 700,000 and 800,000 sq m.
While rental rates have remained stable, the increase in supply in the second half of 2010 is likely to put pressure on landlords to drop rates, CBRE have forecast.
Jeddah’s office market has been under-supplied for a long time and therefore occupancy rates have remained above 90 percent.
Around 60 percent of the Saudi population is aged under twenty years-old and the government’s “Saudisation” plan to get a minimum of 10 percent of Saudis into employment in the private sector has failed. Therefore, the government desperately needs to agree the introduction of the mortgage law in order to allow the growing number of low paid workers to gain access to finance to be able to buy their own home.
“The most pressing issue is the Kingdom’s demographic structure which, when combined with an increasingly unemployed population has the potential to spill over to result in a generally disaffected younger generation,” the CBRE report concluded.