Solid economic fundamentals bode well for Saudi real estate sector

21/04/2012 07:34 AST

Fundamental factors are strongest in Saudi Arabia given the country's attractive demographic landscape, which offers a more solid long-term scenario compared to that of the UAE and Kuwait. The national Saudi population represents 73 percent of the aggregate versus only 32 percent in Kuwait and 18 percent in the UAE implying a more sustainable organic demand for housing over the long term. Almost 60 percent of the Saudi population is below the age of 30 compared to 54 percent in Kuwait and 46 percent in the UAE. Further, Saudi Arabia has the most balanced gender structure with expatriate males representing only 18 percent of total population as opposed to 44 percent in Kuwait and 69 percent in the UAE, according to a report by Global Investment House (Global).

Although Saudi Arabia witnessed the slowest 5-year population CAGR amongst the three countries registering 2.1 percent versus 3.2 percent in Kuwait and 6.8 percent in the UAE, sustainability remains a key advantage of the Saudi demographic profile given its organic nature and the ability to maintain a growth trend. Unlike the UAE which saw its population decrease by 4.4 percent in 2009 and Kuwait by 0.3 percent, the Saudi population saw growth in both its expatriate and national populations between 2005 and 2009.

The Saudi economy posts more vigorous growth figures witnessed in a 2008-2011e average GDP growth of 3.9 percent as opposed to 2.4 percent for Kuwait and 1.6 percent for the UAE. Saudi also maintains a more robust M2 growth that averaged at 13 percent in 2011 versus 6 percent for Kuwait and 10 percent for the UAE. Quarterly inflation in the UAE hovers between negative 0.5 percent to a positive 2 percent with the housing component strongly heading down reflecting the pressures on the sector between 2009 and 2011. Saudi Arabia and Kuwait reported healthier inflation figures at 5 percent and 5.6 percent, respectively on annual basis in Q3, 11.

The favorable Saudi economic landscape is more encouraging for the real estate sector, the Global report said. Direct government spending and the REDF (Real Estate Development Fund) housing loans will continue to generate market activity in the sector in the short to medium term. Major constraints to the development of the Saudi undersupplied sector are related to the structural and legislative inefficiencies along with affordability limitations.

Saudi Arabia has consistently topped the region in terms of FDI inflows with the majority of these inflows being injected in the petrochemicals sector The Kingdom is also top ranked, region-wise, in terms of ease of doing business. The Saudi ranking has been improving consistently moving from a global ranking of 23rd in 2007 to the 10th in 2011 reflecting a more business friendly environment. The UAE and Saudi, accordingly, are better positioned to attract new business, which will have a positive impact on the oversupplied office segment in all three countries and will, in turn, create more demand for housing and increase consumer spending, a trend we see materializing sooner in Saudi given its more stable economic outlook.

The report said selling prices of ready to move in residential units and land continued their upward move during 2011 in both Riyadh and Jeddah driven by stringent supply shortage coupled with affordability constraints. Villa and apartment prices increased by 8-10 percent on average in Riyadh while Jeddah witnessed a more aggressive increase of 13-15 percent.

Rental yields expanded in Riyadh versus a year earlier to 8.4 percent up from 7.9 percent for villas and 7.8 percent from 7.4 percent for 2-bedroom apartments. In Jeddah, yields contracted to 8.8 percent for villas from 9.1 percent in Q4, 10 while those for 2-bedroom apartments shrank from 11.5 percent to 10.8 percent as property prices increase faster than rent, which indicates potential for further rent appreciation in 2012.

Arab News