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By Jitendra Garg
MS (Finance), CFA
Table of Contents
Overview ..............................................................................................................3
Residential Sector- Middle income housing verge of a high growth rate .......... 8
Outlook .............................................................................................................. 13
Overview
The Kingdom of Saudi Arabia (KSA) is by far the largest economy of the GCC
and occupies ¾ of the Arabian Peninsula and holds 25% of the world’s
confirmed oil reserves. The region has an oil-based economy, with oil-related
activities accounting for 35–40% of real GDP and 85-90% of total exports
revenue. Strong crude prices over the last five years have played a significant
role in boosting the economic growth of the region which has registered a real
GDP growth of more than 5% a year during the period 2003 to 2007 and same
is expected to increase by 4.2% in 2008. Massive oil export revenues are
funding high public spending in infrastructure and education and have helped
the economy in maintaining a current account surplus of more than 25% a year
between 2003 and 2007. However, after witnessing a super-spike period during
mid-2008, oil prices fell sharply towards the end of the year to trade at less than
US$35 per barrel and resulted in the collapse of five-years of bull-run in oil
prices, which climbed from US$29 a barrel in early 2003 to a peak of US$147 a
barrel in July 2008. It was the result of a growing realization that the global
economy will face a sharp slowdown in 2009, leading to a huge drop in demand
for oil.
Feb. 08
Mar. 08
Jun. 08
Jan. 09
May.08
Jul. 08
Oct. 08
Dec. 08
Sep. 08
Aug. 08
Apr. 08
Nov. 08
respectively in Jan.
2009. Low interest
rates in the region
Source: Monthly Bulletin, SAMA
work as catalyst
for real estate
sector growth & provide an excellent opportunity to the genuine buyers to buy
a house or an office which they can ill afford. It will also benefit the real estate
developers by reducing the cost of financing and improving their margins.
Apart from it, inflation hit a 27-year high of 10.5% in April-08 as rents climbed
20.4% due to the lack of residential supply and individuals forced to rent.
General cost of living index in the region is still very much higher than the
prevailing nominal interest rates taking the real interest rates in the negative
zone. With negative real interest rates; consumers have less of an incentive to
save/deposit their funds and a greater incentive to invest in real estate to
benefit from attractive rental yields and gain though capital appreciation home
prices.
in the region; suggesting that the recent history of significant price rises should
not, in isolation, give cause for concern and still there is a potential for real
estate prices in commercial sector to go upside.
According to Table, there has occurred a continuous increase in the ratio of the
Kingdom's urban population to total population. It rose from 58.3 percent in
1975 (against the world average of 37.2 percent) to 81.0 percent of the total
population in 2005 (against the world average of 48.6 percent). It is estimated
that the ratio of cities’ inhabitants to total population will reach 83.2 percent in
2015, which is considered high compared to the world average of 52.8 percent.
The continued rise in the ratio is suggestive of the expected expansion in the
demand for public utility services and housing in the Kingdom's cities during
the coming period. Thus, continuing urbanisation will be a major driver of real
estate growth. As well the rapid expansion of its existing cities (notably Riyadh
and Jeddah), six Special Economic Cities (SEC’s) are being developed, which
by 2020 are expected to account for up to 30% of the Saudi economy and
house 4–5 million people. This shows the high potential for growth of
residential market & huge demand for middle income housing sector in the
region.
5.2 by 2015 and if the expatriate non-Saudi household size to remain constant
at 4.1, the household size of Saudi families would decline from approximately 6
at present to 5.8 by 2015. The declining household size will fuel demand for
housing, creating demand for a large number of household units.
Simultaneously the lower average household size and an improved affordability
factor will also accelerate the growth within the apartment segment. Apart from
it, to address the short term short fall serious efforts will need to be made to
accelerate the development of residential dwellings within some of the major
projects (particularly in the Special Economic Cities).
40000 15.00
Income has been seen
%
30000 10.00
since 2004. The per
20000
capita GDP in KSA 5.00
10000
has grown at a CAGR
0 0.00
of 12% for the period 2004 2005 2006 2007
2003-07. Annual per
capita income in the Source: Annual report 2007, SAMA
Kingdom rose by 4.6
percent to Rls 59,016 in 2007 against an increase of 10.2 percent in the
preceding year. This growth
is expected to continue in double digits with CAGR of 11% forecasted for
2007-10E according to IMF estimates. The past four years have shown a
continuous increase in the per capita income. Although GDP per capita is not a
perfect measure, it does in part reflect the earning power of an economy, which
in turn affects the asset prices including real estate and changes in the life style
of the people. The income growth will, increase the quality of life, expand the
housing ownership (new and exciting) and make positive impact on
affordability of houses by middle income people.
Outlook
The first half of 2008 that witnessed high oil prices and in turn windfall oil
revenues for the KSA is estimated to have experienced property prices rising in
the range of 40% to 80% in the Kingdom’s capital city of Riyadh. Besides the
strong domestic demand in the country, the heightened real estate activity was
further catalyzed by the participation of investors from other Gulf states. The
momentum of rising real estate prices during early 2008, started to slow down
as the year end approached and is expected to consolidate at relatively lower
levels in 2009. However, the residential segment is expected to continue to
present under supply situation for the near future. Saudi Arabia is witnessing an
escalating demand from young middle income group. Thus, if Saudi is to meet
such demand it will need to build 1.5mn new homes by 2015 and it will be up
to the financial institutions (both governmental and private sector) to provide
the finance that makes this expansion possible. Overall, the Kingdom’s real