Saudi 'in need of another 973,000 homes'
Riyadh, December 3, 2011
Saudi Arabia will need an additional 973,000 housing units by 2015 and a total of 2.1 million units over the coming decade (215,000 units per year), said a new report by NCB Capital, Saudi Arabia’s leading wealth manager.
The NCB Capital in its latest report analyses the Kingdom’s real estate strategy and examines the key benefits and obstacles to affordable housing.
According to the report, moral, social and economic reasons make provision of affordable housing central to development of a nation.
“Using a definition of affordability where no more than 30-35 per cent of median income is spent on housing, we find that a lack of supply of affordable homes is a significant concern in the Middle East as a whole as well as in Saudi Arabia,” remarked Farouk Miah, acting head of Equity Research at NCB Capital.
“Despite the important role the government is playing in the provision of affordable housing, we find there is a significant discrepancy between supply and demand of housing units in the kingdom. On one hand there is an oversupply in the market for luxury and upscale residential units, but a shortfall of affordable housing units where demand is high,” he explained.
Supporting the need to meet demand for affordable housing, NCB Capital highlights in the report the moral, social and economic reasons which make the provision of affordable housing central to the development of a nation.
'We believe affordable housing helps limits negative social outcomes in society. The lack of affordable housing can prevent people from meeting their other basic needs, such as nutrition and healthcare, or saving for their future and that of their families, potentially leading to social problems such as increased crime,' Miah said.
'If affordable housing is provided, this will lead to financial savings for governments as they will not need to pay for these negative consequences,' he added.
According to NCB Capital, the high cost of land is the kingdom’s main barrier to developing the affordable housing sector, along with other key issues such as construction costs, lack of supply of land which can be developed, bureaucracy and limited financing options.
'Although the demand for housing in general in Saudi is high, in order to translate potential housing demand into actual demand which can be met, the obstacle of affordability must be considered,' said Miah.
'We note that the government’s estimates are even more aggressive than ours. According to the 9th 5 Year Development Plan, 1.2 million units are needed over the next 5 years, or 250,000 units every year,' it added.
The report pointed out that Saudi real estate market was largely controlled by a relatively low number of individuals who wield significant power on market dynamics.
This in its own right causes obstacles from the outset when trying to tackle the issue of affordable housing, the primary one being the high cost of land.
In Saudi Arabia landowners are not taxed, so in essence there is little incentive or pressure to sell a plot of land which will most likely appreciate in value over time.
'When land is approximately half the cost of developing housing units, significant governmental measures will be required in order to overcome this obstacle,' said the expert.
Giving an example, the report states that, currently, in Riyadh land prices per sqm are around 50 per cent of the price of a villa per sqm for the upper end of the scale, and towards 20-30 per cent for the lower end of the spectrum. The average price of land in Riyadh is around SR1,000-1,500 per sq m.
According to Miah, the government plays an important role in affordable housing. 'When analysing the reasons behind the lack of affordable housing and looking at case-studies where this has successfully been tackled, we find governments playing a significant role,” he said.
“Similarly, we believe in Saudi Arabia the government can play a major role to support the provision of affordable housing,” he added.
According to the report, the government would need to focus on two key areas to promote the creation of commuter towns in Saudi Arabia.
The first key area to focus on is Infrastructure, including adequate and affordable transportation routes to and from the commuter town, as well as within the main cities.
The other key area to consider is subsidies. Government bodies should have the ability to subsidise the developer. Generally, government bodies subsidies real estate developers with land, material and construction costs to complete any given project.
According to NCB Capital, Public Private Partnerships (PPPs) are another area which the Saudi government can explore in order to deal with affordable housing.-TradeArabia News Service