Investments in excess of SR680 billion ($180 billion) will be required to meet the growing demand for residential units in Saudi Arabia, which is expected to top 1.3 million units over the next seven years, according to a report.

The Saudi Arabian real estate and construction sector presents one of the most attractive investment opportunities in the region, according to the NCB Capital (NCBC) report.

With 70 per cent of the population below the age of 30, there is an acute housing shortage ahead, it said. The four provinces of Makkah, Riyadh, Madinah and Eastern Province by themselves would require a housing investment of over SR600 billion ($160 billion) by 2015, it said.

In a report titled ‘Kingdom under construction’, NCB Capital expressed a bullish outlook for companies in the real estate and allied sectors in Saudi Arabia. 

NCB Capital believes that a key driver in the sector is the expected mortgage law.

In April 2008, rents rose 20.4 per cent over the preceding year, contributing to inflation which hit a 27-year high of 10.5 per cent, due to the lack of residential supply and individuals forced to rent (rather than buy). NCBC expects the government will expedite the proposed mortgage law, which is already part of its inflation mitigation plan, which in turn will unlock significant demand.

NCB Capital highlighted that Saudi Arabia has relatively high rental yields. Easy liquidity and negative real interest rate give investors a greater incentive to invest in real estate to benefit from attractive rental yields. Thus the upcoming mortgage law will improve housing affordability, driving more people to buy instead of rent. The report estimates that by 2012 the Saudi mortgage market could increase five fold to SR86.5 billion ($23.1 billion).

The report expressed a bullish outlook on commercial real estate. Despite commercial rentals rising 15 per cent per annum over the last five years, they still remain low compared to regional and global levels (for instance rentals for prime office space in Doha and Dubai are at a steep premium of 190 per cent and 168 per cent respectively to Riyadh).

Additionally, the Government is acting as a catalyst for growth, with initiatives such as the economic cities and industrial zones contributing to a project pipeline estimated in excess of SR1.75 trillion ($468 billion) which will drive demand for industrial goods and services as well as building materials.

The construction of four of the six economic cities for instance, will require an investment of SR260 billion ($69.4 billion). This by itself will create incremental demand for more than 130 million tons of cement (as against forecasted industry capacity of 50 million tons by 2010), it said.

The report highlights the booming retail sector in the Kingdom and estimates that the potential for the sector exceeds SR130 billion ($34 billion). The hospitality sector as well is in a high growth phase with occupancy rates, average room rates and revenues per room on the rise – though still lower than regional levels. Potential for religious tourism is huge with infrastructure capacity for tourists being increased to satisfy demand that could exceed nine times the current number of pilgrims. The report also discusses the interesting investment opportunities presented by timesharing opportunities in the holy cities of Makkah and Madinah.

NCB Capital believes key challenges facing the sector in the Kingdom include construction costs which have been on the rise, driven by rising labour costs (due to unavailability of adequate labour) and raw material costs. The affordability of housing is also a genuine issue for lower income families. – TradeArabia News Service