The apartment rental rates in the Saudi cities of Riyadh and Jeddah rose strongly during the first half mainly due to massive demand for low and middle-income housing among both Saudi nationals and expatriates, according to a report.

The average villa prices in the Kingdom continued to rise strongly in the first half, thanks to the intense demand and land price increases, despite the ongoing lack of mortgage finance, said property expert CBRE in its review on Saudi residential markets.

The apartment prices too registered a significant rise, more because of the land price hike than demand, which remains weak in this segment, it stated.

Despite the well-documented difficulties in obtaining mortgage finance, average villa prices increased across all parts of Riyadh as strong macroeconomic conditions, increased employment and generous pay rises amongst public sector staff created buoyant market conditions for middle-income Saudis, the expert stated in the report.

Improved road connections and infrastructure also opened up new areas for residential accommodation, particularly those areas where land is less expensive than the more central areas targeted by land price speculators, the report added.

Compound occupancy and rental rates have also been strong as employment opportunities have been created for middle and upper-income expatriates and increases in supply have lagged behind the rapid increase in demand.

Inevitably, this surge in compound performance has led to a significant increase in construction activity in the compound sector and it remains to be seen how the balance between demand and supply will play out.

CBRE pointed out that apartment sales continued to be weak in overall terms with some well-documented failures in this sector, although apartments can relatively easily be rented out due to the intensity of the need for accommodation.

'If developers have the ability to respond to these market conditions by renting out unsold apartments, they are able to achieve strong rental returns,' the property expert said in the report.

According to CBRE, the rental rate increases for villas in Riyadh have been significant over the first half at around 10 per cent per annum, but these have lagged the rental rate increases for apartments for which there is very strong demand due to the largely price-sensitive nature of the majority of the market.

In Jeddah, CBRE said intense demand pressure for low-cost housing, as yet unmet by the private sector, forced the government to step in, with the Saudi Pension Fund announcing plans to develop a giant housing project of 10,000 units in northern Jeddah.

The project will comprise a mix of apartments and villas on a site measuring 2.6 sq km, although it is unclear as to when the project will be completed and contractors have yet to be appointed, the report stated.

Away from such government-inspired ‘mega-projects’, it is estimated that somewhere between five and ten thousand residential units have been completed in Jeddah in the first half although these are typically contained within small developments of 30 units or less – a similar characteristic to projects undertaken by the private sector in Riyadh.

This is mostly driven by the inability to secure project finance or sell units off-plan in Saudi Arabia, the expert said in its report.

According to CBRE, the average villa prices have risen by around 10 per cent per annum in all northern and western parts of Jeddah over the first half, although price increases have been less significant in the lower-income southern areas of the city.

Apartment prices are reported to have risen across most areas of Jeddah but this is mostly a response to land price pressures rather than strong levels of demand.

Consistent with all other areas of Saudi, apartment purchases are not preferred by Saudi nationals.

An example of the lack of demand for primary home apartment purchase can be seen at the Jeddah Gate project where only 160 apartments out of the 273 available in the first phase of the development have been sold - after four years of marketing, the industry expert said in its report.

Rental rates for apartments have risen by a rate closer to 15 per cent per annum, although this naturally has varied by type, pricing and location, with the greatest increases being experienced in northern districts, it added.

The CBRE pointed out that housing needs remained a pressing issue in Saudi Arabia. The challenges faced by Dar Al Arkan for example, in selling price-sensitive accommodation at the Al Qasr project in Riyadh shows the contradictions between demand, the ability of Saudis to purchase housing and the mismatch between expectations and reality in terms of scale and quality.

This is partly driven by the absence of a secondary housing market which means that a Saudi national’s first purchased home is likely to be the only home they ever purchase, the report stated.

The issue of build quality is key with traditional building techniques and quality leaving houses virtually obsolete over a 30 year period, the expert pointed out.

'Apartments are much less popular due to their limitations in terms of expansion, but also privacy, build quality, management and maintenance of common areas and a number of other core issues are central demotivators.'

Land price speculation that often takes place in Saudi Arabia typically means that villa or townhouse projects are unable to meet the critical price constraints of the market, it stated.

Although there has been much press comment on the new ‘mortgage law’ in recent months, it is not absolutely clear what progress has been made in reality, said the CBRE in its report.

The Saudi cabinet revealed that it had approved new legislation on the topic, but has not yet divulged details as to what issues had been specifically addressed in its new regulations.

The ongoing uncertainty over whether, or how, this will be addressed continues to affect the market with the result that a law intended ultimately to protect the population from unscrupulous lenders, is in fact preventing them from gaining access to mortgage finance and ultimately, buying their own home, the report added.

With regard to office space, CBRE said with more than 800,000 sq m of quality office space due to enter the Riyadh office market in the next two years, the short term future for this sector is likely to be challenging.

Within this context, however, well positioned projects in good locations with high visibility and good access have enjoyed excellent performance, said the CBRE in its report. 

In Jeddah, the office sector continues to be widely distributed with most construction activity taking place along major roads in the northern areas of the city.

The levels of construction activity are significant with the volume of local Class A office space likely to double over the next two years.

As a consequence, rental rates have been in slight decline during the first half although this is more typically from new properties entering at a slightly lower rental rate than existing properties reducing their rental rates, the report added.-TradeArabia News Service