Real estate developers in Saudi Arabia are set to benefit from strong demand for properties, underpinned by the population growth and home-ownership targets under the government's Vision 2030 programme, according to a report by S&P Global Ratings.
A steady demand is likely to be there for housing and higher off-plan sales (before construction's been completed), amid the government's efforts to increase home ownership by Saudi nationals, and simplified ownership for foreigners, thereby boosting Saudi developers' revenue and profits, stated the ratings agency in its 'Property Shortage And Government Push Will Fuel Growth For Saudi Developers' report.
"We also expect listed real estate developers in Saudi Arabia to gradually diversify their funding sources, moving away from their current reliance on bank facilities, and increasingly tap into capital market funding," it added.
S&P Global Ratings pointed out that the kingdom's investments in the non-oil economy as part of its
Vision 2030 programme will underpin the country's economic expansion and support GDP growth.
The capital Riyadh is not only receiving a rising number of expatriate workers but also an influx of
workers from other parts of the country. It's therefore no surprise that development of the real estate sector is a key priority.
That said, demand for real estate in Saudi Arabia is sensitive to high interest rates and prices. In 2023, amid rising interest rates, the number of real estate transactions reportedly dropped by 16% and new mortgage lending also declined, it stated.
The top ratings agency said as the country accelerates on its growth and transformation trajectory, opportunities for developers were increasing but so were the challenges.
"We expect to see a widening gap between large urban centres attracting populations and more remote areas where demographic developments are less favorable. Therefore, real estate developers' pricing power and sales will also vary depending on the regions," it stated in the report.
Considering the high capital intensity of real estate development and listed Saudi developers' generally highly leveraged capital structures, we expect funding and refinancing needs to remain high. Increasing and broadening funding sources is therefore one of the key hurdles we foresee for property developers in Saudi Arabia, it added.
The S&P Global Ratings is forecasting overall GDP growth in Saudi Arabia at 3.4% on average annually in 2024-2027, supported by large public and private investments and robust consumption growth.
"We expect the non-oil sectors, which account for about 60% of GDP, will drive overall economic
expansion of 2.2% in 2024, after a contraction of 0.8% in 2023. Overall growth outcomes have
been moderated by cuts in oil production since 2023," it stated.
"We see a risk of fiscal pressures related to the economic transformation program but expect the
government's net asset position to remain relatively robust. For our forecasts, we assume the
Brent price at a relatively high $85 per barrel (/bbl) for the rest of 2024 and $80/bbl in 2025-2027," it added.
S&P Global Ratings said the government's announced real estate and infrastructure projects reportedly exceed $1 trillion in value. These include a wide range of initiatives, such as the construction of new cities like
NEOM, Diriyah Gate in Riyadh, and many others.
The ultimate objective is to increase the home ownership of Saudi nationals to 70% by 2030 from 63.74% in 2023. At the same time, the real estate sector's GDP contribution is expected to rise to 10% by 2030 from 6% currently.
The government expects Saudi Arabia's population to increase and the share of expats to rise to 50% from about 42% by the end of the decade, said the report.
"We base our expectations for the real estate sector on our assumption of 3.0%-4.0% annual population growth over 2024-2027. Riyadh alone is expected to see population numbers rise significantly, further straining the city's already undersupplied real estate market, since the new supply will likely not meet the incremental demand," it stated.
"We think smaller cities that offer less opportunities to Saudi nationals and expats, may be negatively affected by an outflow of their populations to Riyadh or Jeddah," it noted.
S&P Global Ratings pointed out that reliance on mortgage loans was relatively high: 30%-40% of Saudi nationals own properties secured by a mortgage.
Mortgage loans are provided at fixed rates in Saudi Arabia. Consequently, higher interest rates are dampening new mortgage lending, while older mortgage loans are generally not affected. Tighter liquidity and interest rate hikes therefore led to a 33% drop in the number of new mortgage contracts in 2023, with mortgage lending growth slowing to 10% in 2023 from 23% in 2022, it stated.
According to the report, mortgage loans totaled a whopping SAR607 billion ( ) at the end of 2023, up SAR57 billion from the previous year, although overall growth was down 45% compared with the previous year.
If, as we anticipate, the US Federal Reserve Bank starts lowering its rate from December 2024, with rate cuts reaching a cumulative 250 basis points in the second half of 2026, the Saudi authorities might do the same, resulting in an uptick in demand for property.
However, increasing demand and tight supply will likely keep pushing up residential property prices and rents, particularly in Riyadh and Jeddah, it stated.
This would reduce the benefit of potentially lower interest rates on the overall affordability of housing. In the first quarter of 2024, the residential price index went up by 0.6%, according to the General Authority for Statistics.
S&P Global Ratings said it expects mortgage lending to continue to expand, although slower than in the past, due to the market's maturity, an expected rise in corporate lending as projects related to Vision 2030 are
implemented, and tighter banking system liquidity.
The Saudi government has introduced various initiatives over the past few years via the National Transformation Program that support demand for mortgage loans.
It has also done so via the Ministry of Municipal and Rural Affairs and Housing (MoMRAH), such as the MoMRAH Sakani program, support from the Real Estate Development Fund (REDF) through interest-free
mortgage loans, and the REDF's mortgage guarantee scheme. Other measures, such as reduced taxation of 5% on real estate and 2.5% tax on undeveloped land, further support real estate development.
The government has also set up the Saudi Real Estate Refinance Company (SRC) to help attract
alternative financing sources.
The SRC is fully owned by the Public Investment Fund (PIF), and its main mandate is to buy mortgage loans from banks and other financial institution and refinance them through sukuk issuance.
As of year-end 2023, the SRC had bought mortgage loans totaling SAR26.7 billion, equivalent to about 5% of the banking system's mortgage lending book.
"We believe higher interest rates, possible unrealized losses, and good profitability on mortgage lending are the main reasons why banks are not aggressively divesting them. The SRC has refinanced these acquisitions by issuing sukuk guaranteed by the government," stated S&P Global Ratings in its report.
The Saudi government has a direct financial interest in real estate developers operating in the country. Via the PIF, the government owns stakes in certain real estate companies listed on the Saudi Exchange (Tadawul) - a 25% stake in Emaar Economic City and 64.6% of Saudi Real Estate Company - as well as in other unlisted companies.
The most notable examples of the latter include PIF's fully owned Roshn, one of the country's largest real developers with revenue of $1.8 billion reportedly in 2022, which is on track to build about 400,000 homes by 2030.
Roshn had contracted SAR6 billion of bank financing last year, suggesting forward momentum on its projects.
"In our view, the government's direct involvement in real estate developers supports the successful achievement of its target for 70% of Saudi nationals owning their own home by the end of this decade," said S&P Global Ratings in the report.
"We expect that healthy demand will continue to drive Saudi developers' revenue and profits in 2024-2025, with marginal relief from expected lower interest rates. Also as projects scale up, we expect they will demonstrate steady profitability, following the improvement seen in 2023," it added.-TradeArabia News Service
