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Rent in Saudi skyrockets as developers fall behind

Rent in Saudi skyrockets as developers fall behind

Supply-demand mismatch in Saudi may cause you to pay even more rent for your house and office space. Banque Saudi Fransi’s John Sfakianakis gives us an overview

May 10, 2011 5:20 by



The government has tackled this drawback through state-held Real Estate Development Fund (REDF), which provides non-interest-bearing home loans for citizens and currently accounts for about 81 percent of total home financing. The government injected SR40 billion into REDF this year in order to reduce the waiting period for loans and enable the body to offer maximum credit per customer of SR500,000, up from SR300,000 previously.

Bank lending for home purchases has also picked up pace in the past two years. Outstanding fourth-quarter 2010 real estate loans among Saudi banks stood at SR23.1 billion, up almost 30 percent from a year earlier. New minimum wage requirements in the public sector, furthermore, could potentially expand the homebuyer pool by giving a lift to wages in other brackets, and possibly compelling the private sector to do the same.

The country’s long-awaited mortgage law should be implemented in the medium term, which would open the door for greater home ownership if accompanied with attractive interest rate and tenure terms by banks. The benefits ushered in by the law’s eventual passage are most likely to be felt over the longer term, however.

HOMEBUYERS BEWARE

In the meantime, many homebuyers remain in a quandary. The SR1.28-million price tag for a small villa, the median country-wide price in H1, is too high for most young people to entertain the thought of buying a detached home. We expect some younger families will modify their expectations, choosing instead to buy larger apartments. The size of families in urban areas is getting smaller so it will be feasible for many young people to accommodate their needs in apartments rather than villas. Paying an average SR518,958 for a large apartment will fall within the band of affordability for many more Saudi citizens, particularly as the wage equilibrium improves in the coming years.

While property prices are poised to continue climbing in the short- to medium-term, the prospect of an onslaught of new units being added to the market is likely to lead many Saudis to put off plans to buy properties for a year or two in anticipation that prices would stabilize or fall. Evidence of this is already apparent in rents, which witnessed some sharp gains, particularly in neighborhoods where villa sale prices have soared in the past year.

Findings of the H2 BSF Real Estate Survey confirmed that confidence in the Kingdom’s property sector continues to build, with prices for apartments, villas and land climbing across the six cities surveyed. Yet, a marked decline in the value of land transactions once again highlights the need for the government to consider providing residential land, supplemented with basic services and facilities, at more reasonable rates in the major urban centers. Reducing the cost of land would relieve an enormous burden from construction costs. Also on the regulatory front, the government’s move toward enabling to developers to sell units while real estate is still under construction, known as off-plan sales, should encourage greater private sector participation in the Kingdom’s real estate market.

John Sfakianakis is chief economist at Banque Saudi Fransi, Riyadh



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