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Slow Pace Of Housing Reform Frustrates Saudis
Property developers, for their part, are being deterred by the high costs of development and lengthy bureaucratic procedures. In recent years they have preferred to focus on more profitable, higher-end housing projects instead of addressing demand for cheaper properties, although analysts say that trend may be starting to change.
April 26, 2012 10:25 by kippreport
For 20 years Mohammed al-Shahery has dreamed of leaving his small rented house in the Saudi Arabian capital Riyadh and buying a home of his own. But a huge housing shortage in the country has led the 46-year-old father of five to accept that he will be unable to afford a home for his family until he retires from the medical firm where he works and moves to a remote village. “To buy land in an average area in Riyadh would cost at least 750,000 riyals ($200,000), and to build and furnish the house would cost at least another one million (riyals),” he said.
Shahery’s difficulties are shared by many citizens of the world’s biggest oil exporting-country, where a doubling of the population in the past 20 years and the arrival of property speculators have sent house prices surging by an average 10 percent annually in recent years. Analysts say the kingdom needs to build up to 275,000 new homes a year for the next five years to satisfy demand for about 1.65 million new homes. Property consultancy Jones Lang LaSalle (JLL) forecasts land prices will rise by at least 10 percent this year, while house prices will increase by another 7 to 10 percent. Keenly aware that the housing shortage is a major social problem in a nation that avoided uprisings elsewhere in the region last year, the government has set up a new housing ministry and pledged to construct half a million new homes at a cost of 250 billion riyals ($67 billion).
However, that plan is likely to take years to realise, and economists say more far-reaching reforms are needed to encourage home building, including passing a long-awaited mortgage law and taxing undeveloped land. A short drive along the congested streets of Riyadh reveals an anomaly: large stretches of undeveloped land in attractive residential areas, belonging to wealthy landowners who are in no rush to build on it, or to speculative investors who aim to sell the land undeveloped for a quick profit.
Property developers, for their part, are being deterred by the high costs of development and lengthy bureaucratic procedures. In recent years they have preferred to focus on more profitable, higher-end housing projects instead of addressing demand for cheaper properties, although analysts say that trend may be starting to change. “The Saudi government is doing the right thing by focusing on supply, rather than increasing demand through providing funding (from banks). Things are starting to happen and Saudis will see more solutions in the next five years,” said John Harris, director of JLL’s Saudi arm. Demand for housing is most acute, he says, among middle income families earning around 8,000 a month who are looking for a more spacious family home that will cost them 700,000-800,000 riyals in Riyadh and other major cities.
A proper mortgage law would help make property more affordable to a wider section of the population, but that has been promised for almost a decade and there is no indication on when it will be introduced. Without it ,the kingdom has no proper framework to govern property ownership. Implementation of the law has been complicated by the political difficulty of allowing houses to be repossessed and families evicted for non-payment in a country where citizens have no vote, but receive generous financial protection from the government. Some banks already offer housing loans, but in the absence of legislation allowing repossessions, these must be secured against salaries, making them available only to Saudis employed by leading companies. As a result, only about two percent of homeowners have a mortgage, industry experts say, and foreign banks and private developers have shied away from the market.
Less than half of Saudi households own their home, and that figure drops to around 30 percent in younger households where the occupiers are below 30 years of age, a trend that is prompting young Saudis to put off getting married because they cannot afford their own home. “My monthly salary is 8,500 riyals and I pay (1,500 a month in) installments on a car loan. The high rent plus the car loan did not allow me to get a suitable loan to own a house,” said Abdulrahman al-Anzi, a 27-year-old English teacher.
In February, the Shoura Council, a body that advises the government on new laws, proposed an annual tax on undeveloped land to encourage landowners to release sites for homebuilding. “There have been signs of a speculative bubble (in the market). Taxes on undeveloped land or higher fees on land transactions should reduce the amount of speculative land transactions,” said Paul Gamble, chief economist and head of research at Jadwa Investment in Riyadh. However, there has been no government decision on a tax and the issue is sensitive because a lot of land is owned by princes and leading businessmen.
An Eastern Province official was quoted by al-Hayat daily this month as saying real estate businessmen own a fifth of undeveloped land and do not want to sell. A November 2006 U.S. Embassy cable released by WikiLeaks charged that some of the country’s several thousand princes had confiscated plots for their own gain. Abdulwahab Abu-Dahesh, vice chairman of the real estate committee at the Saudi Chamber of Commerce in Riyadh, said taxing undeveloped land may not be enough to spur property development. “I do not think that imposing tax on undeveloped lands would solve any problem or would decrease prices, especially given that the market is not well regulated,” he said. “Most of the undeveloped sites do not have services like water, electricity and sewage and the developer incurs their cost without any aid from the government,” he added.
Salman al-Saeedan, who owns a real estate company, said the government also needs to cut red tape, which currently requires a developer to obtain several different licences before it can start a project. Obtaining the necessary licences can often take two years or more. “Complicated procedures take a long time, and the absence of a clear vision pushes developers away from the market,” he said. For aspiring homeowners like Shahery in Riyadh, the slow pace of reform is dampening confidence they will ever get a foot on the property ladder. “I have been waiting for the right time for prices to decrease and for new developments to come in Riyadh, but this time has never come and I think it never will,” Shahery said.
By Marwa Rashad