Growing demand for property amid an influx of expat workers and a push to boost home ownership is giving real estate developers in the Kingdom a shot in the arm, according to a report by S&P Global. Demand for housing will remain “steady” thanks to appetite from Saudi buyers and streamlined ownership requirements for foreigners.

Developers need to ramp up supply to meet growing demand, as the country’s population is on track to grow, with the share of expats rising to 50% from a current 42% by 2030. S&P Global expects Riyadh to see the fastest population growth, putting more pressure on the capital’s already-tight real estate market, where “new supply will likely not meet the incremental demand.” Increased demand will be compounded by population flows from smaller cities to main cities Riyadh and Jeddah, S&P suggests. Foreign buyers are also buying into real estate to benefit from simplified ownership and residency rules under the premium residency program

Mortgage lending is still growing, albeit at a softer pace: Some 30-40% of locals buy properties with mortgage finance, which come with fixed rates, according to S&P Global. Mortgage loans were estimated at SAR 607 bn at the end of 2023, although overall growth was down 45% y-o-y due to the high interest rate environment. High interest rates, coupled with tighter liquidity, pushed the number of new mortgage contracts down 33% in 2023, while mortgage lending growth decelerated to 10% last year from 23% a year earlier.

The government has been a key backer of mortgage lending — and that’s likely going to continue to be the case, as the government continues to back overall real estate development, S&P Global says. The government has rolled out several key initiatives, including the Housing Ministry’s Sakani program, no-interest mortgage loans from the Real Estate Development Fund, and a lower tax of 5% on real estate sales and 2.5% tax on untapped land. It also had its PIF-owned Saudi Real Estate Refinance Company buying mortgage loans estimated at SAR 26.7 bn, representing 5% of local banks’ mortgage lending book.

And its holding in real estate developers is key: S&P Global sees the government’s direct ownership in real estate developers through the PIF — including Roshn, Emaar Economic City and Saudi Real Estate Co — helping it achieve its goal of having 70% of Saudis owning homes by 2030.

Financing needs are poised to be significant given the pipeline of real estate projects and the population boom, according to the report. This would require everyone in the market, including listed real estate developers, to look at diversifying funding sources and tapping capital markets amid tighter liquidity in the banking system and “still relatively high funding costs.” Off-plan property sales are expected to rise, which will help curb the sector’s financing needs due to its fitting model of pre-financing construction through fund collection and alleviated risks for developers.

Healthy demand = profitability: S&P Global sees a healthy demand boosting developers’ net income and revenue this year and in 2025 after a “mixed revenue performance” last year. It said an improved average income margin since last year would help boost further growth especially as projects scale up. “We expect healthy demand will keep driving their revenue and [bottom lines] in 2024-2025, with some help from expected lower interest rates.”

Leave a comment

Your email address will not be published. Required fields are marked *