Saudi’s real estate market must move with the times

The burgeoning religious tourism sector and emerging mortgage market in the Kingdom of Saudi Arabia promises lucrative opportunities for residential developers and contractors in the region. But as Angela Giuffrida reports, a lack of structured financing options available to potential homeowners and the absence of a regulatory regime may deter investors.

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By  Angela Giuffrida Published  January 21, 2006

AS Saudi Arabia vies to emulate the mega-development style that has made Dubai the most talked about city in the world, the country is tapping into a booming new market — religious tourism. The number of non-Saudi Muslims flocking to the sacred cities of Makkah (pictured) and Madinah alone is expected to reach 10 million a year by 2010. As such, the pressure on providing sufficient housing to accommodate longer-than-average holiday stays has prompted the Saudi government to relax its housing laws and offer timeshare and other ownership possibilities to religious visitors. One company making the most of the move is UK real estate firm Alpha1Estates. It recently claimed to be the first company to offer Muslims worldwide the chance to buy a home in the Zam Zam Tower in Makkah and Taiba Eastern Tower in Madinah. According to CEO, Talal Mahmood Malik, religious tourism is simply an element of globalisation, which will be compounded once Saudi Arabia makes its accession to the World Trade Organisation (WTO). In Makkah, homebuyers have the option of a 24-year lease, known as a Sukouk, which allows them to spend a period of time in the property each year. The property can be sold for profit several times within that period, but is then handed back to the government when the lease expires. In Madinah, homes can be bought on a 99-year lease, and if the law changes within that time to allow freehold property ownership for non-Saudi nationals, the property will automatically become freehold. “Religious travel has become more widespread,” said Malik. “For Saudi, it opens up 14 centuries of tradition. But one of the major problems faced by the government is a shortage of accommodation for tourists visiting the kingdom for religious reasons, so this is one way of easing it. “It will allow a lot more people to visit the cities at different times of the year. It will be like having a second home, and they could share it throughout the year with family and friends.” With pressure from developers to facilitate the process of buying property in Saudi, the government is expected to relax its laws even further, which could mean banks providing mortgages for the first time. “The Saudi government must now decide the best practice that can be adopted in the industry,” added Malik. “The kingdom is just emerging as a place for serious development, particularly with Emaar’s investment in King Abdullah Economic City, and the other developments cropping up. All of the main developers have approached the government to encourage it to relax the laws and facilitate this growth.” “One of the major hindrances to real estate ownership in Saudi Arabia is the lack of structured funding,” said Reg Barichievy, general manager at Saudi-based Tajheez Property Services. Banks are yet to offer customers mortgages and the Masahama, a type of timeshare deal, failed because it became easy for scammers to manipulate. “It was brought to the market because of a lack of financing options, and worked quite well at the beginning, but then it led to some very poor developments and scams. So to a certain extent it’s fallen out of favour, although it is in the process of being cleaned up and re-legislated,” said Barichievy. “The burgeoning market needs to be better regulated in order to counteract such problems, as well as achieve progress and maintain investor confidence,” added Barichievy. “There is a lack of institutional financing options. The banks won’t lend — but you need financing and investors if you’re going to get serious about development. They’ve got to sort out the laws relating to development to simplify and speed up the process.” Mike Williams, an associate partner at Cluttons in Bahrain, said that the fact that financiers are unable to make secure home loans, has led to a surge in the number of people sharing a home. “The result has been a paucity of housing development, and average household sizes have now grown to 7.2 persons. Until the issue of finance security is addressed, this will remain a problem; it is particularly thorny as it contains within it, sensitive religious issues.” He also said that added to this, land prices in many areas of Saudi Arabia had escalated beyond their development value, making it difficult for them to be developed for a profit. “The increase in funds available for investment in Saudi Arabia has fuelled a substantial increase in land speculation activity. Unfortunately, the speculators have not been analysing the actual economic (or development) value of the land, they have merely been paying more than the last person. “We are aware of many developers in Saudi Arabia who now prefer to land trade than build because it is more profitable, he added.” As Saudi Arabia battles to come up with new economies to counteract dwindling oil supplies, it hopes to ensure that the construction industry remains the largest non-oil sector in the Kingdom and is expected to accumulate more than US $15 billion for the national economy in 2006. A bid to provide affordable housing, eradicate poverty and create new jobs, as well as improve education, health and transport facilities, has also led to increased funding from the government purse for construction. But although there is oversupply at the top end of the retail development sector, there is still a shortage of residential and office accommodation. “We expect to see a further uptake for the construction industry. There will be more work and therefore more contracts up for tender,” said Barichievy. “The Saudi economy is in the best position it’s ever been in, and real estate is a very strong part of that. “There is a very high birth rate, which reaches around 17% in Riyadh alone, therefore the demand for accommodation is huge.”

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