THE LEVANT – Saudi Arabia has made some progress in providing affordable housing to citizens but the housing shortfall remains substantial due to rapid population growth.
Saudi Arabia’s population hit 30 million last year and is expected to rise by another 7 million by 2020, presenting a challenge for authorities to supply quality housing to low- and middle-income families but also opening a new market for developers.
Real estate consultant Jones Lang La Salle pegs the kingdom’s housing shortage at roughly 1 million, while government estimates show the country needs 200,000 new units each year.
McKinsey Global Institute said in a report that unlocking serviced idle land would go a long way in developing the market in cities like the capital Riyadh, where construction costs would need to fall by around 44% to make building affordable homes feasible.
“An analysis of a sample of parcels in Riyadh indicates that some 40 square kilometers that are zoned residential and have access to suitable infrastructure have remained idle for two decades,” McKinsey said.
In September, the kingdom’s Supreme Economic Council said it is studying a proposal to tax undeveloped urban land to ease housing shortages and help the country meet its target of building 500,000 units at a cost of USD 67 billion.
The issue is politically sensitive as much of the prime land in major cities is owned either by members of the royal family or wealthy family groups who are reluctant to sell.
In June, the government seized 1 million square meters of land from Saudi Telecom Company in the Al Faisaliah district in Riyadh, valued at SAR 100 million (USD 28 million), but analysts don’t expect administrators to make much headway in freeing up land owned by the Saudi elite.
Another issue facing Saudi Arabia and other Gulf states is that the standard unit sizes are much bigger than those in some international markets.
In Saudi Arabia, private sector and government programs stipulate affordable units should be at least 120 square meters in size, compared to 60 square meters in Western Europe and 50 square meters in emerging markets such as Mexico, Brazil and China.
Affordable housing remains largely under government and public sector entities, whose programs, including a stimulus package and development of economic cities, have brought additional supply to the market, according to Oxford Business Group.
The government has also increased the loan size offered by the Real Estate Development Fund and is working to develop the home loan market, moves which have also increased active demand for affordable housing.
But sustainable growth would depend on private players entering the sector, particularly as government finances come under increasing pressure due the recent sharp drop in oil prices.
“(The) fragmented real estate sector results in many sub-scale developers and contractors who lack opportunities to incrementally build capacity,” said McKinsey.
Local media have reported that the Saudi Council of Engineers is pushing for a government ban on foreign engineering consultancies unless they enter into partnership with local companies to regulate the market in Saudi Arabia.
The move coincides with growing foreign competition and a surge in the country’s mega projects.
Like other Middle Eastern countries, Saudi Arabia is hoping that development of four new economic cities will not only aid in job creation for its nationals but also ease demand for housing in crowded urban centers.
McKinsey said that standardizing building codes, addressing design shortcomings and improving energy efficiency are some of the structural reforms needed in Saudi Arabia’s housing sector to facilitate growth in the housing without escalating the cost of development.