Although the Saudi market seems attractive from a top-down view, the market may slow due to affordability and financing challenges, Credit Suisse said in its MENA Real Estate Outlook for June. “Hence we prefer exposure to the rental market,” it said. Average residential rental yields in Riyadh and Jeddah are holding up at 8 percent and 10 percent, respectively. The report said the Saudi market may experience slow growth in both supply and demand, even after the potential introduction of the mortgage law this year. The shift to home ownership in the short to medium term will be a limiting factor. “We anticipate additional demand for 1 million units by 2014, which means that annual supply has to double. We believe this looks difficult to achieve, given the shortage of ‘off-plan' sales and the need for developers to finance projects in full before offering them for sale.” Moreover, mortgage finance is coming from a very low base (2.4 percent of total credit) and even if the mortgage market doubles over the next two years, it will still be modest in absolute terms and not enough to boost home ownership. The report further said that though the new mortgage law should address foreclosure issues, the ability of banks to implement foreclosure rules in practice is in doubt in the short-term as the law “remains untested.” “We still think that Saudi Arabia's housing sector looks attractive from a top-down perspective on the back of favorable demographics (the largest population and 65 percent of the GCC population with over 57 percent under the age of 20) and strong local demand outlook (the housing market mainly targets Saudi nationals - 73 percent of population, a key differentiator from other GCC countries).” On the other hand, there are several challenges that may put pressure on the story in the short and medium terms resulting from affordability, financing and continued supply shortage issues, the report noted. Over 55 percent of the population live in rented accommodation owing to affordability issues (mainly resulting from shortage in housing finance from the Real Estate Development Fund and commercial banks) with vacancy rates range between 12 percent and 15 percent of total housing as supply was beyond the purchasing power of many households. “In our view, this suggests that there is significant demand in both the low and middle income segments that needs to be addressed by the market.” According to official figures, this left the market with a shortage of 270,000 (affordable) housing units in 2005. Historically, average annual housing supply was about 100,000 units, which was never enough to replace new and existing replacement demand. Assuming that this supply average holds in the next five years and given the existing unsatisfied demand and replacement demand, coupled with estimated population growth at a CAGR of 2.48 percent (based on the 8th Development Plan), then Saudi Arabia's total housing demand will reach about 2 m units by 2014 (additional demand of 1 m units in the period 2009-14), the report said. This suggests that Saudi needs to double the average annual housing supply in order to satisfy existing and new demand which we believe is difficult to achieve given the shortage of ‘off-plan' sales in Saudi Arabia and developers having to finance projects in full before offering them for sale which results in a highly leveraged financing model, Credit Suisse study said. “We believe that the Saudi housing market has similar characteristics to the Egyptian market in terms of local rather than expatriate demand, demand concentration within the low and middle-income segments as well as very low mortgage penetration.” On the other hand, ‘off-plan' sales are hardly offered in the Kingdom which resulted in developers committing to finance and build large scale projects before offering them for sale which in turn stretches their balance sheets and makes real estate development very capital intensive (as in the case of Dar Al Arkan, for example). In addition, on the demand side, the lack of the flexible payment terms associated with off-plan sales is not compensated by mortgage availability which limits the purchasing power of Saudi home buyers despite the genuine demand. “We believe that this will be one of the main challenges that will put pressure on supply growth going forward,” the report pointed out. Real estate consumer finance is a mere 2.4 percent of total credit and about 1.26 percent of GDP (2009), which suggests that there is significant room for growth in housing finance. However, “we are skeptical about the ability of the new mortgage law when launched to strategically boost demand and affordability for home buyers, as well as increase real estate lending appetite for banks in the short
