Saudi Arabia: Climate For Change

Dr. Saleh Al Habib, executive director, Jiwar

The luxurious Massarah Hotel, Taif
“The real estate business in the kingdom is just starting and the potential for development is great due to an alarming shortage of home ownership properties.”
--Ayedh Bin Farhan Al-Gahtani, president, Al OulaReal Estate Sector Set to Transform Kingdom


Saudi developers are seeking foreign partners and expertise to meet the king's demand for thousands of new homes for his people
Saudi Arabia may have plenty of oil and a great deal of space, but, remarkably, it has a shortage of housing.

The government estimates that more than 500,000 people require new homes annually, equivalent to about 100,000 units a year. To meet the need, scores of house building projects are rolling off the architectural drawing boards, and the property business is booming.

In the last three years, 50 new real estate developers have received licenses from the Saudi Arabian General Investment Authority and regional property firms are entering the market that, until now, has been mostly centered in Riyadh.

Many of the new developments are spectacular mega-projects. The $26.6 billion King Abdullah Economic City, which is being built on the Red Sea coast north of Jeddah, will have three luxury residential districts that will house 75,000 residents.

A second project, Jeddah Hills, which is to be built in Jeddah at a cost of $11.2 billion, will consist of 20,000 top range residential units.

Al Oula Development Company, operating under the umbrella of Emaar Middle East, is responsible for building the properties on almost half of the 5,432 acre site. Ayedh Bin Farhan Al-Gahtani, president of Al Oula, says it will be developed in phases and will be the single biggest residential building project in Jeddah.

Al Oula has projects in all the kingdom's major cities, says Al-Gahtani, who believes that the real estate business in the kingdom is just starting and the potential for development is great, due to an alarming shortage of home ownership properties in the kingdom. He expects to see many more such developments and says that Al Oula will take the biggest share in the market in developing residential units.

Saudi Arabia lagged behind its Gulf neighbors in liberalizing its real estate sector. As a consequence, the kingdom's property development companies, while posting impressive profits, have not so far experienced the hyper-growth that has been achieved in other Gulf states.

Many of the larger Saudi firms have actually made some of their largest investments outside of the kingdom. Al Oula is in Egypt developing a new diplomatic quarter in Cairo. The project has been embraced by the Egyptian government and a number of embassies and additionally Al Oula is focusing on Syria and Jordan.

Many of the larger Saudi firms have targeted the United Arab Emirates, lured by a more open market and higher returns.

Al Hanoo, one of the kingdom's leading real estate developers, formed a $136.2 million company called Ewan to build and sell the first phase of Star Islands, the largest commercial, residential and tourism development project in the emirate of Sharjah. Another major Saudi company, Tanmiyat, acquired the residential and commercial components of Legends, a $2 million theme park and resort development in Dubai.

Nevertheless the real estate business in the kingdom is gathering pace. High oil prices are leading to increasing personal prosperity for many Saudi citizens and a great deal of liquidity.

With a population of 27 million to cater for, the kingdom certainly has a much larger real estate sector than the other Gulf states, and so has potential for far greater returns on investment.

Economic expansion has also increased the need for accommodation as expatriates arrive in the established industrial centers of Yanbu and Jubail and the newer sites growing at Rabigh and Ha'il.

Dr Saleh Al Habib, executive director of Jiwar, a leading real estate company, points out that 60 percent of Saudi citizens do not own a house.

“They may not own a house, but the money is there to do so,” he says. Furthermore, with an estimated 60 percent of those citizens aged under 25 and the population growing at the rate of 7 percent a year, the demand for new homes is rising fast.

Al Gahtani of Al Oula maintains that it would be no exaggeration to say that the real estate sector in Saudi Arabia is second only to oil in terms of its economic contribution.

Saudi Arabia is underdeveloped in real estate terms, he says. This is due to political and financial elements. Banks have been traditionally cautious about engaging in real estate development projects because of regulations that did not allow them to mortgage the properties. This meant that developers had to raise their own financing, usually through private initiatives.

“Now things are changing on both the political and financial sides,” says Ibrahim Bin Fahad Al Assaf, Al Oula's executive vice-president. “Banks are starting to realize the importance of real estate development. In the past, they were running away from these projects, and today they are running to them. Mortgage regulations are in the process of being approved by the government. We expect these to be realized before the end of the year. This will set the groundwork for a mortgage system in the kingdom.”

Expatriates – from other Arab states, the West and the Indian subcontinent – who have lived in the country for ten years continuously can now apply for citizenship, and thus qualify to buy property.

The lack of mortgage facilities has acted as a bottle-neck limiting development, says Al Assaf, and when this problem has been resolved he believes the market will expand quickly with developers selling on a mass level. “We are moving slowly but surely. In Saudi Arabia drastic change does not happen easily but we are continuously changing.”

The company president, Al-Gahtani sees himself as a tool, carrying out King Abdullah's vision of the kingdom's future, and believes that Al Oula will expand to five times its present size in the years to come.

He says the changes since King Abdullah's accession have been dramatic. “He has challenged Saudis to repatriate their money and has made the kingdom a welcoming environment for investment.”

It was this attitude that persuaded the Dubai-based Emaar Properties to enter the Saudi market. In June, Emaar, the largest listed company in the United Arab Emirates, bought John Laing Homes, the second-largest privately held U.S. homebuilder, for $1.05 billion cash, making it one of the world's largest property companies in terms of capital.

When it entered the Saudi market, Emaar linked up with Al Oula.

This, says Al-Gahtani, is because the two companies share a common vision and a common structure. He explains that Al Oula was the first company in Saudi Arabia to be established by a group of companies, rather than by an individual or a family and therefore is an institution not a family business or any one individual's dream.

To emphasize the real estate potential in the kingdom, Al-Gahtani says: “Emaar has completed some incredible projects in Dubai, but Dubai is only the size of one Saudi city. Saudi Arabia will require probably 20 more projects equal to what is the biggest at present, the King Abdullah Economic City, to meet our society's needs. So there is room for more entrants in this market.”

Al Habib of Jiwar has a similar enthusiasm for an international partnership. Jiwar is a subsidiary of the Saudi Binladen Group, the kingdom's biggest construction company. Launching Jiwar after four years as a professor specializing in media and marketing, he saw that the kingdom's real estate sector lacked feasibility studies.

“An important aspect of real estate that was missing was identifying the needs of the people. You have to know what they want in their homes, what they want in their malls, what services they require. This information was not present. So we obtained it. We do our studies, take the numbers and implement them into the design of our projects.”

What the kingdom needs now, he says, is more foreign expertise.

“We need companies with the sort of experience that leading American companies have,” he says. “Our plan for Jiwar is to get our name out into the public arena and attract some partners.

To build the Jiwar brand name, the company invested $13.3 million in sponsoring The World Cup soccer competition and has hired a leading international advertising agency to market its name globally.

“This is the time when we need the American companies and businessmen to come and help us with their knowledge and expertise,” he says. “We have the cash, but we need help to cope with the change, the booming population, the heavy liquidity and the mega-projects.”

Investors in real estate can expect returns of not less than 30 percent, he says, with no taxes and an open environment.