Residential real estate prices and rents continue to soar in Saudi Arabia. Riyadh and Jeddah saw year-on-year sales prices jump by 10 percent and 5 percent, respectively, in the first half of 2024, according to property consultancy company JLL’s KSA Market Dynamics Report H1 2024.
Rental yields also remain high, with year-on-year growth of 9 percent in Riyadh and 4 percent in Jeddah. The total number of real estate transactions across all asset classes surged by 38 percent to just over 106,700 in the first half of 2024. Meanwhile, their total value leaped by 50 percent to SAR127.3 billion, according to global real estate company Knight Frank’s Saudi Arabia Residential Market Review – Summer 2024.
Residential real estate demand to remain strong
S&P Global Ratings attributes this surge in Saudi Arabia’s residential real estate sector, particularly in Riyadh and Jeddah, to several factors including the robust population growth of 3.3 percent on average over 2024-2027. This growth is partly driven by expat inflows.
Saudi Arabia and the rest of the Gulf Cooperation Council region have not seen much impact from the conflict in the Middle East. Debt yields remain broadly stable and tourism inflows are robust. However, if tensions were to escalate, the region could see a higher risk premium on debt, and weaker tourism, foreign direct investment (FDI), and capital inflows. This, in turn, could prevent Saudi Arabia from achieving some of its Vision 2030 targets.
Residential mortgages will continue to rise
New household formation and declining interest rates will support the demand for residential mortgages. Saudi Arabia will also continue to pursue social liberalization and economic growth, which largely aligns with the demands of the country’s large population of young people. Therefore, S&P Global expects new household formation to remain strong as young Saudi families move to the cities for work opportunities.
Vision 2030 targets a 70 percent homeownership rate by 2030, and the country is on track to achieve this target with the rate hitting 63.7 percent at the end of 2023, according to the Ministry of Municipal and Rural Affairs.
The Saudi government supports the residential real estate sector through various initiatives. The Ministry of Municipal and Rural Affairs and Housing’s Sakani program helps meet mortgage demand from locals. Meanwhile, the Real Estate Development Fund provides interest-free mortgages and mortgage guarantees.
“Mortgage lending was up 5.3 percent in the six months to June 30, 2024, the same rate as last year. We could see growth accelerate even further as interest rates decline,” added S&P Global.
The ratings agency expects interest rates to decline by 225 basis points by the end of 2025, including the 50 basis-point reduction in September 2024. “We expect lending growth to hover around 9 percent in 2024-2025, albeit with most of this deriving from the strong pipeline of Vision 2030 projects,” the report added.
Challenges remain for private developers
Several challenges remain for private developers entering Saudi Arabia’s residential real estate sector. This includes the growing costs of land, construction, and materials, construction capacity constraints, and competition for financing with other Vision 2030 projects. In addition, first-time issuers may find it hard to tap the developing debt capital market.
Nevertheless, the total stock of residential units is growing steadily. In Riyadh, it now stands at 1.5 million after the delivery of 16,200 units in the first half of 2024. In Jeddah, the number of units stands at 891,000 after the delivery of 11,300 units, according to JLL’s market dynamics report for the first half of 2024.
“We expect the number of units to rise by another 16,000 in both cities in the second half of 2024. Domestic migration to large urban centers will perpetuate the shortage of properties in cities, supporting strong demand,” added S&P.
FDI in Saudi Arabia’s real estate
Saudi Arabia plans to attract $100 billion of FDI under Vision 2030, or almost 6 percent of the country’s GDP. Annual FDI inflows have averaged only about 2 percent of GDP over the past three years. Among the factors impeding FDI growth are the regulations and processes, which, despite the ongoing reforms, can be complex and cumbersome for foreign investors.
Increasing foreign investments in real estate, especially residential real estate, could be a relatively simple and fast way of increasing Saudi Arabia’s FDI inflows, providing that the government and real estate companies are able to create the right opportunities for international investors. High investments in Dubai’s real estate market over the past few years are a model for that growth. Visa policy reforms and regulatory changes could also accelerate FDI in the real estate sector.
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