S&P Global Ratings forecasts that investments in Saudi Arabia's non-oil economy, in line with Vision 2030, will boost economic growth and expand GDP. Riyadh, the capital, sees a rise in expatriates and domestic migrants, which ramps up the attention on real estate growth. These investments are driving the country's economic transformation, with a particular emphasis on diversification. As a result, Riyadh's real estate sector experiences significant development and expansion. This growth aligns with the broader goals of Vision 2030 to reshape and modernize the Saudi Arabian economy.
CHALLENGE IN SAUDI REAL ESTATE AMID GROWTH
Despite the growth, challenges remain. High interest rates and prices impact real estate demand. In 2023, as rates rose, real estate transactions dropped by 16%. This decline accompanied a decrease in new mortgage lending.
As Saudi Arabia progresses, developers face a changing landscape. Urban areas attract more people, creating a supply-demand gap that varies by region. Financing also remains a hurdle. This is due to the capital-intensive nature of real estate development. But also, high leverage among developers plays a role here too.
ECONOMIC GROWTH DRIVING SAUDI ARABIA’S REAL ESTATE MARKET
From 2024 to 2027, Saudi Arabia expects its GDP to grow by 3.4% each year. Public and private investments will drive this growth. Non-oil sectors play a crucial role here, making up 60% of the GDP. So, even with oil production cuts, the economy continues to grow.
The Saudi government has ambitious projects worth over $1 trillion in its pipeline. Their goal is to raise home ownership to 70% by 2030 and boost the real estate sector's contribution to GDP to 10%.
SUPPLY AND FINANCING IN RIYADH’S REAL ESTATE MARKET
The population in Riyadh is growing fast, about 3.0%-4.0% every year. This growth is putting pressure on the real estate market. But in smaller cities, there might not be enough properties to meet this demand.
Mortgage loans are crucial for owning property, but they're facing challenges. In 2023, new mortgage contracts slowed by 33% due to tighter liquidity and interest rate hikes. This slowdown has affected the growth of lending.
REAL ESTATE FUNDING AND CAPITAL STRUCTURE
The Saudi real estate sector needs lots of money, so it has to find different ways to get funding. Saudi developers have more debt than Dubai developers too, so they need to find other ways to grow. So, alternative funding options are important if Saudi Arabia wants to maintain strong real estate growth.
The Saudi government helps developers with initiatives like the Sakani program and lower taxes. Additionally, the Saudi Real Estate Refinance Company provides financing support. So, there are of course options in place. But they are just the start of what's possible and needed.
RIYADH’S EMERGENCE AS A BUSINESS HUB
Riyadh is emerging as a key destination, drawing in people and businesses. In 2023, real estate transactions in Riyadh increased by 7%. This growth is due to more businesses setting up regional headquarters in Riyadh. So, this leads also leads to higher demand for Riyadh's office space.
Yet this is just what’s occurring at the moment. There are also impressive visions in Riyadh going forward. This includes the likes of building the world’s largest modern downtown, bringing a wealth of investment and opportunity into the Saudi capital city.
FOREIGN INVESTMENT AND HOUSING DEMAND
International interest in Saudi real estate is growing too. Initiatives like the Premium Residency program help support this. Yet, the high investment needed to invest might stop many people from investing.
CHALLENGES AHEAD IN SAUDI REAL ESTATE
Securing funding remains a challenge, especially as Saudi Arabia aims for sustainable growth. This is because developers will continue facing more pressure to go green because of regulations. These rules match the country's goal to reach net zero emissions by 2060. So, while presenting a funding challenge in the short to mid term, the hope is for a much greater long-term benefit. With all this in mind, navigating growth, sustainability standards, and accessing funding are the main challenges Saudi real estate developers face going forward. But with a strategic and well thought out approach, they can mitigate the downsides of these challenges.
