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Saudi Arabia Real Estate Report Q4 2009Product Type: Market Research ReportPublished by: Business Monitor International Published: October 2009 Product Code: R302-8528 Description As we move towards 2010 and the expected recovery of the global economy, Saudi Arabia still looks inreasonable shape. The stock market is back up, oil prices are above US$70/bbl, the budget looks like itwill stay in surplus after all. We stand by our out-of-consensus view that the kingdom can avoidrecession. The economic indicators are mixed. The upward revision of our oil price forecast has sent ourbudget projections comfortably back into surplus, and the current account was always going to stay in theblack. This frees up more cash for the government to spend, which is good news because, as of June2009, banks were still not lending - clearly risk aversion still persists. As far as private-sector growth isconcerned, much will depend on getting the banks lending again, but we think government spending andinvestment will keep growth positive in 2009 and 2010.We also stand by our view that Saudi Arabia will not see anything like the same degree of correction inthe real estate market as some of its neighbours. Thanks to its strong demographics (genuine domestic, asopposed to speculative) demand for housing will remain in place. This was supported in a research noteby the SABB Bank recently, which suggested that commercial real estate prices were expected to fallfurther in the coming months but that, ‘Housing will not see a similar correction. In many areas, housingprices have fallen at a rate of around 5-10%, but we think that is the maximum they would correct giventhe sheer demand and an undersupplied market.’ Politically, the same old challenges of maintaining domestic stability while keeping the US and otherallies on side have been exacerbated by the economic hardship. Our core scenario is for ongoing stability,and we think 2010 will be a better year for the kingdom. While office rental prices have held up in Riyadh, they have been under pressure in Jeddah because ofsupply issues; however, there is a consensus that these will recover later in 2009 or early 2010. It is alsoexpected there will be a change to financing regulations - in the form of allowing mortgages on off-planpurchases - which could in many ways change the game for the residential market in Saudi Arabia.Affordable housing has emerged as a key opportunity in the kingdom, driven by demographics and thehealth of the Saudi economy relative to other Gulf Co-operation Council (GCC) countries. A young and growing indigenous population seeking affordable homes is the driving force behindhousing demand in Saudi Arabia. This is in contrast to the Dubai market, for example, which has in thepast been driven by luxurious villas and penthouses. Saudi Arabia is expected to face a shortfall of up to1mn housing units by 2012, according to new reports, and the new residential projects launched over thepast three years are insufficient to meet that demand. The current value of ongoing and planned projects in Saudi Arabia is estimated at some US$586bn -128% of the kingdom's GDP. These include many government-backed projects. The government isundertaking mega projects in the form of six ‘economic cities’. King Abdullah Economic City(abbreviated as KAEC), launched in 2005 by Abdullah bin Abdulaziz Al Saud, the king of Saudi Arabia,is the centrepiece of this set of projects. According to the Saudi Arabian General Investment Authority(SAGIA), the new cities will contribute US$150bn to the country’s GDP by the year 2020. They are alsoexpected to provide job opportunities for 1.3mn people and an increase in per capita GDP to SAR125,625for those living in the cities. The office market in Riyadh is expected to see 1.1mn square metres (m2) of office space delivered duringthe period 2009-2014. Demand, which is already high due to economic activity built up over the years ofhigh oil prices, has been further boosted by the announcement that the central bank for the GCCMonetary Union will be housed in the King Abdullah Financial District being built in Riyadh. However, conditions in Saudi Arabia’s second-largest city of Jeddah remain challenging in mostsegments - with hospitality the obvious exception. Jeddah house prices have fallen by 10% year-on-year(y-o-y) as demand has fallen in 2009 compared with 2008. Many observers believe prices could rise againtowards the end of the year. Jeddah’s retail and office markets are also oversupplied with more than300,000m2 of new offices expected to be delivered before 2011, according to Jones Lang Lasalle. Saudi Arabia is embarking on some much-needed reforms and is introducing new laws and a regulatoryframework to ensure that its real-estate sector growth is healthy and viable. It is expected to introduce amandatory escrow account/guarantee system for off-plan sales, based on a model of regulation similar tothat developed during the past two years in Dubai. The developer will be required to deposit into theguarantee account all development finance and off-plan sales receivables. Saudi Arabia is also expectedto create a register of qualified real estate developers - and require developers to make available financialrecords in order to ensure they are of good financial standing. Table of Contents
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