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Kuwait Financial Centre “Markaz” MENA REAL ESTATE RESEARCH
KSA Outlook 2013 & 14 Undersupply in residential to persist
KSA RE fundamentals – expats to grow at 1.5% CAGR
KSA’s real GDP growth is expected to grow by 6.0% & 4.2% in 2012 & 13, with non-oil GDP set to grow at 6.5% and 5.6% respectively. We
forecast Saudi & expat population to grow at a CAGR of 2.0% & 1.5%
respectively over 2011-14, as against government targets of 0.2% growth in non- Saudi population, as we expect KSA’s plan to employ
Saudi nationals in the non-oil private sector to be a gradual process.
KSA aggregate residential- near term undersupply
We estimate the growth in KSA’s population to lead to an annual residential demand of 163,500 units. Annual supply on the other hand
is likely to be lower by c.38,500 units, even after factoring in planned official interventions, which underpins our belief that the residential
market should remain undersupplied in the near term.
Cities residential outlook– different tenor; same story though
Riyadh: The Riyadh city residential market is forecasted to stay undersupplied in 2013 & 14, primarily due to the existing undersupply
in middle & lower middle income housing (2012 undersupply: 44,400
units). We expect the incremental demand to also be higher than supply by c.11,800-13,200 units over 2013 & 14, as most of the
incoming supply is not expected to cater to the middle and lower middle income Saudi households. We expect rentals to surge from an
influx of expats, while higher investment activity from both Saudi &
non-Saudi households leads to higher prices. Jeddah: The undersupply in Jeddah as of 2012 was c.80,200 units, from low supply
of Saudi mid & low income housing and low development activity in rental market dominated by expat households. These continuing
trends should result in Jeddah city’s residential market being undersupplied by c.95,000 units on an average over 2013 & 14. We
forecast the prices of duplexes & multi-family villas and, rents of villas
in compounds to move higher. Dammam & Khobar: We expect Dammam & Khobar’s residential market estimated to be undersupplied
by c.61,000 units in 2012, to remain undersupplied over 2013 & 14, as we forecast population to grow at a CAGR of 4.6%, household sizes in
both cities to reduce, and supply growth to be low.
Office outlook- unwinding of the supply overhang unlikely
We estimate high existing vacancy rates and substantially higher
supply growth compared to growth in demand, to limit any positive catalysts from emerging in Riyadh, Jeddah, Dammam & Khobar’s
office markets, and lead to lower rentals in 2013 & 14. However, we
expect the oversupply situation in Jeddah & Dammam & Khobar to reverse quicker than Riyadh, in a higher demand environment as: 1)
Bulk of the supply in Jeddah comes from one single project, which is already 75%-80% pre-leased 2) Supply pipeline growth in Riyadh is
substantially higher than Jeddah, Dammam & Khobar.
Transaction trends counterintuitive
Transaction trends in KSA portrayed counterintuitive trends to the undersupply situation prevalent in KSA’s residential market, in spite of
healthy lending conditions to the sector. The observations of lower transaction activity being ascribed to diversion of capital towards
equities by the market have been rendered inaccurate, as both real
estate transactions and equities have trended lower since Mar’12. We would monitor this divergence going forward for conclusive trends.
November 2012 Research Highlights:
A study to analyze key emerging
residential trends in KSA and provide an outlook for 2013 &
2014
Markaz Research is available on:
Bloomberg - Type “MRKZ” <Go>
Thomson Research, Reuters Knowledge
Nooz Zawya Investor
ISI Emerging markets
Thomas K. Mathew Senior Research Analyst
+965 2224 8051
Venkat Ramadoss ACA, CFA Manager
+965 2224 8548 [email protected]
Bassam N. Al-Othman Executive Vice President
+965 2224 8011 [email protected]
Kuwait Financial Centre “Markaz”
P.O. Box 23444, Safat 13095, Kuwait
Tel: +965 2224 8000
Fax: +965 2242 5828 markaz.com
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 2
KSA real estate fundamentals KSA’s real GDP growth is forecasted to grow by 6.0% & 4.2% in 2012 & 13, with non-oil GDP set to grow at 6.5% and 5.6% respectively.
Non-oil GDP in turn is expected to grow, as a result of a 7.0% CAGR in the non-oil private sector over 2012 & 13, while the non-oil public
sector grows by a lower 4.2% over the same period. Real GDP
recovered and grew by an avg. 6.1% over 2010 & 11(2009: 0.1%), as non-oil sectors contributed to 4.5% of the growth in 2010 and 5.9% in
2011.
Exhibit-1: Economic growth trends
Source: IMF, Markaz analysis
KSA authorities in their effort to widen the economic base had laid various development targets in its 9th Development Plan (DP) from
2010-14 which includes, a real GDP growth CAGR of 5.2%, reduction
of oil GDP to 1.2% CAGR, non-oil GDP growth of 6.3% CAGR and non-oil private sector growth of 7.1%.
Exhibit-2: 9th DP vs. 2010-11 achievements & IMF forecasts
Source: IMF, Markaz analysis
Two years into the 9th DP, the results seem broadly in line with the
targets, with the exception of the reduction of dependence on oil-
GDP. Though non-oil GDP achievements are in line with targets, non-oil GDP continues to be driven by factor accumulation i.e. an increase
in factors of production thorough investment activities, which is largely dependent on oil-GDP, and not as much from productivity growth. IMF
expects the factor accumulation spending, dependant on oil GDP, to
be vulnerable to a sustained drop in oil prices and estimates that the medium term non-oil primary deficit is above the level consistent with
Real non-oil private sector to grow at 7.0% CAGR
over 2012 & 13
9th DP achievement targets on track; 2010 &
11 goals achieved
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 3
intergenerational equity (share of resources and assets that belong to future generations) by about 10% of non-oil GDP, which it expects to
be on the higher end of the sustainability range. Further, IIF estimates
that improvement in productivity, and much higher private sector investment (2011: 14% of GDP), would be required to sustain non-oil
GDP growth of 6%.
Expatriate population to grow higher than targeted
While growth in Saudi population is driven by demographic factors,
expatriate population growth is a function of economic growth and employment policies of the government. The 9th DP enumerates that,
Saudi national population in KSA would grow by c.2.0% over 2010-15,
while it pegs the target for expats growth at 0.99%, far lower compared to the 5.39% growth achieved during 2004-2010. Also the
Saudization programme targets to increase the share of Saudi workforce in total labour force from 47.9% in 2009 to c.53.6% in 2014
by providing 1.1 Mn jobs to labour market entrants. Also the DP aims to reduce the unemployment rate amongst the national workforce
from c.9.6% in 2009 to about 5.5% by the end of the Plan in 2014. As
of 2011, the overall unemployment amongst Saudi nationals grew to 11%, with youth unemployment (20-29 years of age) much higher at
c.25%. As of 2010, the number of Saudi nationals in the public sector employed was c. 12.1%, while only 10.4% of the private sector
workforce was Saudi nationals.
We consider the government initiatives to increase Saudi national employment in the private sector, implemented with due importance
so far, to have limited impact on expatriate population growth in the near term. Substantially higher public sector remuneration deters
Saudi nationals from joining the private sector where the average
remuneration is over 50% lower. Moreover, the private sector is incentivized to hire willing expats whose skillsets match with its
current business needs, while at the same time they remain more affordable resources for cost driven businesses. Due to these reasons,
we expect the non- Saudi population growth to be higher than the 0.99% targeted by the 9th DP. Nevertheless, we expect the successful
implementation of channelizing the Saudi workforce to the private
sector & allocating capital formation resources to have a significant impact on residential & office sector demand supply trends in the
longer term, and build our forecasts accordingly.
Longer term outlook – need to diversify away from Oil & Govt.
Our analysis suggests that allocation of productive labor resources
have been mainly towards either the oil sector or the government sector from 2000-10. Exhibit-4 depicts that the two largest sectors in
KSA over the ten year time frame have been the Oil & the government
sector. In spite of the higher GDP contribution, the oil sector growth volatility remained the highest during the period. The government
sector on the other hand employed over 40% of the labour force, while providing little incremental growth potential. The non-oil sectors
that provide inclusive growth for any overall economy lag behind the
oil & government sectors in terms of labour force allocation in KSA.
The longer term economic & demographic outlook hinges on realizing KSA’s stated objectives set in its 9th DP, to diversify away from both
the aforementioned dominant sectors into non-oil sectors, with
substantial private sector contribution. This should result in lower growth volatility & broader economic growth, and would have far
Government targets 2010-
15 Non-Saudi population growth of 0.99%
Saudi workforce
unemployment targeted to be brought down from
c.9.6% in 2009 to 5.5% by 2014
Longer term diversification away from
oil & government sectors should reduce growth
volatility & broaden
economic growth
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 4
reaching implications on our residential and office real estate forecasts.
Exhibit-3: Diversion of labor into Government & Oil Sectors
Source: CDSI, Markaz analysis
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 5
KSA residential – Undersupply to persist The KSA residential sector is faced with severe shortage of supply of
housing units; evident from the increasing household size trends from 2004-10. The average household size increased from 5.48 in 2004 to
5.84 in 2010, as the number of households grew 16.3% from c.4.0 Mn households to 4.6 Mn households. The increase in overall household
size was largely attributed to the increase in Saudi household size
which grew from 5.98 to 6.12 in the same period, while the average expat household size grew from 5.00 to 5.32 as well. Taking the 2004-
10 trends into consideration, the overall household size is expected to increase to 5.94 in 2014, if left without any official intervention.
The National Housing strategy (NHS) for KSA was put in place among
other initiatives for alleviating the existing housing shortage and unbalanced housing distribution in KSA, especially for the low to
middle income households. The NHS along with the 9th DP, aim to bring down the overall household size to c.5.7, which would entail
supply addition of 200,000 units annually. The other implicit initiatives
of the KSA government are targeted towards reducing the infrastructure gap, curbing significant price & rent increases for
housing units and crowding of households (more than one household living in a housing unit). Furthermore the KSA government has
allocated USD 67 Bn for the construction of 500,000 housing units through its Ministry of housing (MOH) as part of its social welfare
schemes.
Exhibit-4: 9th DP targeted housing demand (2010-14)
Source: CDSI, Markaz analysis
As per the NHS, the number of housing units added on an average over 2004-10 was 108,500 units per year, as the expat population
grew by 5.39% over the period, contributing to a take-up of 55% of
the stock added during the period, while the Saudi population grew by a lower 2.09%. In line with the 9th DP, NHS forecasts Saudi population
to grow by a CAGR of c.2% over 2010-15 and expects a significant drop in Non-Saudi population growth rates to a CAGR of 0.2% over
the same period. They also expect incoming supply to reduce the Saudi household size to 5.76 and estimate 50% of the housing
demand to be eliminated by Saudization policies.
Aggregate residential demand of 163,500 units annually
The two most important factors expected to affect KSA’s aggregate
residential demand over 2010-15 are the rate of Non-Saudi population growth, as a result of Saudization initiatives and MOH housing
Saudi household size in KSA grew from 5.98 to
6.12 over 2004-10
NHS targets overall
household size to decline from 5.84 in 2010 to 5.7
in 2014
108,500 residential units added per year from
2004-10
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 6
implementation run rates. A faster implementation run rate of MOH supply is expected to lower prices and lead to higher demand during
the period, while any delay is expected to result in a push out of the
targeted household size reduction.
The NHS lays out three demand scenarios for housing take up:
Upper bound: In this scenario, NHS expects 257,100 units of
residential demand, as non-Saudi population CAGR continues
at 5.39%, while the household size of Saudi nationals is
expected to decline by the construction of 350,000 units by
2015.
Lower bound: Saudization initiatives are successful, leading to
a non –Saudi population CAGR of less than 1% over 2010-15,
and non MOH housing units are constructed. This demand
estimate is expected to result in 115,400 units of annual
residential demand.
Intermediate scenarios: These intermediate scenarios assume
a non-Saudi population CAGR of c.1.5%, with MOH
construction of 250,000-350,000 units by 2015, and are
expected to result in 160,000-180,000 annual housing units of
demand over the period.
Exhibit-5: NHS annual construction demand scenarios
Source: NHS, Markaz analysis
We consider the intermediate demand scenario estimate of 163,500
units per annum, driven by a non- Saudi population growth of 1.5% and c.230,000 MOH units addition to be the most aggressive supply
scenario, given the current implementation run rate. Nevertheless, the estimate is driven by our belief that, although we expect a reduction in
non-Saudi population growth rates, we do not expect the growth rates
to come down to 0.2%, as we expect KSA’s target to employ Saudi nationals in the non-oil private sector to be a gradual process, due to
the aforementioned challenges involved. Moreover we do not expect MOH to complete the targeted 500,000 units before 2015 and remain
comfortable with an estimate of c.230,000 units.
Supply shortfall to continue in spite of MOH addition
To arrive at the annual residential supply over 2010-15, we looked at
the impact of both a reduction of non-Saudi population growth to 0.2% CAGR, and the effect of MOH & private sector addition. We
arrived at a supply estimate of c.125,000 units which still lags behind demand by c.38,500 units. Our supply estimate also incorporates the
Demand estimates of 163,500 residential per
annum over 2010-15
0.2% non- Saudi
population growth 2010-15 highly unlikely
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 7
effect of a 40% private sector crowding out phenomenon, which is the lower construction from the private sector, as a result of supply
adjustments from MOH housing units being constructed. We expect
this supply estimate to be more on the aggressive side, as we do not expect a reduction on non-Saudi population growth of this magnitude.
Therefore we conclude that, despite efforts to stabilize the undersupply situation in KSA, from MOH housing units addition and
other policy initiatives, we expect the overall undersupply in the residential market to persist in the medium term until the full effects
of Saudization and supply of MOH addition are realized.
Exhibit-6: KSA annual supply addition
Source: NHS, Markaz analysis
Residential real estate underinvestment still a concern
The undersupply scenario is also evident from the trends in residential
real estate capital formation. The KSA government in its 9th DP set a target total Gross Fixed Capital Formation (GFCF) growth of 10.4%
over 2010-14, with private sector GFCF growth forecasts of 11.8% in the same period. Over 2010 &11, a total GFCF growth of 13% was
achieved, which was higher than targeted, however non-oil private GFCF grew at only c.8% over the period with bulk of the investments
still flowing into creating government productive capacities which grew
by c.25%.
Exhibit-7: GCFC real estate investment trends
Source: CDSI, Markaz analysis
Annual supply to remain
c.23% lower than demand over 2010-15 in
spite of MOH addition
Total GFCF growth of 13% achieved over 2010
& 11 against 9th DP target of 10.4%
Non-oil private residential real GFCF declined from
45% to 18% of real estate GFCF over 2002-
2011
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 8
Further, our analysis suggests that the two components of real estate capital formation: 1)Non-oil private real estate GFCF of Real Estate
GFCF and 2) Non-oil private residential real estate GFCF of Real Estate
GFCF showed a slowing trend from 2001-2011 (Refer Exhibit 3). Over the period, private real estate GFCF as a % of total real Estate GFCF
decreased from 77.3% to 32.8%. Moreover, private residential real estate GFCF as a % of real estate GFCF also declined from 45.6% to
18.8%, showing a clear trend of underinvestment in residential real estate.
Mortgage law approved – finer details to decide impact
In our 2009 KSA Residential Real Estate Report, we had mentioned
that the younger generation of KSA, in the age group of 20-35, was deprived of real estate ownership due to the lack of supportive home
financing terms, and that once the mortgage law is passed, the
potential for residential real estate in KSA would increase significantly thereby turning around the waning investment trend. Moreover, lack
of financing is also a key impediment to alleviate the mid income housing undersupply. The mortgage law was passed by the Council of
Ministers on 2-Jul-12, which includes the enforcement of mortgage
contracts, mortgage registration and real estate financing companies’ laws. On 19 Nov-12, SAMA released the draft versions of implementing
regulation of 1) Real estate finance, 2) Financial lease law and 3) Law on supervision of finance companies. Central to the implementation
strategy, was the setting up of the “Real Estate Refinancing
Corporation” to provide a regulated secondary market and liquidity for real estate financing. The Real Estate Refinancing Corp. would have
minimum capital of SAR 2 Bn and would be responsible for issuing Islamic bonds or securities backed by mortgages or real estate. Real
estate finance companies are permitted to acquire equity in the Real Estate refinancing Corporation up to an upper limit of 30%. Even
though the secondary market draft details should provide stability and
liquidity in the real estate sector, implementation details of the law in the primary mortgage market are yet to be clear, and we would
update our demand-side forecasts once the full impact can be studied, as and when these details are available.
Mortgage law impact on
demand to depend on the finer details of the passed
law yet to be released
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 9
Riyadh city residential outlook The results of the Census carried out during 2010 have been published in brief, and while we use the same for our base year data
and analysis, we await a detailed publication of the results. Especially, while we have the population estimate for each province and city, data
on households is not part of the information published so far. We
would be able to provide a more detailed analysis and outlook once the remaining data is also published.
Census – 2010 statistics provides three population estimates related to Riyadh; 1) population at province level 2) population at the level of
Riyadh administrative region and 3) population in Riyadh city. For our
analysis, we chose the relevant population estimate in Riyadh city to estimate the demand for residential real estate.
As per the statistics, Riyadh city had a population of 5.2 Mn as of 2010, and we estimate the number of households in Riyadh city to be
c.880,800 households. Our estimates are based on household size of
5.89 in Riyadh city, which we expect to be similar to the household size of Riyadh province (5.89 as per NHS). We derive our estimate by
extending data from the 2004 census where household size in Riyadh City was similar to that of Riyadh Province (5.46), and that population
in Riyadh city constitutes significant portion of the population in Riyadh province. The population in Riyadh city grew at 4.6% CAGR
over 2004-10, with Saudi population growing at a CAGR of 1.8%,
while expat population jumped by 10.2% (CAGR) over the period. Residential supply on the other hand was c.857,000 in 2010 as per JLL
estimates, which leads to undersupply estimate of c.23,000 units. The structural undersupply in the overall Riyadh residential market is
driven by an undersupply in Saudi housing, mainly in the lower and
middle income segments, due to lower affordability, and lack of new residential supply in this segment. Housing for expats mainly
comprises of the leasing market, which remains marginally undersupplied. JLL forecasts supply to grow at a CAGR of 3.3% from
2010-14, and expects over c.117,000 units to be added over this period, most of which is expected to be added in north Riyadh, where
residences are more upmarket than central or South Riyadh where
most of the middle and low income Saudis reside.
Exhibit-8: Riyadh incremental demand-supply gap (2011-14)
Source: JLL, Markaz analysis
c.880,800 households in Riyadh city as on 2010
Residential supply in Riyadh city to grow by
3.3% CAGR over 2010-14
4.3% CAGR population
growth expected over
2010-14
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 10
We forecast potential demand from incremental population growth alone in Riyadh city to grow by 4.4% over 2013 & 14. We assume the
average household size to remain at 5.89 - the provincial household
size as of 2010, leading to an average of over 39,000 units of incremental demand being added per annum. However, in the NHS,
the government mentions that it aims to bring down the provincial household size from 5.89 to 5.75. Nevertheless, we do not expect a
reduction in household size, due to the lack of focused supply, but include the effect of the reduction to understand desired future
trends. Furthermore, our demand estimates for 2013 & 14 includes
replacement demand of an average of c.3,800 housing units per annum. As most of the supply is not expected in the Central &
Southern parts of the city, where most of the middle and lower middle income Saudi households reside and who constitute a substantial part
of the overall population in the city, we expect the Riyadh’s aggregate
residential market to remain undersupplied.
Rentals & Prices
Rents and price in Riyadh’s residential market have continued to climb higher, as a result of the undersupply of Saudi housing and crowding
of households (more than one household living in a housing unit, mostly seen in families with more than one generation occupying a
single housing unit). Published rental data for apartments and villas by
JLL suggests that apartment rents have increased more in comparison to villa rents since Q1-11 with average apartment rents having
increases c.23% driven mainly by rental growth in Western Riyadh apartments (+65%), while villa rents increased at a lower 8.5%.
Warooud, Malaz, Olaya and Sulaimania remain popular locations in
Riyadh city due to their proximity to school and hospitals, which is evident from high occupancy rates and increase in rents noted by JLL.
Rents in Eastern and Central Riyadh, mainly characterized as high income villas reportedly moved up higher compared to other areas.
Further rents for villas in compounds rose higher than standalone
villas, due to short supply and high popularity amongst Western expats.
Exhibit-9: Riyadh villa rents Q1-11 to Q2-12 Exhibit-10: Riyadh apartment rents Q1-11 to Q2-12
Source: JLL, Markaz analysis
Prices for apartments and villas in Riyadh city reportedly rose by 14.3% and 23.9%% since Q3-08. Also, compared to a year ago (Q3-
11) apartments & villa prices rose by 9.5% & 8.8%. The marginal
lower price increase for villas since Q3-11 was mostly attributed to price declines for villas situated in Central Riyadh in Q2-12 Q-o-Q,
where most of the sales activity was for older projects due to limited supply of new villa projects. Nevertheless, the increase in prices over
Over 39,000 units of
demand to added per year over 2010-14
Average apartment rents in Riyadh increase by
c.23% since Q1-11
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 11
the period was driven by: 1) Higher investment activity from Saudis for income generation as gross rental yields for apartments were 8%-
9%, while villa residences earned 4.5%-6%%, 2) Expats preferring to
buy rather renting residences.
Exhibit-11: Riyadh villa & apartment prices Q3-11 to Q2-12
Source: JLL, Markaz analysis
We forecast prices in Riyadh’s residential market to continue to
increase in 2012 & 2013, as housing for Saudi middle income households would continue to remain undersupplied as incremental
demand continues to outstrip incremental supply and, rental yields still
warrant investment activity from Saudis.
The rental market mostly comprising of expats, is likely to see rents
surge higher, as we expect the influx of expats into KSA to continue in 2012 & 13 at over 1.5% per annum. Our forecasts are in contrast with
Govt targets, as we do not expect expat population growth to slow down from the 5.39% CAGR over 2004-09 to 0.2% over 2010-14. We
expect villa residences in compounds which are currently very much in
demand due to popularity factors from Western expats to witness slower rental growth as more supply is expected to come on-stream
over the remainder of 2013 & 2014.
Villa prices in Riyadh increases 23.9% since
Q3-08
Gross rental yields for apartments in Riyadh
c.8%-9%
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 12
Jeddah city residential outlook Similar to Riyadh city, we derive our residential demand side- the total number of households in Jeddah city for 2010 using city population
estimates from the 2010 census data, as the households’ data is yet to be officially published from the 2010 census.
Using the 2010 Census as our base year data, we estimate the total
number of households in 2010 to be c.735,000 based on a household size of 4.72 and Jeddah city population of c.3.45 Mn. The population
in Jeddah city grew at 3.9% CAGR over 2004-10, with Saudi population growing at 3.1%, while expat population increased by
4.7% over the period. The household size in Jeddah city was lower
than the household size at Mekkah province in 2004 Census. We extrapolated similar trends to 2010 and lowered the household size
estimate in Jeddah city below the household size of 5.14 estimated by NHS for the Makkah Province. Residential supply as per JLL estimates
was c.702, 000 in 2010, which indicates that demand exceeds supply
by c.32,000 units. The higher demand can be ascribed to: 1) The undersupply of Saudi housing similar to Riyadh city, mainly in the
lower and middle income segments, due to lower affordability and 2) Lower income levels of expat households, leading to lower rentals and
subdued development activity 3) Replacement demand flows from households who reside in the Central districts of Jeddah where
housing infrastructure quality standards are lower and residences are
older, while most of the newer & higher quality residences are located in North Jeddah.
Exhibit-12: Jeddah residential market trends
Source: JLL, Markaz analysis
JLL forecasts supply to grow at a CAGR of 2.9% during 2012-14 and expects over c.94,000 units to be added over this period. Supply
initiatives from government agencies and other semi government
agencies, such as JDURC* and the proposed NHS is unlikely to result in any meaningful supply being delivered over 2012-14. We forecast
demand to grow by 3.8% over 2013 & 14 contributing to c.63,500 households of total incremental residential demand based on a
household size of 4.60, as the NHS expects an overall reduction in the Makkah Province household size to 5.01 over the period. Our demand
estimates also include replacement demand, mainly from the Central
districts of Jeddah, to contribute c.3,000 units of demand.
We expect the Jeddah residential market to continue to remain
undersupplied, mainly due to the undersupply in the Saudi middle &
Population in Jeddah city grew by 3.9% CAGR over
2004-10
Undersupply of c.32,000
units in Jeddah as of 2010
c.63,500 units of
incremental residential
demand over 2013 & 14
*Jeddah Development & Urban Regeneration Company
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 13
low income housing. Also, we expect land costs to continue to remain expensive for developers, providing less incentive for development
activities, as rental yields continue to remain low, arising from expat
housing affordability constraints. Moreover, established private developers also continue to focus on upper and upper middle class
households due to higher rental realization rates. The mortgage law and the NHS initiative should help alleviate these affordability
constraints in our view; however, we do not see any structural improvements altering existing demand-supply trends drastically over
2013 &14.
Rentals & Prices
A similar rental trend to Riyadh was observed in Jeddah from 2011
until Q2-12, with apartment rents witnessing higher rental increases than villas. Apartment rents in the Western Jeddah continue to
command higher rentals and witness higher rental increases than
other parts of Jeddah (+24.7%), as per JLL estimates. Also, rents of villas in residential compounds continued to reportedly witness higher
rental increases than the overall villa market (+1%) due to high demand from expat households to live in gated villa residences. The
higher increase of apartment rents in comparison with villa rents is likely attributed to the larger number of low income expats in Jeddah
(as compared to Riyadh), who prefer to stay in apartments rather than
villa residences. While residences in close proximity to the city like Al Balad, Malak are still preferred, new residential projects away from the
city like Al Fareeda & Mashraf are likely to see higher interest coming in, as these projects are targeted towards Jeddah’s mid-income
households.
Exhibit-13: Jeddah villa rents Q1-11 to Q2-12 Exhibit-14: Jeddah apartment rents Q1-11 to Q2-12
Source: JLL, Markaz analysis
Prices in Jeddah surged across locations in both villa(+26.3%) and
apartment markets (+40.4%) from 2011 to Q2-12, driven by undersupply and pass-through of higher progressive development
costs incurred by developers as a result of the shortfall of housing supply, mainly in the middle income and lower middle income
segments. However, certain locations have witnessed Q-o-Q declines
in Q2-12, as a result of new supply.
Jeddah to remain structurally undersupplied
over 2012 & 13
Western Jeddah apartment rents increases
24.7% since Q1-11
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 14
Exhibit-15: Jeddah villa prices Q1-11 to Q2-12 Exhibit-16: Jeddah apartment prices Q1-11 to Q2-12
Source: JLL, Markaz analysis
We expect prices in low & middle income housing in Jeddah to
continue to move up, depending upon locations and type of residence,
as demand would continue to exceed supply. With land prices constituting over 60% of the total development costs, larger
developers more focused on catering to the mid and high income housing. As a result of the high land prices, we also expect emerging
trend of buyers opting for multi-family villa dwellings and duplexes to
continue as against owning single family dwellings. As for rentals, we expect villas in compounds to continue to increase higher than the
overall villa market due to the limited supply expected over 2012 & 13, and apartments with good amenities and infrastructure to witness
rental increases from higher expat leasing activity.
Land prices constitute
over 60% of total
development costs in Jeddah
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 15
Dammam & Khobar residential outlook Based on the 2010 census data, we estimate the number of households in Dammam & Khobar as of 2010, representing residential
demand, to be over 231,000 households, derived from population estimates of over 962,100 in Dammam & 597,800 in Khobar. We
assumed a lower household size for Dammam (5.86) & Khobar (5.44)
than the estimates of the Eastern Province as whole (6.38), provided by NHS. The population in Dammam & Khobar grew at 0.4% CAGR
over 2004-10, with lower Saudi population in 2010 than 2004 (-3.1%), caused likely by internal migrations, while expat population jumped by
6.9% over the period. Based on residential supply estimates from
Saudi Rama, Dammam & Al Khobar were undersupplied by c.42,800 units in 2010, as Saudi middle income households remained
undersupplied similar to Riyadh & Jeddah.
Exhibit-17: Dammam & Khobar undersupply build-up
Source: Saudi Rama, Markaz analysis
Supply in Dammam & Khobar is estimated to increase by 3.4% (CAGR) over 2011-14 with over 8,300 units of supply expected to be
added each year, as per Saudi Rama. We forecast the undersupply
situation in the Dammam & Khobar to increase over 2011-14 with c.15,500 units of incremental demand expected to be added per year
on an average during the period. Incremental demand is expected to be driven by population growth of 4.6% CAGR in these cities over the
period, higher than the average Eastern Province growth rate (+3.4%) primarily due to higher expat population growth and family size
reduction in Dammam (5.72) & Khobar (5.31).
Exhibit-18: Dammam & Khobar rental trends Exhibit-19: Dammam & Khobar price trends
Source: Broker estimates, Markaz analysis
Dammam & Khobar undersupplied by c.42,800
residential units in 2010
Incremental demand in
Dammam & Khobar to grow by 4.6% CAGR over
2011-14
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 16
As per estimates from various brokers, rents in Dammam & Khobar grew by c.20% on an average from FY08 to Q2-12, with villa rents
(+24%) growing more than apartment rents (+16%). Prices of villa
residences (+13%) grew higher than apartments (+11%) from FY-08 to Q2-12. We forecast the rental market in Dammam & Al Khobar to
remain particularly strong until successful implementation of the mortgage law, as home ownership still remains out of reach,
particularly for the middle income households. Prices of high income residences should continue to grow on higher demand, but the growth
rates are likely to be lower than what was witnessed in the past, as
incremental demand from migration is largely expected in the middle and lower income brackets. In spite of home ownership options, the
lack of the availability of home financing would continue to hamper higher realization of this latent demand potential until the mortgage
law is successfully implemented and terms are conducive to home
ownership for the middle income bracket.
Apartment and villa rents
grew by c.20% avg. since 2008 in Dammam &
Khobar
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November 2012
Kuwait Financial Centre “Markaz” 17
KSA office fundamentals The office real estate market is primarily driven by 1) existing demand
–supply trends 2) office based employment generation, reliant on overall economic growth particularly in the private sector for
incremental trends and 3) government initiatives towards encouraging office based business activity.
Labor growth in the services sector is the foremost driver for office space demand. The non-oil private sector employment in KSA is
expected to grow by 2.5% over 2010-14 and account for 73.1% of the total increase in jobs under the 9th DP. Labor growth in the services
sector is slated to grow by a higher 3.1% (CAGR) during 2010-14 and
constitute c.65.5%of the incremental employment, which should drive higher demand for office space over 2013 & 14. Also licenses for
commercial establishments provided by the Ministry of Commerce and Industry grew at a CAGR of 18.8% over 2009-11, after Y-o-Y growth
slowed down to 2.3% in 2009, which should help absorb supply if
trends continue over 2012-14. Further, the ease of starting a business in terms of number of days KSA is c.75% lower than the MENA
average, which could provide faster take-up of office supply.
Exhibit-20: KSA commercial license issuance trends
Source: Ministry of Municipal & Rural Affairs, Markaz analysis Supply side drivers in the form of construction permits for commercial & industrial sector grew at a CAGR of 16.1% over 2007-11, as
approvals in KSA take c.40% lower approval time than the MENA
average according to the World Bank. This should ensure that there are no delays in construction of office space getting underway. Based
on the aforementioned observations, we expect the office market demand fundamentals for KSA to remain conducive for higher office
space activity, while the overall prospects of the office sector would
also depend on existing and forthcoming supply dynamics of each city.
Exhibit-21: Commercial & industrial construction permits trends
Source: CDSI, Markaz analysis
Office space drivers to
grow by 3.1% CAGR over
2010-14
Commercial & industrial
construction permits grew
by 16.1% CAGR over 2007-11
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 18
Riyadh city office outlook Our analysis suggests that the Riyadh office market is likely to remain
oversupplied over 2013 & 14. The total city wide office stock as of
2011 is c.3.2 Mn sq.m and they estimate city wide vacancy rates to be 14% as of Q2-12, while CBD vacancies were estimated to be higher at
16%, as per JLL estimates. However in spite of vacancies in the aforementioned areas, completed Grade A space reportedly remains in
short supply as the government, Saudi conglomerates & multinationals continue to seek high quality office spaces. Further office supply of
grade A and B office spaces located in the CBD, North & East ring
Roads, Khurais, Mazer and Sitteen Streets, estimated at 1.8 Mn sq.m in Q2-12 by JLL (c.56% of the total Riyadh office market), is expected
to grow by 21.3% over 2011-14, with c.1 Mn sq.m expected to be added over 2013 & 14. The increase in supply is largely expected from
the delivery of the first buildings of the new office stock from the King
Abdullah Financial District (KAFD) and Information Technology Communications Complex (ITCC) projects with c.500,000 sq.m of
office space combined likely to be added over 2013. KAFD, developed by the Public Pension Agency is located north of Riyadh, is mainly
Grade A quality office space along with a financial academy and other
recreational facilities has a floor area of over 3 Mn sq.m. The ITCC complex is located next to the King Saud University & King Abdulaziz
Science & Technology City, with a floor area of 0.8 Mn sq.m mainly constituting office spaces, along with a research & development
building, and housing for IT & communications companies.
Exhibit-22: Riyadh office rental trends Q3-08 to Q2-12
Source: JLL, Markaz analysis
The continuing addition of office stock and the gradual pickup in office
supportive economic activity post the global financial crisis resulted in
lower average office rents in Riyadh over 2008-12. Average CBD office rents declined c. 27.1% from Q3-08 to Q2-12 as a result. We forecast
office rents to continue their receding trend, as the supply overhang is expected to continue weigh on rentals in spite of likely project delays.
Growth of labor and employment, primarily in the services sector form
the foremost drivers for office demand potential. We forecast overall labor growth in Riyadh to grow by 2.9% over 2011-14, and expect the
services sector labor demand to increase by 3.6%, which should be beneficial for higher take up of office space. Nevertheless, with
existing oversupply and high vacancy rates, new office supply expected to grow by a CAGR of 21.3% over 2011-14, and demand
side drivers expected to grow by 2.9%, we do not foresee any
Riyadh city wide office stock of c.3.2 Mn sq.m as
of 2011
KAFD & ITCC to
contribute to c.50% of
the supply over 2013 & 14
Demand drivers to grow by only 2.9% CAGR; while
supply grows at 21.3%
CAGR over 2011-14
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 19
structural positive trends emerging from the Riyadh office market. However, as new supply from KAFD and ITCC come in, and overall
office supply increases, we expect rents in current Grade-A (JLL Q2-12
average: SAR 1,330/sq.m) & Grade B (JLL Q2-12 average: SAR 900/sq.m) office market to decline and vacancy rates to increase, as a
result of the exodus to these new office spaces. These reduced rentals should translate into higher affordability for office space occupants
who could potentially deviate from existing Grade B & C office spaces and take up higher quality Grade A & B office spaces in Riyadh,
thereby bringing down vacancy rates in such types of office spaces in
the longer term.
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 20
Jeddah office outlook The Jeddah office market, similar to Riyadh is likely to remain oversupplied over 2011-15. However as most of the new supply added
in 2012 is limited to one single project which is already 75%-80% pre-leased, we expect incremental office demand-supply trends to be
much more balanced as compared to Riyadh, and higher
achievements of the services sector labor growth to result in a quicker take up of the excess supply of office and unwinding of the supply
overhang.
Exhibit-23: Jeddah office supply trends
Source: JLL, Markaz analysis
Grade A & B office stock in Jeddah’s CBD as of 2011 was 574,000
sq.m and estimates of CBD vacancy rates stood at 27% as of Q2-12,
according to JLL. Further office supply of grade A and B office spaces located in the CBD are reportedly expected to grow by 17.4% over
2011-14, with bulk of the supply coming from the addition of c.75,000 sq.m from a single project-The Headquarters by Q4-12, which is
already 75%-80% pre-leased. The increase in supply and the gradual recovery of economic activity post the global financial crisis resulted in
lower average office rents in Jeddah over 2008-12. Average CBD office
rents declined c. 29.5% from Q3-08 to Q2-12 as a result. We forecast office rents to remain subdued over 2013 & 14, as the supply of office
stock is expected to exceed demand for office space during the period.
Exhibit-24: Jeddah office rental trends Q3-08 to Q2-12
Source: JLL, Markaz analysis
Overall labor growth in Jeddah is forecasted to grow by 2.8% (CAGR) over 2011-14, and we expect the services sector labor demand to
increase by 3.3%, which is expected to aid office space demand, in our view.
Unwinding of office space
oversupply in Jeddah to be quicker than Riyadh
Avg. CBD rents in Jeddah
declined 29.5% from Q3-08
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 21
Dammam & Khobar office outlook Office space in the Dammam & Khobar market largely followed trends witnessed in other office markets in KSA and remains oversupplied.
Our estimates of vacancy rates stands at c.20% and our market research suggests that supply is reportedly expect to increase at a
CAGR of 7% over 2012-14 with almost half of the supply catered
towards office spaces for organizations with 10-39 employees.
Exhibit-25: Dammam & Khobar office rents Q3-08 to Q2-12
Source: Markaz analysis
Demand-side fundamentals in the Dammam & Khobar are still
expected to be driven by the government and oil sectors which are likely to grow by a CAGR of c.4.5% and 2.4% respectively over 2012-
14. However though the growth rates seem to be healthy, c.75% of the employees continue to be employed outside the government and
oil sectors. The office space demand, mainly resulting from the
incremental growth in number of employees outside the government and oil sectors, mainly in the services sector, is only likely to grow by
c.3.5% as per our forecasts. Therefore with vacancy rates of 20% and relevant demand set to grow at only c.4%-5% at best, while supply
gets added at over 7.0% over 2012-14, we expect the oversupply in the Dammam & Khobar office market to persist over the medium
term.
Office rents in Dammam & Khobar declined by an avg. 15% over 2008-12, lower than Riyadh (-29.5%) and Jeddah (-27.1%), as most
of the office demand was from the government and the oil sector providing stability to office rentals. Office spaces in Khobar are more
preferred compared to Dammam, as office spaces in Khobar are more
high quality driven by the hospitality industry, and close proximity to Bahrain. An alternate source of office space demand in Khobar is also
seen from representation offices setup in the city, as many projects are being set up in Jubail in the areas of contracting and oil & gas. We
forecast office rents to recede over 2012 & 13, in-spite of a pick-up of
office space demand in H1-12 due to high vacancy rates as aggregate office supply is expected to exceed demand for office space over the
medium term.
Office rents in Dammam & Khobar declined by.
15% avg. over 2008-15
Representation offices from other Eastern
Province cities constitute alternate source of
demand in Khobar
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 22
Real estate sector liquidity
Property and construction sector lending has been increasing steadily
from 2009 to 9M-2012 at a CAGR of c.17%, aiding property and
construction GDP to grow at over 6% over the period. Further, lending to the sector in 9M-12 has already surpassed the full year 2011 figure
by c.4% pointing towards adequate liquidity available for the sector. Credit lending to real estate & construction sector as a percentage of
total credit remained broadly stable from 7.2% in 2010 to 7.4% in 9M-
12, after dipping in 2009 to 6.1%. Furthermore, real estate credit grew marginally from c.7.5% of private credit in 2010 to c.7.8% in
9M-12, and increased from c.3.9% of total assets in 2010 to c.4.4% in 9M-12. Mortgage financing trends have grown substantially from Q1-
09 to Q2-12 growing over 200%, and witnessed a c.53% jump from
Q-o-Q from Q1-12 to Q2-12. The jump is mostly ascribed to increased lending confidence on behalf of banks from the Real Estate
Development Fund (REDF) recapitalization and anticipation of the mortgage law getting approved.
Exhibit-26: Building & Construction credit trends Exhibit-27: Mortgage financing trends
Source: SAMA, Markaz analysis
We expect the liquidity situation for the KSA banking system to remain
extremely strong, fully supported by internal funding (resident
deposits), as total combined public and private sector credit requirements only constitute 62% of the internal funding of Q3-12,
and has remained c.60% since 2007. The excess internal funding is channelized mostly into investments (13.2% as of Q3-12) and
reserves (10.1% as of Q3-12). Further, bank internal funding
constituted over 94% of the overall asset position as on 9M-12, and remained above 90% since 2007. Moreover, resident customer
deposits amounted to c.85% of overall customer deposits in Q3-12, and have remained above 80% since 2007, while the liquid assets-to-
total asset ratio remained over 22% over 2007 to Q3-12.
As the overall banking system remains strong & well capitalized from internal funding and resident deposits, we expect the credit lending
situation to the real estate & construction sector to remain comfortable over 2012 & 13. Furthermore, the implementation of the
approved mortgage law by the Saudi Arabian Council of Ministers in Jul-12 would have a positive impact on mortgage financing trends if
affordability constraints are adhered to effectively.
Construction and real estate lending remained
Stable from 2010 to 9M-
12
Total funding requirements constitute
only 62% of funding
receipts
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 23
Exhibit-28: KSA liquidity funding position
Source: SAMA, Markaz analysis
Transaction trends counterintuitive
Transaction trends, an indicator of the liquidity environment prevalent
in the key real estate markets of Riyadh & Dammam declined from Q1-11 to Q3-12 and are counterintuitive to the undersupply situation
prevalent in KSA’s residential market, even more so as lending to the real estate sector has been stable. Earlier, the lower transaction
activity was ascribed by the market to diversion of capital towards the equity market looking at trends from Aug’11 to Mar’12. However,
those observations have been rendered inaccurate as both real estate
transactions and equities have trended lower since Mar’12. It remains to be seen whether the decline in transactions can be ascribed to
investors remaining on the sidelines, due to the substantially higher price environment. We would continue to monitor this divergence and
trends in real estate transactions going forward for conclusive trends.
Exhibit-29: KSA weekly RE transactions & TASI index trends
Source: Bloomberg, MOJ, Markaz analysis
The downtrend in transactions is more evident in Riyadh as residential
real estate & office transactions were down 69% and 55% on six
month summation basis over the period; whereas the decline in Dammam was lower at 22% and 10% respectively.
Liquidity scenario strong
as 94% of total banks funding from internal
sources
Intriguing transaction
trends witnessed since Q2-2011
Residential transactions
down 69% since Jan-11
till date
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 24
Exhibit-30: Transactions* on trailing six month summation basis
Riyadh transactions Dammam transactions
Source: MOJ, Markaz analysis
Exhibit-31: Yearly transactions trends
Riyadh transactions Dammam transactions
Source: MOJ, Markaz analysis, * until 21-Nov-12
MENA REAL ESTATE RESEARCH
November 2012
Kuwait Financial Centre “Markaz” 25
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Kuwait Financial Centre “Markaz” MENA REAL ESTATE RESEARCH