Standard & Poor's said in a report that the demand for the housing sector in Saudi Arabia is supported by the government and its various initiatives, especially the Kingdom's Vision 2030, which targets the percentage of home ownership for citizens. The agency said in a report that the demand for the housing sector in Saudi Arabia is supported by the government and its various initiatives, especially the Kingdom's Vision 2030, which targets home ownership to reach 70%, so the government is expected to continue to support and finance new housing supply.
S&P said in a report that real estate developers in Saudi Arabia are expected to see significant growth supported by the lack of supply and government support for the real estate and housing sector. S&P added that the Saudi government expects the population and expatriate population to increase to 50% from 42% by the end of the decade, adding that it based its forecast on an estimate of annual population growth between 3 and 4% from 2024 to 2027.
S&P added that the Saudi government expects the population to grow between 3 and 4% over the period from 2024 to 2027, adding that it based its forecast on an estimate of annual population growth between 3 and 4% over the period from 2024 to 2027.
Riyadh alone is also expected to see a significant increase in population, increasing pressure on the already undersupplied real estate market in the city, where new supply will likely not meet projected demand.
Riyadh.
Mortgage lending growth
The agency also expects real estate lending to continue to grow but at a slower pace than previously due to market maturity, an expected rise in corporate borrowing as Vision 2030-related projects are implemented, and greater liquidity tightness in the banking system.Standard also said that it expects real estate lending to continue to grow but at a slower pace than previously. <S&P said solid demand will continue to drive Saudi Arabia's real estate developers" revenues and profits in 2024-2025 with a slight positive impact of an expected interest rate cut. As projects expand, Standard expects corporate profitability to stabilize after the improvement recorded in 2023.
S&P said. The agency suggests that off-plan real estate sales will rise given the Kingdom's housing supply needs and increasing financing needs.
The agency said that off-plan sales will rise given the Kingdom's housing supply needs and increasing financing needs. It said that off-plan sales would reduce the financing needs of the sector, as it would provide pre-financing for construction by accelerating the collection of cash and thus reducing risks for developers.
Off-plan sales would reduce the financing needs of the sector. It added that off-plan real estate transactions increased by 52% in the first half of 2023, expecting this strong growth to continue supported by a 9.% increase in the number of off-plan developers in the same period.
Off-plan real estate transactions increased by 52% in the first half of 2023.
Rising demand for office properties
The agency also expects rental prices for office real estate in Saudi Arabia to rise as new companies seek office space. As of January, foreign companies that receive government contracts in the kingdom are required to set up their regional headquarters in Saudi Arabia, it said.
Riyadh is also expected to see a rise in office real estate rental prices as new companies seek to set up shop. <Riyadh will be a direct beneficiary as this is expected to drive demand for office real estate, she said, noting that demand from government-linked companies in Riyadh is also boosting office rents.
Stimulating foreign demand for real estate
Standard & Poor's (S&P) sees the Kingdom's premium residency program introduced in early 2024 stimulating demand from foreign buyers for real estate in the Kingdom, noting that residential property prices in Riyadh have been rising since 2020 supported by strong local demand, but with the recently announced simplification of ownership and residency rules, higher demand from international buyers is expected, which could contribute to the return of real estate transactions to growth after a weak performance in 2023.While Standard & Poor's believes that the premium residency program introduced by the Kingdom in early 2024 will stimulate foreign buyers" demand for real estate in the Kingdom. <Based on the Kingdom's 2020 census, less than 5% of residential units in Saudi Arabia are owned by non-nationals, indicating significant growth opportunities. Under the new program, foreign buyers will be able to purchase real estate in the country. S&P also expects Riyadh to attract the most international attention, but noted that the high real estate investment requirement of 4 million riyals (~$1.07 million) under the program may deter many potential buyers and make it primarily aimed at high net worth individuals.
S&P also expects Riyadh to attract the most international attention.
Saudi market stability
"Saudi Arabia's real estate market is inherently more stable than Dubai's, mitigating the risk of rapid fluctuations in demand that could lead to pricing pressures," S&P said in its report.S&P said in its report. The agency attributed this to a number of reasons, including the fact that demand for real estate comes from the larger and more stable population in Saudi Arabia. Expatriates make up a smaller segment of the population in Saudi Arabia, around 42%, compared to Dubai where the proportion of expatriates exceeds 90%, so any potential decline in the expat population, especially during cyclical recessions, will have a much smaller actual impact on house prices in Saudi Arabia.
The agency added that the demand for real estate comes from the larger and more stable population of Saudi Arabia. The second reason is the government's support for housing demand through its various initiatives such as Vision 2030.
The second reason is the government's support for housing demand through its various initiatives such as Vision 2030.
Alternative funding sources
Regarding the real estate finance market, S&P said the lack of liquidity in the Saudi banking system means the need for alternative sources of funding, especially given the volume of projects across the country and across different sectors.S&P said that the lack of liquidity in the Saudi banking system means the need for alternative sources of funding, especially given the volume of projects across the country and across different sectors. real estate development companies listed in Saudi Arabia typically use term loans and revolving facilities from local banks for most of their funding. The companies' capital structure usually consists of bank debt and a limited amount of sukuk with an absence of bond issuances as well as sustainability-linked debt instruments. <This is in stark contrast to the more diversified capital structures of Dubai-based real estate developers rated by the agency. By the end of 2023, Sukuk accounted for 80% of capital for Emaar Properties, DAMAC and BNS Investments (Sobha).
Growth of real estate developers
As Saudi Arabia's capital markets continue to develop, S&P expects the markets, along with foreign investment, to increasingly fund the growth of real estate developers.
S&P Capital Markets expects the markets, along with foreign investment, to increasingly fund the growth of real estate developers. In S&P's view, real estate developers will increasingly need to tap domestic and foreign debt markets as financing costs remain relatively high.
S&P believes that real estate developers will increasingly need to tap domestic and foreign debt markets as financing costs remain relatively high. <For some real estate developers, this scale of expansion is new and investor appetite has not been widely tested, especially for smaller, privately-owned companies.
