Rising land costs are driving some developers in Saudi Arabia to focus on mid and high income housing as they try to cover their costs, despite strong demand for cheaper accommodation, industry experts say.

With a growing population of over 25 million, 70 percent of which is under the age of 30, the world's largest oil exporter will need to build one million new homes by 2014, HSBC said in a report last year.

Assaudia Real Estate Development is one such developer that has revised its plan to focus on mid income property.

'The market conditions have forced us to shift to mid income housing,' said Mohammad Al-Masaabi, the firm's sales supervisor told Reuters on the sidelines of a property exhibition in Jeddah.    

'Now we will not sell for less than 1.8 million riyals ($480,000) because costs have risen,' Al-Masaabi said, adding that land prices were 1,500 riyals a sq m when the firm planning the project but have since risen to 2,500 riyals a sq m.

The developer originally planned to build 1,000 homes in Jeddah that will cater to individuals with limited income. They planned to sell villas ranging from 800,000 riyals to 1.2 million riyals but revised their plan as land costs rose.

Kinan International Real Estate Development company, the real estate wing of Savola Group, will also cater to mid income customers and plans to develop a two million square meter development project for up to 11,000 homes in Jeddah over the next six years.     

While most demand for housing in the kingdom comes from low income individuals, the absence of a mortgage law is preventing them from buying homes as costs continue to rise.

'There is a great demand for affordable housing but [developers] can't take the risk of developing... to provide affordable housing units when they know the targeted segment cannot afford it without the mortgage,' said Sari Anbatawi, associate director at Colliers International.

'There is a section of housholds in Saudi Arabia where the income is less than 6,000 riyals a month, I don't think the commercial developers are focusing on this market,' said John Harris, head of Saudi operations at Jones Lang LaSalle. 

'This could be probably 40 percent of households... It is a very big market but we don't see a lot happening for that sector at the moment,' he added.

Saudi Arabia's long-awaited mortgage law has been in the planning stages for almost a decade. - Reuters