Saudi Arabia’s housing stock is expected to expand by 2.4 million units in the next 10 years, marking a rise of 52 per cent from 4.6 million units in 2010, a report said.

A growing population entering the marriageable age, an expanding labour force and a rising per capita income, will boost the annual demand for housing from 195,000 in 2011 to 264,000 units by 2020, added the latest Saudi Housing Sector Review released by NCB Capital, a leading asset manager.

Key regulatory initiatives such as King Abdullah’s injection of SR250 billion ($66.57 billion) into the construction of new homes, REDF allowing banks to offer bridge financing and the newly passed mortgage law will stimulate the demand for housing in the medium to long-term, the report said.

According to the review, the lack of affordable housing will continue to be a challenging issue, which has limited home ownership for Saudis, as renters account for the largest share of the population at nearly 60 per cent.

A change in cultural norms will cause a drop in the average household size, leading to a decrease to 5.28 persons per occupied housing unit by 2020, said the report.

Assuming historical growth rates, the Gross Fixed Capital Formation in residential construction will amount to SR650 billion through 2020.

After factoring in the allocation of SR250 billion, total expenditures will reach SR900 billion, still short by SR400 billion needed to meet the SR1.3 trillion in housing expenditures.

While all income segments will stand to benefit from the enactment of the mortgage law, those within the affluent segment will benefit the most as loan tenors and product ranges will increase.

Policy initiatives

The current policy initiatives are aimed at targeting pent-up demand for housing across the low, middle and affluent income categories, the report said.

Firstly, the allocation of SR250 billion ($66.57 billion) announced last year for the construction of 500,000 homes will largely benefit the low income segment.

With the average value of a housing unit approximately falling in the SR500,000 price point, such a level is within an affordable range to the lower income demographic. Meanwhile, the speed at which these homes are expected to be erected underscore the lack of input the buyer will have to customize or tailor these homes as they will largely be constructed on a pre-fabricated basis.

Secondly, the SR40 billion capital injection in the REDF and the increase in loan size from SR300,000 to SR500,000 along with the supplementary bank lending program known as Dhamen, will primarily cater to the middle income segment.

This will allow for the purchase of an existing dwelling unit such as a villa at a cost that exceeds SR500,000 without a prerequisite to own land. As the mortgage industry matures and competition heightens, the middle income segment will stand to benefit the most from aggressive mortgage rates and lower risk criteria set forth by lending institutions.

Although the benefits of such changes may not be felt until the medium to long-term, it will go a long way to-wards providing economic stability in the market. Lastly, the ratification and enforcement of the mortgage law will provide much needed clarity to the housing market and will allow for the proliferation of new mortgage products.

While all income segments will stand to benefit from the enactment of the mortgage law, those within the affluent segment will benefit the most. Current residential lending by banks use various forms of financing but prefer ljara scheme due to the lack of legal regulation necessary to implement mortgages.

The mortgage law would allow for greater use of Islamic financing schemes within mortgage lending between developers and potential buyers.

Motivated also by implementation of the law, banks would be inclined to issue mort-gages with higher loan amounts and longer amortization periods than is currently being offered.

The estimated SR1.3 trillion investment needed to construct the 2.4 million housing units between 2011-2020 illustrates the magnitude of expenditures needed by both government and private entities in order to close the supply and demand gap.

According to the report, the growing demand in the housing market will create many opportunities for both commercial banks and real estate developers alike to take on more active roles.

The residential bank lending will reach SR60 billion in 2012, the report added. – TradeArabia News Service