Affordable demand: Opportunities in the housing market grow as the population increases

One of Jeddah’s most pressing needs is a vast supply of new housing, both to cater for an expanding population and improve the quality of living for those in unplanned settlements. Growing 1.5% each year, Jeddah’s population is projected to be 13% higher in 2015 than in 2010, according to the Jeddah Development and Urban Regeneration Company (JDURC). By 2025 that figure will be 28% higher. This pressure is expected to make for an annual need of over 43,000 new housing units by 2015, and growing to about 58,000 by 2025. Jeddah is in greater need of new housing than any other region in the Kingdom, according to the 2009 Jeddah Strategic Plan. Despite significant additions – 60,000 units between 2012 and 2015, according to Jones Lang LaSalle (JLL), the international real estate firm – demand looks set to remain ahead of supply for some years. More relief should be provided by several large developments currently being under way by the JDURC, although delivery on these has not been fixed.

While private developers have shown some concrete interest in Jeddah, the JDURC hopes that government-led projects will serve to catalyse investment from the private sector. “People often mistake us for a straightforward development company, but our primary function is to provide real estate business stewardship and facilitate city-wide developments,” Greg Mackowiak, vice-president of development at the JDURC, told OBG.

Affordability

Around half of accommodations to be built in the coming decade are classed as “low-income” by the JDURC. “Getting the private sector interested in affordable housing projects is tricky, as profit margins in this segment tend to be lower than in others. That is why Jeddah’s government-led residential work is so important,” said Mackowiak. Developers have failed to bridge the affordability gap, catering mainly to the upper-income segment to the extent that roughly an eighth of all housing units in Jeddah stand vacant.

But attitudes are changing. While affordable projects have been on the agenda for years, the pace has picked up since King Abdullah bin Abdulaziz Al Saud announced in March 2011 that SR250bn ($66.6bn) had been allocated for construction of 500,000 new units over the next few years. In August 2012 the Pension Fund announced another public housing development project, including construction of 6160 apartments and 1180 villas geared to the middle and upper-middle class. The area, to the North of Jeddah, is likely to see increased demand in the years ahead with the King Abdullah Economic City and new airport close by.

Work on a grander scale is under way at Wadi Al Aslaa in Jeddah’s eastern outskirts. As the largest of JDURC’s projects, it spans around 130 sq km and will include residential space for around 170,000, as well as standard facilities such as a hospital, clinics, mosques, schools and a university. Also significant is the Salman Bay Housing Project, which looks to provide 25,000 units for low-income buyers, as well as a certain amount of retail space. Work on the vast project began in December 2012. Other JDURC housing projects include construction of 30,000 apartments and villas in South Jeddah, although these remain in the planning stage.

Private Sector

Despite the large demand for affordable housing, developers are likely to find more lucrative opportunities among higher-income ranges. The JDURC estimates that 20% of demand until 2025 will be in the high and upper-middle income ranges, with 30% in the mid-income range.

Several private developments are taking shape. A contract for infrastructure supply to the Al Fareeda project, a development by Jeddah-based Ewaan targeting mid-income buyers, was signed in 2011. Nearby at Masharef, Kinan is developing residential units alongside commercial and retail space, and began selling property in 2011. Both have managed to sell the majority of their units in the initial phases, which should encourage further investments.

Public-Private

At the lower end of the market, opportunities for private development are likely to be fewer, given the high costs of land and construction. However, public-private partnerships (PPPs) targeting the affordable sector have begun to bear fruit. Al Henaki Holding announced in March 2012 that it has begun developing 1000 affordable apartments at Kandara in cooperation with the municipality. These are scheduled for completion in two years, and will enable purchasers to make payments in monthly instalments.

Regeneration

Like new households, existing ones will also need new homes in the years ahead. In 2009 the Jeddah Strategic Plan estimated that 476,000 people would need to be relocated to improve living conditions in Jeddah’s unplanned settlements. Research by the JDRC in 2012 suggests that as much as 47% of the housing demand through 2025 will be replacement growth. “The social aspects of regenerating a dense urban environment like Jeddah’s are challenging,” said Mackowiak. “We need to advance our other development projects so that we have sufficient replacement housing to expedite regeneration projects.”

Still, the city is witnessing ambitious regeneration projects take shape. One example is Henaki’s development, while other examples are the Qasr Khozam and Ruwais projects led by the JDURC. Originally planned for completion in 2015, work at Qasr Khozam is being carried out by Khozam Real Estate, a PPP with developer Dar Al Arkan. Ruwais Alliance holds a 74% stake in the project, which aims to renovate one of Jeddah’s most rundown areas by 2017, and JDURC holds the remainder.

In spite of all this activity, demand looks set to remain high in the coming years, keeping upward pressure on rental and purchasing prices for villas and apartments. The average price for villa space increased by 11% in the first quarter of 2012 year-on-year – partly driven by an increasing inflow of upper-income expatriates – and average rental prices for apartments increased 10% in the same period, according to JLL.

Mortgage Law

Ratification of Saudi Arabia’s first mortgage law in July 2012 could create new demand in the home-buying market. Designed to clarify regulation that in the past led to costly legal disputes, the law is hoped to stimulate the Kingdom’s nascent mortgage market. By stipulating that the property being bought – rather than the borrower’s salary – will serve as collateral, the law should make it easier for lower-income groups to secure loans. It is also possible that the government’s Real Estate Fund will provide interest-free loans of up to SR500,000 ($133,250) to help them secure mortgages from private banks.

However, the law will not be a magic bullet. “Banks are expecting the Ministry of Finance to soon approve relevant bylaws, such as one that will allow properties to be repossessed if the owner defaults on a payment, and in general lenders will be hoping for full implementation of the rules,” Fayyaz Ahmad, associate director at JLL in Riyadh, told OBG. Others note the sharia-compliant structure is untested. Yet after a decade of debate, the passing of the law is seen as a significant milestone. “In the long term, this could boost the real estate market in Jeddah and throughout the Kingdom,” said Ahmad.