Riyadhi
December 28th, 2005, 08:15 PM
The Real Estate Boom
P.K. Abdul Ghafour, ghafour@arabnews.com
Eye-catching residential towers and superstar hotels in Makkah and Madinah; state-of-the-art mega malls and commercial centers in Riyadh, Jeddah and Dammam and impressive tourist infrastructure facilities in Taif, Abha and Baha; all give a picture of booming real estate market in Saudi Arabia.
The boom has been attributed to the continuous repatriation of Saudi funds from overseas and increasing liquidity supported by soaring oil revenues. But the burgeoning market needs to be regulated and organized in order to avoid scams, of which there have been quite a few, as well as achieve continuous progress and maintain investor confidence.
Real estate is the fastest growing sector in the Kingdom, drawing more than SR1 trillion in investments. Not just the Kingdom. “The growth of real estate in the Kingdom is considered the second highest in the world after Shanghai,” says Solaiman Al-Majed, chairman of the Tanmiyat Group.
Government projects and initiatives provide major opportunities for the private sector. They also continue to ensure that the construction industry remains the largest non-oil economic sector in the Kingdom. It is expected to contribute more than $15 billion to the national economy this year. Higher than expected oil prices and positive economic growth rates enabled the government to increase its budget allocations for the construction of new schools, colleges and universities, housing units, hospitals and desalination plants. This has provided a major boost to the real estate industry.
Recognizing the need to diversify and reform its economy, the government has provided incentives and relaxed laws. This has boosted the private sector’s enthusiasm for investment — heavy investment — in residential and commercial buildings, and thus meet the needs of a growing population. It is estimated that 555,000 individuals will need new housing annually. This gives ample scope for developers. It equates to 100,000 new residential units a year. Additionally, the Kingdom is also developing its tourism industry (largely local and religious tourism) and it is expected to contribute $22 billion to the economy by 2023.
The two growth factors — population and tourism — will have a positive impact on other sectors of the economy, especially in the development of restaurants, shopping malls, resorts, recreational centers and theme parks, hotels and business centers.
The Kingdom’s new Real Estate Law allows non-Saudi residents to own real estate for their private residence with the permission of the Interior Ministry. It also allows ownership of real estate by foreign investors to conduct their business activities and to own properties needed for their accommodation and that of their employees. The law also entitles investors to rent out property. It is anticipated that the new law will encourage major international companies and property developers to enter and influence the Saudi market.
The law, however, has made provisions to prevent artificial price hikes and real estate speculation. To ensure this, it stipulates retaining ownership of a property for at least five years. At least SR30 million should be invested to obtain a license to purchase land and buildings for selling and renting purposes.
The emergence of a large number of real estate development companies in the Kingdom within a short time reflects the attraction of this lucrative market. “Total investments in 53 real estate share businesses across the country have reached more than SR14 billion,” says Abdul Monem Murad, chairman of the real estate development committee at the Jeddah Chamber of Commerce & Industry (JCCI).
Abdul Rahman Al-Jeraisy, chairman of the Riyadh Chamber of Commerce & Industry (RCCI), is spearheading a joint venture with other businessmen to set up a large real estate company in Riyadh with a capital of SR30 billion. The new company will have a strong presence all over Saudi Arabia, said Al-Jeraisy. His estimate is that five million housing units will be required by 2010.
A recent study showed that Makkah and Madinah have become the most preferred areas for real estate investment. Riyadh came second and Jeddah third followed by Alkhobar, Dammam and Abha. It estimated that real estate investment in Makkah alone during the last three decades was SR400 billion. Out of the SR15 billion invested every year, 50 percent was channeled to the central area around the Grand Mosque.
Real estate business in Madinah attracted many Saudi investors following approval of 60 new projects valued at SR60 billion for developing the central area of the holy city. “The number of pilgrims visiting the two holy cities will exceed 10 million by 2020. This fact alone vindicates how much the lucrative real estate business may grow in the two holy cities,” says Mowad Al-Hassan, a real estate agent.
The area outside the Grand Mosque in Makkah — where a square meter of land can cost SR300,000 when it is available — is the most expensive in the world. Businessman Mansour Abu-Rayash expects real estate prices to continue to soar in the next five years. According to him, the area that will witness the highest price increase is the prime real estate around the holy mosque where land prices could cross the SR500,000-a-square-meter mark.
Increases in property prices and rents in areas close to the Prophet’s Mosque in Madinah have affected not only small-scale traders but also visitors of the mosque. There is a scramble for land to develop. Trader Khaled Al-Amoudi said he was finding it difficult to expand his business because of the sudden increase in rents. The central area is the prime target for investors. “I sold my store, which is just 12 square meters, for SR1.5 million,” says Ahmad Al-Ahmadi. But the other side of the coin is that poorer pilgrims and visitors now face the problem of finding accommodation at reasonable rates in the area.
Apart from businessmen, thousands of ordinary Saudis have invested their money in real estate, in the expectation of large profits. But financial analyst Abdelmenem Jamil Addas says this is not a healthy trend. “People think that they are seeing the dawn of a new era in the real estate market, that it will bring unimaginable riches and prosperity to all. This overconfidence will have dangerous consequences on our economy,” he says.
The recent rise in real estate prices, according to Addas, is being fueled by artificially low short-term interest rates and a huge increase in bank loans. “We should not forget that as soon as interest rates rise, the rally in real estate prices will come to an abrupt end,” he said. Any market that is rising because of an increase in bank’s loans ought to be viewed with great caution, he adds.
High liquidity can be both a boon and a curse to an economy, depending on the circumstances. “The filtering of this liquidity in massive proportions into the property market has caused high prices and inflation, especially in an environment of low real inflation averaging about two percent in Saudi Arabia and other GCC countries,” says analyst Mushtak Parker.
The market is still disorganized and needs to be regulated by stringent measures. Most investors do not have any idea about how the market operates and could suffer heavy losses. Some investors have done so already. There have been several property scams, with unscrupulous developers taking advantage of people’s trust and lack of knowledge. While conducting a workshop in Jeddah, Wafa Al-Ghamdi, an expert in the field, made a comparison between the professional approach toward real estate in the US and the chaotic way of developing and marketing real estate in Saudi Arabia. The professional approach relies on market studies, market analyses and meeting customer demands. “The Saudi real estate market still depends on old methods and does not meet customer demands, especially middle and lower class families,” she says.
Among the problems the Saudi real estate market faces is the domination of a few investors, lack of studies, lack of laws protecting the investors and customers, lack of transparency in dealings and the reliance on rumors to promote properties. “There is also lack of market awareness among customers, particularly women, and agents take advantage of the women’s lack of knowledge,” said Al-Ghamdi.
A JCCI working team recently made a number of proposals to make the business transparent and foolproof, protect the rights of investors and ensure steady growth. The team proposed that the flotation of real estate shares be restricted to licensed real estate offices and officially registered joint partnership companies. These should have a capital of not less than SR5 million and a business history of not less than three years. It wants real estate offices and companies to have commercial registration and have offices in the cities where they intend to float the shares. “They should get permission from the Ministry of Commerce and Industry before starting flotation procedures,” the team said.
Property in which shares are being marketed would have to be owned by the company, or its owner; there should not be any legal dispute as to ownership. Construction plans for a real estate project would have to be approved by the municipality where the property is located. A committee of not less than three and not more than seven members should be formed by shareholders to confirm that the funds invested in the business are deposited in a bank account and that cash withdrawals from the account are made for legitimate purposes.
The Council of Ministers, chaired by Custodian of the Two Holy Mosques King Abdullah, recently adopted a series of measures to regulate the market and protect the rights of investors. The Cabinet insisted that real estate companies must have the approval of the Ministry of Commerce and Industry to float shares for public subscription. The ministry must verify that the land for which the shares are sold is in fact owned by the company, which must have valid deeds; and the company or individual offering the shares must have at least a 20 percent stake in the property.
The new law also states that the real estate units offered for floatation should have a valid license from the municipality. There must also be a study by an official consulting office showing the building costs, duration of project and services. After obtaining the ministry’s approval and before advertising for investment, the company or individual must apply to the Capital Market Authority (CMA) to establish an investment fund under the name of the shareholding project. Before establishing the investment fund and advertising for shareholders, the owner of the land must register the land in court in accordance with Justice Ministry and CMA regulations to ensure that none of the land is sold off or otherwise alienated during the period of investment.
According to Dr. Abdul Aziz Turkistani, a real estate expert, the real estate boom has led to the creation of many professional companies. “These firms,” he says, “are working to improve their organizational structure and marketing strategy in order to transform the sector into a successful industry.” He feels real estate companies in the Kingdom should form an association to promote the industry with a view to facing competition from foreign firms.
The rapidly growing real estate sector offers a lucrative investment channel for Saudis and plays a significant role in the country’s economic development. The newly enacted regulations, coupled with awareness programs as well as the influx of more foreign investment, would strengthen the market further, especially after the Kingdom’s accession to the World Trade Organization. But the dangers remain, not least for investors going into the market with their eyes closed in the blind belief that property values will always soar.
P.K. Abdul Ghafour, ghafour@arabnews.com
Eye-catching residential towers and superstar hotels in Makkah and Madinah; state-of-the-art mega malls and commercial centers in Riyadh, Jeddah and Dammam and impressive tourist infrastructure facilities in Taif, Abha and Baha; all give a picture of booming real estate market in Saudi Arabia.
The boom has been attributed to the continuous repatriation of Saudi funds from overseas and increasing liquidity supported by soaring oil revenues. But the burgeoning market needs to be regulated and organized in order to avoid scams, of which there have been quite a few, as well as achieve continuous progress and maintain investor confidence.
Real estate is the fastest growing sector in the Kingdom, drawing more than SR1 trillion in investments. Not just the Kingdom. “The growth of real estate in the Kingdom is considered the second highest in the world after Shanghai,” says Solaiman Al-Majed, chairman of the Tanmiyat Group.
Government projects and initiatives provide major opportunities for the private sector. They also continue to ensure that the construction industry remains the largest non-oil economic sector in the Kingdom. It is expected to contribute more than $15 billion to the national economy this year. Higher than expected oil prices and positive economic growth rates enabled the government to increase its budget allocations for the construction of new schools, colleges and universities, housing units, hospitals and desalination plants. This has provided a major boost to the real estate industry.
Recognizing the need to diversify and reform its economy, the government has provided incentives and relaxed laws. This has boosted the private sector’s enthusiasm for investment — heavy investment — in residential and commercial buildings, and thus meet the needs of a growing population. It is estimated that 555,000 individuals will need new housing annually. This gives ample scope for developers. It equates to 100,000 new residential units a year. Additionally, the Kingdom is also developing its tourism industry (largely local and religious tourism) and it is expected to contribute $22 billion to the economy by 2023.
The two growth factors — population and tourism — will have a positive impact on other sectors of the economy, especially in the development of restaurants, shopping malls, resorts, recreational centers and theme parks, hotels and business centers.
The Kingdom’s new Real Estate Law allows non-Saudi residents to own real estate for their private residence with the permission of the Interior Ministry. It also allows ownership of real estate by foreign investors to conduct their business activities and to own properties needed for their accommodation and that of their employees. The law also entitles investors to rent out property. It is anticipated that the new law will encourage major international companies and property developers to enter and influence the Saudi market.
The law, however, has made provisions to prevent artificial price hikes and real estate speculation. To ensure this, it stipulates retaining ownership of a property for at least five years. At least SR30 million should be invested to obtain a license to purchase land and buildings for selling and renting purposes.
The emergence of a large number of real estate development companies in the Kingdom within a short time reflects the attraction of this lucrative market. “Total investments in 53 real estate share businesses across the country have reached more than SR14 billion,” says Abdul Monem Murad, chairman of the real estate development committee at the Jeddah Chamber of Commerce & Industry (JCCI).
Abdul Rahman Al-Jeraisy, chairman of the Riyadh Chamber of Commerce & Industry (RCCI), is spearheading a joint venture with other businessmen to set up a large real estate company in Riyadh with a capital of SR30 billion. The new company will have a strong presence all over Saudi Arabia, said Al-Jeraisy. His estimate is that five million housing units will be required by 2010.
A recent study showed that Makkah and Madinah have become the most preferred areas for real estate investment. Riyadh came second and Jeddah third followed by Alkhobar, Dammam and Abha. It estimated that real estate investment in Makkah alone during the last three decades was SR400 billion. Out of the SR15 billion invested every year, 50 percent was channeled to the central area around the Grand Mosque.
Real estate business in Madinah attracted many Saudi investors following approval of 60 new projects valued at SR60 billion for developing the central area of the holy city. “The number of pilgrims visiting the two holy cities will exceed 10 million by 2020. This fact alone vindicates how much the lucrative real estate business may grow in the two holy cities,” says Mowad Al-Hassan, a real estate agent.
The area outside the Grand Mosque in Makkah — where a square meter of land can cost SR300,000 when it is available — is the most expensive in the world. Businessman Mansour Abu-Rayash expects real estate prices to continue to soar in the next five years. According to him, the area that will witness the highest price increase is the prime real estate around the holy mosque where land prices could cross the SR500,000-a-square-meter mark.
Increases in property prices and rents in areas close to the Prophet’s Mosque in Madinah have affected not only small-scale traders but also visitors of the mosque. There is a scramble for land to develop. Trader Khaled Al-Amoudi said he was finding it difficult to expand his business because of the sudden increase in rents. The central area is the prime target for investors. “I sold my store, which is just 12 square meters, for SR1.5 million,” says Ahmad Al-Ahmadi. But the other side of the coin is that poorer pilgrims and visitors now face the problem of finding accommodation at reasonable rates in the area.
Apart from businessmen, thousands of ordinary Saudis have invested their money in real estate, in the expectation of large profits. But financial analyst Abdelmenem Jamil Addas says this is not a healthy trend. “People think that they are seeing the dawn of a new era in the real estate market, that it will bring unimaginable riches and prosperity to all. This overconfidence will have dangerous consequences on our economy,” he says.
The recent rise in real estate prices, according to Addas, is being fueled by artificially low short-term interest rates and a huge increase in bank loans. “We should not forget that as soon as interest rates rise, the rally in real estate prices will come to an abrupt end,” he said. Any market that is rising because of an increase in bank’s loans ought to be viewed with great caution, he adds.
High liquidity can be both a boon and a curse to an economy, depending on the circumstances. “The filtering of this liquidity in massive proportions into the property market has caused high prices and inflation, especially in an environment of low real inflation averaging about two percent in Saudi Arabia and other GCC countries,” says analyst Mushtak Parker.
The market is still disorganized and needs to be regulated by stringent measures. Most investors do not have any idea about how the market operates and could suffer heavy losses. Some investors have done so already. There have been several property scams, with unscrupulous developers taking advantage of people’s trust and lack of knowledge. While conducting a workshop in Jeddah, Wafa Al-Ghamdi, an expert in the field, made a comparison between the professional approach toward real estate in the US and the chaotic way of developing and marketing real estate in Saudi Arabia. The professional approach relies on market studies, market analyses and meeting customer demands. “The Saudi real estate market still depends on old methods and does not meet customer demands, especially middle and lower class families,” she says.
Among the problems the Saudi real estate market faces is the domination of a few investors, lack of studies, lack of laws protecting the investors and customers, lack of transparency in dealings and the reliance on rumors to promote properties. “There is also lack of market awareness among customers, particularly women, and agents take advantage of the women’s lack of knowledge,” said Al-Ghamdi.
A JCCI working team recently made a number of proposals to make the business transparent and foolproof, protect the rights of investors and ensure steady growth. The team proposed that the flotation of real estate shares be restricted to licensed real estate offices and officially registered joint partnership companies. These should have a capital of not less than SR5 million and a business history of not less than three years. It wants real estate offices and companies to have commercial registration and have offices in the cities where they intend to float the shares. “They should get permission from the Ministry of Commerce and Industry before starting flotation procedures,” the team said.
Property in which shares are being marketed would have to be owned by the company, or its owner; there should not be any legal dispute as to ownership. Construction plans for a real estate project would have to be approved by the municipality where the property is located. A committee of not less than three and not more than seven members should be formed by shareholders to confirm that the funds invested in the business are deposited in a bank account and that cash withdrawals from the account are made for legitimate purposes.
The Council of Ministers, chaired by Custodian of the Two Holy Mosques King Abdullah, recently adopted a series of measures to regulate the market and protect the rights of investors. The Cabinet insisted that real estate companies must have the approval of the Ministry of Commerce and Industry to float shares for public subscription. The ministry must verify that the land for which the shares are sold is in fact owned by the company, which must have valid deeds; and the company or individual offering the shares must have at least a 20 percent stake in the property.
The new law also states that the real estate units offered for floatation should have a valid license from the municipality. There must also be a study by an official consulting office showing the building costs, duration of project and services. After obtaining the ministry’s approval and before advertising for investment, the company or individual must apply to the Capital Market Authority (CMA) to establish an investment fund under the name of the shareholding project. Before establishing the investment fund and advertising for shareholders, the owner of the land must register the land in court in accordance with Justice Ministry and CMA regulations to ensure that none of the land is sold off or otherwise alienated during the period of investment.
According to Dr. Abdul Aziz Turkistani, a real estate expert, the real estate boom has led to the creation of many professional companies. “These firms,” he says, “are working to improve their organizational structure and marketing strategy in order to transform the sector into a successful industry.” He feels real estate companies in the Kingdom should form an association to promote the industry with a view to facing competition from foreign firms.
The rapidly growing real estate sector offers a lucrative investment channel for Saudis and plays a significant role in the country’s economic development. The newly enacted regulations, coupled with awareness programs as well as the influx of more foreign investment, would strengthen the market further, especially after the Kingdom’s accession to the World Trade Organization. But the dangers remain, not least for investors going into the market with their eyes closed in the blind belief that property values will always soar.