The Kingdom Tower dominates the night skyline in Riyadh. King Abdullah has pledged to spend 30 per cent of the country’s annual economic output on housing, job creation and other social and economic measures. Image Credit: Reuters

Riyadh: The Saudi property market is set to boom thanks to a boost in government spending. Reflecting this stimulus, the International Monetary Fund (IMF) recently announced economic growth forecasts of around 6.5 per cent in 2011 up from 4.1 per cent in 2010.

In March, King Abdullah pledged to spend 30 per cent of the Saudi Arabia's annual economic output (approximately $130 billion (Dh477.5 billion) on mass housing, job creation and a number of other social and economic measures. He announced he will be investing $67 billion building 500,000 homes in addition to his earlier pledge of $15 billion to finance the construction of 1.65 million homes over the next five years. A ministry was also established with a budget of $4 billion.

"A lot of projects are coming onto the market over the next year or two years so there will be a sudden surge in supply. We will have to see how this new supply affects the market," said Mike Williams, senior director of Middle East Research and Consultancy at CB Richard Ellis.

According to Jones Lang Lasalle's Top Trends for Saudi Arabian Real Estate in 2011, the increased spending will mean an increasing supply and demand and stimulate construction activity.

Stabilising the market

"With the initiative that the King has announced, there's the speculation it will help them to stabilise the market and prices," said Soraka Al Khateeb, Co-Head of Jones Lang LaSalle Saudi Arabia.

The Kingdom's growing population has led to high demand which has led to an increase in property prices by as much as 60 per cent in the first half of 2011 according to a recent report by CB Richard Ellis.

"As the housing demand and supply gap continues to widen due to robust population growth and limited supply [particularly of low and middle income houses], Saudi Arabia continues to face a housing shortage," stated the report.

As well as the new residential units funded by the government, Kingdom Holding's Prince Al Waleed Bin Talal recently signed the construction contact with the Bin Laden Group for the construction of the world's tallest tower in Jeddah.

"Because of the Kingdom Tower's iconic position, the value of the land surrounding the building will go much higher. In terms of the accommodation, it will be mostly catering to high end and it may be a bit excessive. It will have its challenges but being iconic is the name of the game and it will add value to the area," said Al Khateeb.

No mortgage law

A big deterrent to this growth is the lack of mortgage law in Saudi Arabia. While the kingdom has the largest property market in the GCC, it also has the least developed mortgage market said CB Richard Ellis.

Mortgage penetration rate is estimated at around two per cent in Saudi Arabia, much lower than the 14 per cent penetration rate in neighbouring UAE and the 70 per cent penetration rate in the UK. This means a shortage of owner-occupied residential housing. Currently less than 35 per cent of Saudis own a home.

"The government is going to help out the lower income sector, but the middle income sector is a huge potential which won't be fulfilled until the mortgage law comes in," said Williams.

According to Jones Lang Lasalle, infrastructure development is also needed to support the property market. Long term investments in infrastructure and transport include six airport projects valued at 25 billion riyals, two port projects valued at 12 billion riyals and 23 railway projects valued at 96 billion riyals.

Energy: meeting demands

Rapid economic growth and the resultant urbanisation boom is fuelling demand for power in Saudi Arabia. This has led to the Kingdom implementing multi-billion dollar investments in power infrastructure to boost production to meet current and future demands.

Recent reports indicate the Middle East's largest economy is set to spend close to $100 billion (Dh367.3 billion) in boosting energy production over the next decade. This includes the construction of new power plants, expansion of existing ones and improving distribution systems across the country. This investment forms a large chunk of the total $250 billion energy investments planned across the countries of the GCC.

"Given the huge expenditure involved in setting up new energy infrastructure and the rising patterns of energy use among the increasingly prosperous societies in the region, the effective integration of energy-efficient lighting systems along with infrastructural investments can promote sustainable energy use in the future," said Ahmad Pauwels, chief executive officer of Epoc Messe Frankfurt.

It is estimated that Saudi Arabia's vast appetite for energy will grow at eight per cent annually from the current peak levels of 44,000 MW to triple the current offtake by 2032 at 121,000 MW. It is also estimated that architectural and consumer lighting account for nearly a quarter of the power use across Saudi Arabia. To cope with this predicted rise in energy demands, the country plans to increase electricity production capacity by building a series of new plants. Plans include a thermal plant at the port of Yanbu on the Red Sea, with a capacity of 850 MW and a cost of $1.5 billion and the Ras Al Zor point in the eastern region.