Top five opportunities in the Saudi residential market
We highlight the top five stand-out opportunities in the Saudi residential market for developers, with insight from our recent residential surveys.
5 minutes to read
The diverging responses from tenants, homeowners and HNWIs (High-Net-Worth-Individuals) in our surveys reveal some remarkable differences, as well as similarities, all of which present a unique set of opportunities for the authorities and developers as they work to satisfy the seemingly insatiable demand to get on the housing ladder.
This has of course been spawned by the 2016 National Transformation Plan and Vision 2030 which aim to attract FDI, encourage private sector participation and improve the quality of life in the Kingdom.
Below we review five stand-out opportunities we have identified for the market to consider that will help deliver the ambitions of Vision 2030 and that align with our market experience, which has now been confirmed by our surveys.
1. Affordable housing
It is clear that the definition of what constitutes as “affordable” needs to be defined by the market. For now, we can look at income multipliers to give us a steer on the state of play: villas in Jeddah can cost over 12 times average annual incomes, while in Riyadh this figure is closer to 8.5 times annual household incomes. In either case, they are both above the usual 4-6 times annual earnings that is usually considered “affordable” globally.
To an extent, the Ministry of Housing’s programme has begun to address this, however clear gaps remain in terms of the type of stock being planned and the aspirations of would-be homeowners. Furthermore, demand preferences are evolving, with younger Saudi-nationals preferentially opting to live in apartments, mainly due to cost considerations, but also due to the lifestyle amenities that come with apartment living.
What’s more, household sizes are declining. This combined with significant population growth projections – Riyadh, for instance, is expected to house more than 15 million people by the end of the decade, from around 8 million today – suggests domestic demand stemming from young Saudi’s is going to grow for some time to come.
When it comes to budgets, the majority (48%) of tenants are looking to spend between SAR 750,000 and SAR 2.2 million (US$ 200,000 – 600,000). Finding a high-quality home within these ranges, particularly in Riyadh, is likely to prove challenging. That said, some developers have turned to townhouse developments to bridge this gap, while also offering a villa-like product that is priced above the Ministry of Housing’s (MoH) thresholds, but below planned/expected Giga project (the largest projects within Vision 2030) ticket prices. Still, the delta between the type of product being demanded, along with the accompanying budgets, represents a clear opportunity for developers to tap into a burgeoning segment of buyers who are looking for high quality, “affordable” homes.
Read about the latest trends in Saudi Arabia’s residential market.
2. Branded residences
Amongst existing homeowners, who are planning to either upgrade their homes, or buy a second home, the appetite to purchase a villa (44%) is perhaps unsurprisingly higher than apartments (41%).
The appeal of branded residences has been lower than what we anticipated, but this is not a surprise. It is likely due to the sheer lack of branded residential properties in the Kingdom. In Riyadh alone, there are just a handful of branded residential properties, which form a negligible proportion of the total residential stock in the city. That said, given the depth of demand for luxury second homes amongst HNWI homeowners (49% will spend between SAR 3-7 million, or US$ 0.8-2 million), there is a real opportunity to create and deliver a vibrant, branded residential market to satisfy some of this escalating demand for luxury living.
Read about the latest trends in Dubai’s branded residential market.
3. Second homes market
For the first time, we have been able to quantify the size of Saudi Arabia’s second-homes market in addition to the size of budgets for second homes in the Kingdom. At 44%, the number of homeowners looking for a second home is significant. The challenge of course will be to ensure that developers work in parallel with one another to ensure the risk of an oversupply of luxury homes is avoided.
4. Redefining living
The planned Giga projects are set to redefine living in the Kingdom, with our survey respondents demonstrating a particular soft spot for NEOM, attracted by its promise of delivering a cutting edge, ultra-modern city that will put people and the environment at the heart of its design and a city that is expected to form the centrepiece of Saudi Arabia’s transformation plans.
The gargantuan US$ 500 billion project has clearly captured the imagination of Saudi’s across the Kingdom, with the appetite to purchase here amongst tenants, homeowners and HNWI standing at 40%, 43% and 60%, respectively. Indeed, most are even willing to pay a premium for the privilege of living or owning a home here. Developers have a real opportunity to tap into this surging demand and meet the clearly laid out expectations of potential buyers
The excitement around NEOM is clear, but now work must begin to deliver on the promises made and more importantly, deliver a city that caters to the aspirations of the Kingdom’s hopeful home buyers and eager investors alike.
Creating a city from scratch, with a vibrant economy that draws in (and retains) talent is no easy feat, but numerous successful examples exist around the world. We feel some of the challenges around delivering NEOM could be addressed through private sector participation.
5. Private sector participation
Private sector participation can take many forms to ease some of the challenges highlighted above. The establishment of certification and training programmes for contractors, who aspire to become developers, will help to deliver the ambitious volume of real estate development being planned. Furthermore, it will foster better coordination between the private and public sectors, allowing the authorities to assume more of a supervisory and strategic role in transforming the nation, leaving the nuts and bolts of delivering the vision for a new Saudi to the private sector.
To an extent, this can be achieved through the ‘Master Developer Delivery Model’, which has worked well for some of Dubai’s master-planned communities such as Dubai Marina. This ensures that private developers are being offered the opportunity to participate in the success of the Giga projects whilst the bulk of the development risk is being absorbed by the government. Furthermore, we believe the widespread adoption of this model will spur innovation, boost the nation’s knowledge capital, and attract the attention of global institutional investment, while in parallel diversifying the Kingdom’s economy.
Download the full Saudi Arabia Residential Survey 2022