Holy Cities key to Saudi Arabia’s realty growth

Thanks to the increasing Hajj and Umrah visitation to Saudi Arabia’s Holy Cities of Makkah and Madinah, the kingdom has emerged as Middle East and North Africa’s (Mena) destination of choice among real estate investors.

Figures from the new Investor Sentiment Survey conducted by Jones Lang LaSalle show that while other real estate markets across Mena have seen a slowdown in both development activity and investment over the past 18 months, interest in Saudi Arabia has remained strong from both local and overseas investors.

It also shows Saudi Arabia’s construction sector grew 3.9 per cent in real terms in 2009 – faster than the 2.2 per cent growth registered in the previous year.

“This is partly a reflection of the knock-on effect of government infrastructure spending. The Kingdom’s real estate sector is still suffering from a shortage of housing units, a fact that has shielded it from sharp price corrections. The demand for new housing will continue, steered by the growing indigenous population,” the study states.

Property restrictions for foreigners eased

The survey says that the distinguishing feature of the Holy Cities is their unique importance as destinations for Muslims from across the world seeking to undertake Hajj and Umrah, adding onto the interest that has been mainly focused on the growth of the country’s largest cities of Riyadh and Jeddah.

“Saudi Arabia is a society organised around Islamic principles, based on its role as custodian of the Holy Mosques (located in Makkah and Madinah),” it says, adding, “the distinguishing feature of the Holy Cities is their unique importance as destinations for Muslims from across the world seeking to undertake Hajj and Umrah. The major challenge is how this demand can be balanced with the accommodation and other needs of the growing local population across the Kingdom including the Holy Cities.”

While restrictions on foreign ownership of real estate across Saudi Arabia have been relaxed recently, foreign parties are still prohibited from owning land in Makkah and Madinah.

“In practice this has not constrained the involvement of GCC and other foreign parties, a number of who have become major players in these markets through joint ventures with local Saudi developers,” the report states.

Riyadh, Jeddah housing sector buoyant

Official statistics show that the kingdom’s inflation has fallen from 10 per cent in 2008 and is forecast by local economists to be in a range between 4-5 per cent for the next two years.

“The one part of the inflation calculation that has remained stubbornly high has been the inflation of residential rents, which according to government surveys is still running at close to 10 per cent. The persistence of rental inflation should help support the economics for home ownership versus rental across Saudi Arabia,” Jones Lang LaSalle says.

Makkah and Madinah are the capital cities of two of the 13 provinces of the Kingdom of Saudi Arabia. These cities, which are located approximately 425 km apart, are relatively small by global standards, with resident populations of around 1.8 million and 1.1 million respectively, according the LaSalle report.

Meanwhile in Riyadh and Jeddah, the housing sector remains the most buoyant real estate market at the present time.

“Developers are shifting interest within this sector to more affordable housing, which will receive a major boost from the eventual passage of the long delayed mortgage law,” the advisory firm says.