Analysis Real Estate Young Saudi workers demand more affordable, smaller flats By Melissa Hancock November 29, 2022 Creative Commons Average apartment values rose 30 percent over the past 12 months, and some of the most desirable areas saw increases of 40 percent Younger Saudis leaving home earlier and want smaller propertiesIncreased employment also driving need for affordable real estateAffordability gulf causes home sales to fall 24% so far this year The total value of homes sold in Saudi Arabia rose 6 percent in the first three quarters of this year, with prices in some of the most affluent areas of the capital Riyadh rising by up to 40 percent year-on-year. Despite this, industry research showed the total number of Saudi real estate sales during the period fell by 24 percent, and experts said this highlighted the need for more investment in the development of smaller, affordable housing stock to cater to the changing needs of mainly young Saudi workers. PIF launches digital platform for Saudi’s real estate sectorSaudi Arabia’s housing loans hit $170bn in Q2 2022The new boom: 5 trends shaping Gulf property markets The latest quarterly research by real estate consultancy firm Knight Frank found that average apartment values in the Saudi capital rose 30 percent in the last 12 months. This is even higher, at around 40 percent, for some of the most desirable suburbs in north Riyadh. Villa prices in the capital too have risen by 20 percent. “The affordability gulf between buyer expectations and the significant house price increases registered in cities across the kingdom is underpinning the slowing in the number of home sales,” said Faisal Durrani, partner and head of Middle East research, Knight Frank. Durrani said one of the key factors to explain the data is a shift in demand towards smaller apartments, particularly among young Saudis. “The average Saudi household size is declining as young nationals are opting to fly the nest at a younger age, highlighting the decline in the popularity of multi-generational living,” he said. “In a country where 56 percent of the population is below the age of 35, this is a significant change and will likely be a substantial source of new residential demand going forward”. Research by real estate firm CBRE echoed the drop in the volume of Saudi home sales, highlighting the lack of new housing stock coming on the market to reflect the changing dynamics, which has pushed prices and rents upwards. “We are seeing limited levels of suitable stock curtail activity across the kingdom,” said Taimur Khan, head of Mena research at CBRE. “We expect this trend to continue in the short run where activity levels are likely to remain somewhat subdued and performance indicators continue to trend up, almost uniformly across sectors and major metropolitan areas.” Khan told AGBI: “We are seeing family formation structures changing pretty rapidly across the kingdom today. It’s quite a young population. “Previously – and it’s still the case to a certain degree – Saudis would stay at home until they were married, or in some cases, they would live at home permanently. “Historically speaking, most of the stock has been larger family units consisting of six to seven bedroom houses. That’s now starting to change in the Saudi real estate market and there’s a lot of development happening, particularly for quality apartments. “However there’s currently a bit of a lag whereby the right stock isn’t available for the new demand profile of a young Saudi national to buy.” Khan said he anticipates that the market will start to see suitable stock that is correctly priced ramping up over the next 18 months to two years. However, he also highlighted how the private sector will have to play a larger role. “The Saudi government is providing the right framework to encourage private sector investment and we’ve already seen that with the likes of the UAE’s Majid Al Futtaim coming in with projects like Riyadh North that are providing apartment living. “The government is certainly providing the correct incentives and the regulatory changes are very helpful but it’s very difficult for one party alone, even with the likes of ROSHN and so on, to meet all this rising demand.” Khan also noted how increased employment is driving the demand for apartments and affordable real estate. Figures from Saudi Arabia’s General Authority for Statistics show that in the 12 months to Q2 2022, the total employment for Saudi nationals and non-Saudi nationals increased by 10.9 percent and 9.5 percent, respectively. This equates to an additional 1.46 million people being employed in Saudi Arabia on an annualised basis, with total employment now sitting at 3.9 percent higher than pre-pandemic levels. “We’re now starting to see greater Saudi nationals’ participation in the workforce, including female employment, which has increased quite rapidly,” Khan said. “I think private sector involvement will be key to supplementing what the government is doing, particularly when you take into account the middle and higher quality segment of the apartments market where there is also demand.” CBRE’s research in the mortgage market noted the same trend, with the number of mortgage contracts issued by banks down 15.9 percent year-on-year. Yet analysis of the numbers showed that the total number of mortgages linked to smaller, affordable apartment purchases increased by 12 percent in the year to August 2022, while those linked to more expensive, larger villas declined by 45 percent over the same period. The Saudi government will be keen to reverse the decline in the issuance of mortgage contracts, and the drop in volume of home sales, given the emphasis it has placed on boosting home ownership in recent years. In 2016, the Saudi government unveiled a target of 70 percent home ownership by 2030 as part of its Vision 2030 plan. The same plan had targeted 60 percent homeownership by 2020 which, according to the IMF, was surpassed with a figure of 62 percent. However, the slowdown in mortgage issuance is expected to continue into the near future according to industry commentators. “Eventually, the increase in interest rates and the higher base will result in lower origination in the next 12 to 24 months,” noted Roman Rybalkin, a primary credit analyst based in Dubai for global ratings agency S&P, in a report published in July. The Central Bank of Saudi Arabia has been steadily raising interest rates this year in lockstep with the US Federal Reserve’s hiking cycle which, in turn, has made mortgages more expensive. This is expected to weigh on mortgage growth into 2023, S&P said. The contraction in Saudi Arabia’s real estate market this year sits in stark contrast to the rapid expansion in its economy which recorded the highest real GDP growth among G20 countries in the third quarter of this year, at a rate of 8.6 percent.