The Saudi Arabian real estate and construction sector presents one of the most attractive investment opportunities in the region according to NCB Capital (NCBC). With 70% of the population below the age of 30 and growing at a healthy rate, there is an acute housing shortage ahead. NCB Capital forecasts incremental residential demand at over 1.3 million units over the next seven years and expects that investments in excess of SR 680 billion ($ 180 billion) would be required. The top four provinces of Makkah, Riyadh, Madinah and Eastern Province by themselves would require a housing investment of over SR 600 billion ($160 billion) by 2015.
In a report titled ‘Kingdom under construction’, NCB Capital expressed a bullish outlook for companies in the real estate and allied sectors in Saudi Arabia. NCB Capital believes that a key driver in the sector is the expected mortgage law. In April 2008, rents rose 20.4% over the preceding year, contributing to inflation which hit a 27-year high of 10.5%, due to the lack of residential supply and individuals forced to rent (rather than buy). NCBC expects the Government will expedite the proposed mortgage law, which is already part of its inflation mitigation plan, which in turn will unlock significant demand.
NCB Capital highlighted that KSA has relatively high rental yields. Easy liquidity and negative real interest rate give investors a greater incentive to invest in real estate to benefit from attractive rental yields. Thus the upcoming mortgage law will improve housing affordability, driving more people to buy instead of rent. The report estimates that by 2012 the Saudi mortgage market could increase five fold to SR 86.5 billion ($23.1 billion).
The report expressed a bullish outlook on commercial real estate. Despite commercial rentals rising 15% per annum over the last five years, they still remain low compared to regional and global levels (for instance rentals for prime office space in Doha and Dubai are at a steep premium of 190% and 168% respectively to Riyadh). Additionally the Government is acting as a catalyst for growth, with initiatives such as the economic cities and industrial zones contributing to a project pipeline estimated in excess of SR 1.75 trillion ($468 billion) which will drive demand for industrial goods and services as well as building materials. The construction of four of the six economic cities for instance, will require an investment of SR 260 billion ($69.4 billion). This by itself will create incremental demand for more than 130 million tons of cement (as against forecasted industry capacity of 50 million tons by 2010).
The report highlights the booming retail sector in the Kingdom and estimates that the potential for the sector exceeds SR 130 billion ($34 billion). The hospitality sector as well is in a high growth phase with occupancy rates, average room rates and revenues per room on the rise – though still lower than regional levels. Potential for religious tourism is huge with infrastructure capacity for tourists being increased to satisfy demand that could exceed 9 times the current number of pilgrims. The report also discusses the interesting investment opportunities presented by timesharing opportunities in the holy cities of Mecca and Medina.
NCB Capital believes key challenges facing the sector in the Kingdom include construction costs which have been on the rise, driven by rising labor costs (due to unavailability of adequate labor) and raw material costs. The affordability of housing is also a genuine issue for lower income families.
The report aims to provide investors with NCB Capital’s outlook on the broad industry and includes profiles of 18 listed companies within the real estate, construction and allied sectors. NCB Capital expects to shortly publish detailed reports on key companies in Saudi Arabia that are expected to benefit from the strong growth being witnessed in the sector.