Saudi real estate has received a US$1.5 billion boost from the Saudi Real Estate Refinance Company (SRC), the debt platform established by the Kingdom’s sovereign wealth fund in February 2018 to accelerate economic diversification.

SRC has signed a portfolio purchase agreement with Alrajhi Bank worth SAR5 billion (US$1.33 billion), representing the biggest ever such deal in Saudi Arabia to date. The deal is part of the Public Investment Fund’s (PIF) efforts to diversify the economy by accelerating growth in the housing market by developing a secondary mortgage market in the Kingdom.

The agreement reflects SRC’s efforts to support the development of the residential real estate finance sector. Saudi Arabia’s housing demand was at 99,600 houses in 2021 and is expected to increase by more than 50% to reach 153,000 houses by 2030, according to PwC’s report  Transforming the Housing Sector in Saudi Arabia.

Access to sustainable financing solutions remains key with the SRC, having injected more than SAR6.5 billion (US$1.73 billion) by the end of 2020 with plans to refinance 20% of the Kingdom’s residential mortgage market by 2025. In 2022-2030, the Kingdom will need to create approximately 1.2 million new homes to reach a housing stock of nearly 5 million houses by 2030.

In early 2018, Saudi Arabia revealed plans to spend US$32 billion on subsidised home loans for borrowers, in order to expand the private sector’s role in a mortgage market that has traditionally been dominated by the government as well as US$3.4 billion to support home down-payments, to be spent in the period to 2030. The purpose of the programme is to expand the mortgage market, but reduce the direct role of the government. The government hoped to increase home ownership among Saudi citizens to more than 60% in the 2020s.

Demand for property finance in the kingdom is expected to rise from US$75 billion in 2017 to US$133bn in 2026. SRC was expected to refinance up to US$20 billion in the kingdom’s real estate sector in 2018-2023.

However, the Saudi real estate market is seeing a slowdown due to an increase in property prices, according to a survey by Knight Frank carried out in partnership with YouGov. Last year, the demand growth for homes in Saudi was at 84%, however, it has dropped to 40% this year. While house prices in Riyadh grew 45% in the past two years, the total number of homes sold in Riyadh fell by 34% last year, while in Jeddah there has been a fall of 16%, according to Knight Frank. Villas in Riyadh and Jeddah standing at 13.3x and 15.1x annual incomes, well above the globally accepted level of ‘affordability’ of 6x annual income.

Harmen de Jong, Partner – Head of Real Estate Strategy and Consulting, Saudi Arabia at Knight Frank said, “Domestic migration has been a key driver of housing demand in the kingdom. Our surveys have helped us to estimate that the level of domestic migration could be as high as 47% of the total number of Saudis in Riyadh, 42% in Dammam and about a third in Jeddah. Clearly not all of these ‘career migrants’ will be keen to buy a home in their adopted cities – in fact 68% claim they would move home should the right job arise.

“The critical consideration for the country’s developers will be how to cater to this typically young and footloose generation of Saudis, many of whom are finding themselves priced out of the home ownership market.”

Related funds PIF
Related tags Real Estate