Wanted: Affordable Homes

WHAT CRISIS? The Housing Ministry estimates the country’s need of over 3 million units by 2025, but experts say it is rather hard to provide this supply by then.

Saudi Arabia seeks PPP to find a solution for its affordable housing shortage

By Farha Abdelhaq

The lack of affordable homes available to rent or purchase has been a major concern for Saudi’s burgeoning populace.
Over the past 15 years, the population of the capital city, Riyadh, has increased by over 50 percent to 6.5 million people. However, only 500,000 new houses were built during that period, according to a report by property consultancy firm, Chestertons KSA.

In this regard, the shortage in supply and the continuously increasing demand for affordable housing has created a crisis in the Kingdom.

The extent of the shortage of affordable housing varies in each city. In major cities such as Jeddah, Riyadh and Dammam, the shortage of affordable housing is in the tens of thousands, whereas in smaller towns, the shortage can be in the low hundreds of units.

At present, Saudi Arabia needs over three million units in the next 10 years, according to the Saudi Housing Ministry, which projects the number of the population to increase to 37 million in 2025 from a current 31 million. And the market is unequipped and inadequate to provide the required units at this time.

“If I were to put it, the housing crisis is probably the second most underlying issue for the government after unemployment,” says Yousra, (not her real name), a Saudi national who works as a public servant.

According to her, “with low salaries, it is hard for financiers to offer [the average Saudi] a housing loan. They see it as a big risk to offer a loan over a period of time that may extend between 20 to 30 years. There are lots of factors to be considered and risks, such as the drop in oil prices and others.”

“The average monthly salary within the private sector does not exceed SR5,000 ($1,333), while the public sector enjoys a higher average of monthly income of SR10,000 ($2,667). However, across the home-financing portfolio, average contract size has increased from SR700,000 ($186,721) to SR900,000 ($240,008) recently,” Nader Alomeri, CEO of Saudi Home Loans, tells Newsweek Middle East.

Defining “affordability” is necessary here, says Tuba Terekeli, a real estate consultant, adding that “under the current scheme, affordability is beyond the average-salaried Saudi.”

“We have this misconception that if a house is 1 million riyals, it is affordable,” says Terekeli.

The Ministry of Housing (MoH) has defined affordability of a house by its value, that ranges anywhere between SR400,000 ($106,670) to SR1 million ($266,676), depending on the size, type and location of the unit, says Redwan Zaouk, Development Director at Kinan International Real Estate Development.

“However, as a private sector developer, we find it extremely difficult to achieve the low end bracket of affordability due to expensive developed land prices located in the urban boundaries of major cities,” he adds.

And most homeowners face the same potential challenges. For example, finding the down-payment for the mortgage (anywhere between 15 to 30 percent), expensive financing, aspiration to live in a large unit but inability to afford one, and misleading marketing from developers are all existing challenges, Zaouk explains.

It is “unfair and unreasonable” to think that the average Saudi can afford hefty financial schemes and high prices of housing units, says Yousra.

“Not everyone can afford a large down payment that may reach up to 40 percent and even more at times, or the high monthly installments. In other countries, the down payment can be 5 percent or 8 percent. In Saudi Arabia, it is hefty,” she says.

Despite the fact that companies, including Saudi Home Loans are trying to provide responsible financing to serve the huge current need, as long as there is no secondary mortgage market in the Kingdom, it will be difficult to sustain competitive rates on a long-term basis, say experts.

According to Yousra, the country lacks solutions such as the mortgage giants in the U.S. Fannie Mae and Freddie Mac. Both companies were created by the U.S. Congress to “perform an important role in the nation’s housing finance system—to provide liquidity, stability and affordability to the mortgage market. They provide liquidity (ready access to funds on reasonable terms) to the thousands of banks, savings and loans, and mortgage companies that make loans to finance housing,” as per the U.S. Federal Housing Finance Agency (FHFA).

“Fannie Mae and Freddie Mac buy mortgages from lenders and either hold these mortgages in their portfolios or package the loans into mortgage-backed securities (MBS) that may be sold. Lenders use the cash raised by selling mortgages to the enterprises to engage in further lending. The enterprises’ purchases help ensure that individuals and families that buy homes and investors that purchase apartment buildings and other multifamily dwellings have a continuous, stable supply of mortgage money,” according to FHFA’s website.

By that, the government would ensure that a large section of its middle class has access to home loans and refinance options among other products related to the housing sector.

“This does not exist in Saudi Arabia. But hopefully the Saudi Vision 2030 would tackle the issue and we see solutions at hand,” says Yousra.

Despite government initiatives, and the announcement of Vision 2030, the Saudi housing crisis seems to be there to stay for a long time, as it isn’t going to solve itself overnight, nor in the near future, simply because building hundreds of thousands of housing units also takes time.

CAN YOU AFFORD IT? According to the Housing Ministry, an affordable housing unit ranges between SR400,000 and SR1 million. Many Saudis say their salaries cannot support that, especially with hefty down payments.

CAN YOU AFFORD IT? According to the Housing Ministry, an affordable housing unit ranges between SR400,000 and SR1 million. Many Saudis say their salaries cannot support that, especially with hefty down payments.

As recent as last week, Majed Al Hoqail, Saudi Arabia’s housing minister, announced on December 6 the formation of the Saudi Refinancing Company with a capital of up to SR50 billion ($13.3 billion) set for the Kingdom’s housing sector over the next five years.

This comes at a time when Saudi officials are working on several initiatives to help ease the pressure of demand on housing units, in line with the Deputy Crown Prince Mohammed bin Salman’s Saudi Vision 2030.
As part of the efforts, Saudi Arabia aims at raising the percentage of Saudis who own their houses.

The Saudi Ministry of Housing said earlier this year that it will be spending around SR2.8 billion ($746.3 million) on a Loan Guarantee Program and SR59 billion ($15.7 billion) spread over 21 initiatives to enable at least 52 percent of Saudis to own a home by 2020, up from nearly 45 percent who own their homes at the moment.

And the Saudi government has recently reduced down payment requirements for potential homeowners, and according to media reports, the central bank is also studying options to help homeowners reschedule mortgage loans due to the recent fall in disposable incomes.

Experts speaking to Newsweek Middle East suggest housing sector presents an opportunity to address employment, financial, and environmental crises. Smart, intelligent cities should have smart, high quality housing that caters to the environment and various income groups.

On the other hand, the Saudi Ministry of Labor and Social Development (MOLSD) also plans to launch a program giving housing to beneficiaries listed in social security lists.

“Initiatives and announcements come and go… we have seen promises in this regard over the past 25 years, but nothing has materialized so far,” Yousra says mockingly.

Specific plans include curbing bureaucracy by significantly cutting down the average time-frame to approve residential projects from 730 days (nearly two years) to just 60 days (two months).

However, time delay is not the only issue at hand. The costly land prices, especially in large cities such as Riyadh, Jeddah and Dammam, have shunned away investors at times and made it near-impossible for the average Saudi to own his own plot and build a house.

Besides, large swathes of land are owned by few people, including members from the royal family, and most are kept unutilized.
According to bankers and real estate experts approached by Newsweek Middle East, the value of land in prime cities and prime locations have shot up in recent years, and landowners—who currently control the supply—prefer to sleep on their investment thinking they can sell for a higher price later than to develop the land itself. Real estate consultants estimate the rise in land prices in prime pockets to be well above percent per year.

The cost of acquiring the land is too expensive, to the extent that developers cannot afford building reasonably-priced housing, say real estate consultants.

To eliminate the problem, Saudi Arabia earlier this year approved a new land taxation act called the White Land Tax, which imposes 2.5 percent taxes on undeveloped land (also known as White Land) in hopes to push wealthy landowners to develop their plots, and thus help introduce new housing units going forward. It will also provide the government with billions of dollars in additional annual revenue, given the fact that up to 40 percent of the capital Riyadh, and a double-digit percentage of Jeddah and Dammam’s territories fall under this new tax.

An indirect result of the tax would be the reduction in housing prices, since any new development means introducing new supply to the market and by that easing the pressure of demand, and consequently prices, according to Jamil Ghaznawi, head of real estate research firm Jones Lang La Salle’s (JLL) Saudi office.

The law has already seen prices of land decreasing in the outskirts of the city over the past months, however, the full extent will be clearer once the tax is fully implemented by early 2017. However, it will be several years before units materialize as a result of the tax, Ghaznawi tells Newsweek Middle East.

But that doesn’t solve an average Saudi’s problem, still.

“Let’s say I want to build an affordable house, I am a person who can afford up to SR28,000 ($7,465) of installments per month, however, I can’t find an affordable piece of land that is evaluated correctly. There’s no single entity to assess if my land is fairly priced,” says Terekeli.

“If I was lucky enough to find a land, then the problem is finding contractors—no contractor certification exists. Local authorities do not have a list of verified 10 to 14 contractors that have the right tools, equipment, quality and outcome—contractors are only given an operation certification,” she adds.

“The Ministry of Housing became aware of the shortage of affordable land plots when they began to implement the half a million residential units announced by the late King Abdullah in 2011. The lack of affordable land in central districts prompted the Ministry of Housing to acquire land in the outskirts of the city, raising further issues of connecting services, developing infrastructure, and distance from employment areas,” says Ghaznawi.

PPP IS THE WAY: The Kingdom is looking at models of partnership between the private and public sectors to solve the shortage in housing units, which experts believe is second to the unemployment issue in Saudi Arabia.

PPP IS THE WAY: The Kingdom is looking at models of partnership between the private and public sectors to solve the shortage in housing
units, which experts believe is second to the unemployment issue in Saudi Arabia.

Holistic Approach to PPP (Private-Public-Partnership)
Al Khabeer Capital, an asset management and investment firm notes that the Saudi residential market would remain under-supplied by 100,000-200,000 of residential unit per annum, and this presents a unique opportunity for public private partnership projects among local and foreign investors and contractors.

To attract more international companies to engage in PPP and accelerate the development of affordable housing projects, the government needs to establish a timeline to obtain planning permission, connecting water and electricity services to developments, timely payments to developers to commence construction, managing the skill shortage in the market and shortage of laborers, suggests Ghaznawi.

“PPP models, if managed effectively, can ease the affordable housing shortage in Saudi,” says Ghaznawi.

“In the short to mid-term, with the private sector managing the development, you will end up with economies of scale lowering the average cost per unit ensuring units remain in the affordable range,” he adds.

Ghaznawi further believes that faster development from experienced developers with consistent quality will also shorten the lengthy waiting list which currently reaches up to 18 years for Saudis qualified for a home under the current government scheme.

At present, with low hydrocarbon revenues contributing to Saudi public spending cut-backs, the government seems to be increasingly exploring PPP models in an attempt to find a better solution and be able to provide affordable housing to Saudis through greater private sector engagement, according to Ahmad AlKubair, a real estate management consultant.

But, it is important to note that a legal infrastructure must be set, first and foremost, to establish the legal and regulatory framework for long-term PPP projects, especially those extending over 20 years, which gives the investors comfort and assures stability, says Arvind Mahajan, a PPP expert.

Kuwait and the UAE have created PPP laws which give a legal framework to carry out PPP initiatives; but PPP experts believe some of the legal frameworks in Saudi are not conducive to alternative funding.
“You get through the most difficult technical process—and in the end, it’s the lowest price that wins, that does not give you any assurance as a bidder,” says Mahajan.

Experts speaking to Newsweek Middle East said that even without a PPP legal framework, transparency can be ensured for investors through the bidding process and concessions agreement, which defines the role, priorities etc.

A concessions agreement is similar to a legal agreement. Over the period of concessions, a concessions agreement will define the rule for government, developers, quality, the specifications and maintenance, similar to that in Turkey.

Sources close to Turkey’s Mass Housing Administration (TOKI), which has been successful in providing social housing to Turkey’s growing population, suggest TOKI was invited in 2011 to replicate a similar model in Saudi without “appropriate financial and strategic assistance.”

In January 2016, President of TOKI Ergun Turan said new regulations are required to implement Turkish system in Saudi, and stressed the need for public sector involvement.

But foreign companies will always face a problem competing in Saudi market due to the lack of customer-knowledge and regulatory environment, says Zaouk of Kinan Real Estate.

“They always come with high expectations given the attractiveness of the opportunity from a strategic perspective, yet they get stuck quickly into details.”

Transparency is vital especially when attracting international companies that will need to evaluate the current market climate, regulations and barriers which will enable them to deliver developments more effectively, according to JLL.

Saudi’s real estate market is considered as semi-transparent, ranking 63rd globally and second in the region, according to JLL’s 2016 Global Real Transparency Index. The recent move into the semi-transparent category is due to some improvements in open data platforms such as the Ministry of Justice and the formation of real estate committees in the Chambers of Commerce across the country.

Recently, it was reported that the Saudi MOLSD is planning to launch a social housing program through PPP in the Kingdom.
Recent PPP initiatives in housing include some of the projects in Eskan developments and the 100,000 unit development in north Riyadh where the government signed an MOU with a consortium of developers, including Daewoo E&C and Hanwha Engineering & Construction Corp.

Center of excellence for PPP under the Ministry of Economy and Planning can look at other countries, both developed, developing and GCC/Middle East, and also learn from what the Kingdom has done itself.

“This would enable the government to learn the principles and lessons from countries so it doesn’t try to do everything by itself, and create something that you think can work in Saudi. The question is how the knowledge, framework that one company has acquired is transferred to other agencies like MOLSD in a seamless manner,” says Al Omeri.

“Also, each country has a unique political framework [through] which it is executing PPP projects, and therefore the benefits of PPP will need to be communicated publicly as well—for example, they have to communicate even though it may cost more.
PPP would attract world class developers/experts, but this would scale up faster and the gap in demand and supply in housing can minimize over a period of time,” according to experts.

And creating a dedicated fund of some sort could help finance long-term PPP projects for example, financial institution, which can get access to funds from multilateral agencies.

Some of the seed capital comes out of government but it can be leveraged through other sources, either bonds or though multilateral agencies such as the World Bank, and even pension funds.

In the meantime, Terekeli suggests the government should help people buy homes by subsidizing down payments instead of a “giving away” system because the process of getting on the “beneficiary” list is not transparent or fair.


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