THE SAUDI ARABIAN real estate and construction sector presents one of the most attractive investment opportunities in the region according to one of the kingdom's leading banking houses. With 70% of the population below the age of 30 and increasing at a healthy rate, there is an acute housing shortage ahead, according to research conducted by NCB Capital, the asset management and investment banking arm of the Saudi-based National Commercial Bank (NCB), which forecasts incremental residential demand at over 1.3m units over the next seven years and expects that investments in excess of SR680bn ($180bn) would be required. The top four provinces of Mecca, Riyadh, Madinah and the Eastern Province by themselves would require a housing investment of over SR600bn ($160bn) 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. The company 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, forcing individuals to rent rather than buy. In order to address the situation, the government is expected to expedite the proposed mortgage law, already part of its inflation mitigation plan, which in turn will unlock significant demand.
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Property in Saudi Arabia returns relatively high rental yields, while easy liquidity and a negative real interest rate give investors a greater incentive to put their money into real estate to benefit from those yields. Thus the upcoming mortgage law will improve housing affordability, driving more people to buy instead of rent. The NCB report estimates that by 2012 the Saudi mortgage market could increase five-fold to SR86.5bn ($23.1bn).
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 SR1.75 trillion ($468bn) 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 SR260bn ($69.4bn). This by itself will create incremental demand for more than 130m tons of cement (as against forecasted industry capacity of 50m tons by 2010).
Highlighting Saudi Arabia's booming retail sector, the report estimates that the potential for the sector exceeds SR130bn($34bn). 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 nine times the current number of pilgrims. The NCB 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 labour costs (due to unavailability of adequate homegrown labour) 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. A second NCB report featuring key companies in Saudi Arabia that are expected to benefit from the strong growth being witnessed in the sector is expected soon
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At present Saudi Arabian nationals comprise about 20% of the estimated 145,000 engineers of various types employed in the kingdom. There are also some 1,300 Saudi professionals architects practising in the country.
Tourism is an emerging sector that is beginning to provide substantial construction work. A$1bn seafront venture over 3.4m square metres reclaimed land between Al-Khobar and Dammam is planned to provide houses, apartments, hotels, a marina, shopping malls as well as a man-made lagoon.
There is currently a project under discussion between the Egyptian and the Saudi Arabian authorities on a $3bn project to build a causeway across the Red Sea, providing a road link between Dibah and the Egyptian port of Sharm El Sheikh.
RELATED ARTICLE: About NCB Capital.
NCB Capital (NCBC) is the asset management and investment banking arm of Saudi Arabia-based The National Commercial Bank (NCB), the largest bank in the Middle East in terms of capital. Headquartered in Saudi Arabia, NCB had total assets of $55.7bn, shareholders' equity of $7.9bn and managed investments of $22.8bn as on 31 December 2007. NCB enjoys a credit rating of A+ from Standard & Poor's.
The company enjoys the distinction of being the first investment subsidiary of a local bank to be licensed by the Capital Market Authority under the terms of its mandate that all banks in the kingdom must separate their investment, brokerage and asset management activities from their commercial banking operations.
Capitalised at SR1bn ($267m), NCB Capital is also licensed by the Central Bank of Bahrain as a Category 1 Investment Business, a licence which allows it to deal in financial instruments as a principal, as well as undertake all other regulated investment activities.
NCBC has declared its ambitions to be the leading investment bank and asset management house in the Middle East region. It offers corporate advisory services through its investment banking team and has an asset management team that manages local, regional and international assets across the full spectrum of asset classes. In addition, NCBC's brokerage team provides local and international brokering services for retail and institutional investors.
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