With the announcement this year of a US$66.7 billion initiative to address the demand-supply imbalance in the Kingdom’s housing market, social infrastructure spend is topping the Government agenda as it focuses on building affordable homes for the future.
Saudi Arabia is taking the affordable housing bull by the horns with King Abdullah pledging US$66.7 billion for an initiative that will see 500,000 homes spring up across the Kingdom in the next five years.
Rapid urbanisation and the current lack of real estate competition, twinned with a youth-centric population and significant number of low income households, have been the catalysts propelling affordable housing to the top of the Government’s agenda, but aren’t the only issues impacting supply.
According to Deepak Jain, Head of Strategic Consulting, MENA, at Jones Lang LaSalle, high land costs and a lack of accessible land plots within city limits as well as a lack of infrastructure support are also barriers to investors and developers, with concerns that housing schemes will be relegated to outlying areas, requiring additional infrastructure spend.
“Unlike most other cities, where empty land in cities is owned by government agencies, in Saudi it is owned by private investors and tends to be very expensive and [therefore] not conducive for affordable housing. A recent land tax was announced in the Kingdom to discourage land banking in the cities, [but] the lack of available land plots within city limits has forced large tracts of land in remote locations to be designated for affordable housing,” he says.
David Smith, founder of US-based Affordable Housing Institute and speaker at the Cityscape Riyadh conference, agrees, and adds: “Saudi Arabia has an enormous supply of land in waqf, which could make admirable sites for affordable housing, provided that the legal forms of land stewardship and property ownership are designed to meet with Islamic principles and Saudi cultural traditions, coupled with global experience in affordable land trusts.”
Jain also cites high construction costs - due to the inability of small developers to benefit from economies of scale - and a lack of multi-modal public transportation networks as mitigating factors. But he also points out the opportunities available, such as public-private partnerships (PPPs) – particularly in infrastructure delivery – and a focus on developing sustainable communities rather than residential sprawls.
The impending ratification of the long-awaited mortgage law, which is set to address the underdeveloped mortgage and home finance market, is key to fast tracking residential sector opportunity, with new communities supporting commercial and retail asset class development. Less than 40 per cent of Saudis currently own their own homes and, with demand outpacing supply, the prices of existing units continue to rise, leaving little room for low as well as middle income families to get on the first rung of the property ladder.
For Smith, the allocation of funds is just the start of the process, as he explains: “Affordable housing is easy to build – just add enough money, and there can be homes, but is hard to make work if developed poorly, or with unwise legal, financial, or operational structures.”
“The key challenges are twofold: establishing a fast delivery system, with a meaningful scale, while avoiding the pitfalls of too quick, too simplistic, too cheap development,” he adds.
Jain agrees that the difference between delivering affordable housing and constructing quality units, is a balancing act, and says: “This is a potential red-flag as the preference is for concrete houses with large plot sizes, and there is a resistance to system building technologies, some which are more expensive than traditional construction.” He recommends a focus on sustainability, cross-subsidisation to support private sector involvement and engagement with end users to better understand their requirements and optimise the end product, as critical success factors.
The case for private sector involvement is also strong, specifically in the medium to long term, provided the Government is able to offer appropriate incentives, as Jain explains: “From a infrastructure perspective PPPs have a lot of potential, and offer a win-win situation for both the public and private sector. Affordable housing also requires initial Government support to attract the private sector by way of providing infrastructure and legislation; without a framework wherein the private sector can sell or lease the product in the market, it is difficult for [them] to commit.”
“Direct government production has never worked long term, anywhere in the world, and it must be the right kind of PPP,” adds Jain, who believes that partnerships are the way forward. “This should not simply be a procurement, where the private sector builds something turnkey and then walks away. It should have a medium term time dimension of partnership, with payments deferred and incentives aligned.”
The launch of the Kingdom’s first countywide affordable housing initiative also has longer-term benefits for the economy. “[Commercially] it will benefit the various companies involved as contractors, and help channel billions of Government dollars to the private sector and boost employment,” says Jain.
According to Smith, the potential for positive social impact is exciting. “The development of new business models and skill sets will create low to moderate-income jobs and help develop cities that are more attractive places to live, and hence more competitive globally, as well as increasing household happiness and satisfaction, leading to a stronger and more stable society.”
From the Cityscape magazine.