Severe 'undersupply' of housing to hit Saudi by 2012

Pent up demand, a growing population and a shift toward smaller households will underpin the Saudi real estate market over the next three years, according to Citigroup.

Citi initiated coverage of Dar Al Arkan, the Tadawul real estate heavyweight, with a buy rating and a target price of SAR25.0 in a research note e-mailed to the media on Sunday.

“We estimate [an] undersupply of Saudi residential units of 150,000 to 800,000 by 2012,” analysts at the bank wrote.

Unlike neighbouring countries like the UAE and Qatar, the Saudi property market is relatively insulated from a reduction of the expatriate workforce; Saudi nationals make up 75 percent of the population.

It is also rare for developers in the kingdom to sell properties off plan, meaning that the buyer secures the property with a small deposit and pays the remainder in installments or at the time of delivery.

The Saudi Department of Economy and Planning expects the country’s population to grow by 8 million to 33 million in 2020.

“Demand for residential units is likely to increase as a shrinking household size demands more smaller sized apartments,” the analysts wrote.

Jones Lang LaSalle (JLL), the real estate services firm, expects the average size of a household in the kingdom to shrink to 5.2 people by 2012 from today’s 5.7 people.

The average household in the US and the UK is less than half that size.

In a survey carried out in the third quarter of last year, JLL estimated that the cost of an apartment in Riyadh was roughly one sixth of what it was in Abu Dhabi, and one fifth of what it was in Dubai.

Dar Al Arkan’s strategy to focus on the middle income housing market is likely to create long term opportunities in the Saudi real estate market, Citi added.

“Expatriate demand is generally geared toward high end developments. The dominance of Saudi nationals in the population suggests emphasis on low and middle income segments makes most sense,” the analysts wrote.

Shares in Dar Al Arkan closed at SAR19.3 on Sunday, giving the company a market capitalization of SAR13,895 million ($3,706m).

The stock has lost 13.7 percent of its value in the year to date, compared with a 0.65 percent decline in the Tadawul All Share Index.