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Mon 13 Dec 2010 02:09 PM

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Riyadh housing supply crimped by tight credit

Lack of funds and ban on offplan sales hit progress on major real estate projects – JLL

Riyadh housing supply crimped by tight credit
Few Saudi players have the funds to develop larger communities, meaning that many of the more recent real estate projects have been small-scale

Despite increased demand for residential real estate in the Saudi capital, tight construction credit and the inability to sell property offplan are constricting the flow of supply into the market,  new research by Jones Lang LaSalle (JLL) has found.

The real estate consultancy has said that few players have the funds to develop larger communities, meaning that many of the more recent projects have been small-scale.

“Nismat-Ar-Riyadh by the Thabat JV is the first significant residential project in Riyadh to obtain permission under the new escrow laws for offplan sales,” JLL’s Riyadh City Profile note said.

“The government has appointed a consultant to monitor the progress of the project and to ensure the re-investment of sales receipts. The market will be watching with keen interest to see if Thabet is successful.”

JLL said that progress on some of Riyadh’s bigger projects had been slow during 2010, but that medium-sized developments had delivered over 450 villas in recent months.

Population growth – in terms of both nationals and expatriates – and immigration into the cities is driving demand in Riyadh, although much of the proposed supply has not been well-targeted.

“Developers are starting to shift their focus to ‘mid-market’ single family dwellings that can be accepted by both Saudi and expatriate buyers,” the research note said.

“This category will enable the volumes to develop large tracts of land, but scale also creates absorption risks for developers.”

Some villa prices – a segment particularly popular with Saudi nationals – had risen by 10 to 15 percent since early 2010, although apartment values had remained generally stable, the report said.

However, rents had increased more for apartments (by about 10 percent) than for villas (up by five percent).

“Landlords are aware of shortages of rental supply in some prime districts and are asking for rental increases,” the report added.

“In the absence of rental caps; conditions are expected to remain landlord favourable and some increase in rental levels could be experienced during 2011. The sectors most likely to witness this growth are mid-market apartments and expatriate residential compounds.”

On the retail side, JLL said that data showed that the market was reaching some stability at the bottom of its cycle, and that the lack of major new malls coming onto the market in the next two years should allow the sector some time to recover.

For commercial space, the consultancy said that much of the new supply this year had already been absorbed by the government, multinational firms and the private sector. Vacancy levels have been kept at 10 percent, and rents are likely to stabilise before a new slew of supply comes online in 2013.