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Thu 29 Apr 2010 01:07 PM

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Saudi property growth to be slow - Credit Suisse

Demand for housing in Saudi Arabia to reach about 2 million units by 2014 - analyst.

Saudi Arabia’s real estate market will probably grow more slowly than expected because of high prices and a lack of mortgage lending, Credit Suisse Group said. “A strong shift to home ownership will likely not be in effect in the short and medium term,” Dubai-based analyst Ahmed Badr said in a report today. Housing supply needs to double, and that will be difficult to achieve because a shortage of off-plan sales means developers have to finance projects in full before offering units, he said.

Demand for housing in Saudi Arabia, which has the largest population among the six Gulf countries, will reach about 2 million units by 2014, Badr wrote. About 57 percent of the country’s population is under the age of 20 and demand will mainly come from low and middle income buyers.

The property market may double by 2015 if a planned mortgage law is put into effect, NCB Capital said in February. Mortgage lending by commercial banks has been held back by the lack of a legal framework for property foreclosures.

“Although we think that the new mortgage law will address this problem in theory, we are concerned about the ability of banks to implement these foreclosure rules in practice in the short-term,” Badr wrote. It will take “considerable time” before the new law has a significant effect on affordability.

Commercial bank mortgages represent just 2.4 percent of total loans in the country, he said. “Even if we assume that the mortgage market will double over the next two years, it will still be modest in absolute terms,” according to Badr.

More than 55 percent of residents rent because house prices are too high for many people, he said.

“We prefer the exposure to the rental market which has been holding up well during 2009,” Badr wrote. “Average residential rental yields in Riyadh and Jeddah are still holding up at 8 percent and 10.5 percent respectively.”

Badr cut his share price estimate for Dar Al Arkan Real Estate Development Co, the Middle East and Africa’s third- biggest developer by market value, to 14.77 riyals from 18.21 riyals. The analyst also reduced the estimate of Saudi Real Estate Co., known as Al Akaria, by 7.5 percent to 31.55 riyals, while maintaining an “outperform” rating.

The company remains “the only pure play on the rental market in Riyadh with average occupancy rates of 76 percent” in 2009, Badr wrote. “We expect occupancy rates to go back to normalized levels of 89 percent on average this year as the company progresses on renting out al Akaria Plaza.”