Underpinned by its vast hydrocarbon riches, the economy of Saudi Arabias Eastern Province is thriving. Billions of dollars-worth of industrial projects are under construction, and vital infrastructure schemes from transport networks linking population centres to power grids are underway or planned. Local and foreign investment is also flowing into the province, servicing the expanding economic base.

To an extent, the local real estate market also reflects the land of opportunity the Eastern Province represents. A recent report in the English language Saudi Gazette newspaper said property trading volume had reached nearly SR4 billion ($1.06 billion) in the Eastern Province over the past four years, and that the total value of development plots in the region sold through auctions in the last five months of 2012 reached nearly SR3 billion, up 20 per cent on the same period in 2011.

On the face of it, demographic indicators are overwhelmingly positive, too. Saudi Arabias indigenous population is young and growing by as much as three per cent annually. As well as placing a huge strain on infrastructure, this represents a huge new potential market for real estate developers.

Affordable housing is in particularly short supply across the kingdom. The Saudi economy may be making new millionaires out of many more citizens every year, but rapid population growth along with other factors is also creating a generation of Saudis unable to afford either the land or the large villas that previous generations, fed on the kingdoms post-1980s oil boom, once could. Land scarcity and speculation has pushed prices beyond the reach of many who, in the absence of a sophisticated mortgage system, tend to rely either on savings or their families to buy or build a home.

There are many factors affecting the speed and growth of the real estate market in the Eastern Province, says a spokesman for Mada al Sharqiah, a local developer. For example, the lack of a supreme body that regulates the industry and develops future urban plans; delays caused by government procedures and services; the continued rise in land prices by up to 15 per cent annually; the fluctuation price of construction materials, and contractors failures to commit to the initial delivery dates of projects, he tells The Gulf.

The limits of Saudi Arabias financial system are a key constraint. Banks do provide mortgages secured against salaries but many are said to be reluctant to lend in the absence of concrete safeguards against loan default. Real estate advisory CB Richard Ellis reckons less than one per cent of all home purchases in the country are financed by a mortgage, while a recent report published by Jeddah Economic Gateway (JEG), affiliated to the citys chamber of commerce, noted that home loans made up only 2.8 per cent of total bank credits in 2010.

On the other hand Bloomberg, citing central bank data, recently reported that real estate financing in Saudi Arabia had jumped 83 per cent to a record SR48 billion ($12.8 billion) from a year earlier.

Faith in the Real Estate Development Fund (REDF), which provides low or interest-free loans to citizens, is said to be eroding. Overwhelmed by applications JEG reports a backlog of more than 650,000 loan applications since the end of 2009, up about a third from 2006 the REDF recently received a fresh capital injection of SR40 billion to try to streamline loan approvals.

A new mortgage law offers hope that more low- and middle income Saudis will be able to access funding. Ratings agency Standard & Poors said the law would transform home financing in Saudi Arabia to property-secured lending. The process took another step forward last month when central bank governor Fahad al Mubarak told a local Arabic language newspaper that the bank would launch a real estate refinancing company capitalised with SR5 billion ($1.3 billion) and launched through the Saudi governments Public Investment Fund (PIF) or its subsidiaries to develop the kingdoms mortgage market.

Reflecting the issue affordable housing has become for both policy makers and citizens in the kingdom, the issue featured prominently at last months Jeddah Economic Forum.

Estimates on the number of affordable houses Saudi Arabia needs vary, although one recent report suggested low and middle-income households constitute some 80 per cent of the kingdoms unmet housing demand. The government has sanctioned a massive SR250 billion ($66.7 billion) programme for some 500,000 new affordable homes, the first 200,000 of which are now being built. But even this new stock pales against an estimated nationwide shortfall of about 1.65 million units by 2015.

Many observers believe the private sector should now shoulder some of the burden of building new units in the country. Abdulaziz al Sowailim, chairman and chief executive for the MENA region at corporate professional services firm Ernst & Young said in a report unveiled at the forum that it was critical for government to give industry players and developers clear rules and a coordinated process. He also highlighted the uneven field on which private sector real estate developers currently play, including the five per cent import duties they must pay on materials imports, and the one per cent fee levied on land registration fees that their public sector counterparts are exempt from.

Governments could readily address these costs by decreeing that private sector-driven projects for affordable housing are considered public sector because they are serving the public interest. Similar reasoning should allow developers to use more modern building techniques that have proven successful in other MENA regional countries, the Ernst & Young report said.

Ahmed Reda, a Jeddah-based executive at Ernst & Young, warned of the dangers of government housing subsidies. Governments can never solve the problem simply by pledging large sums: too much money will drive up prices, not create more affordability, he said.

In its report Islamic banking services provider Anfaal Capital pointed to what it called the fragmented nature of the Saudi real estate development market. It said the limited number of professional and international property developers meant most residential development is currently provided by micro-managed private developers, in a fragmented manner. Thus, real estate development has become highly reliant on labour intensive building technology, rather than systems built around economies of scale.

This, in theory, is good news for private sector real estate developers who have the requisite economies of scale. Anfaal Capital thinks the changes could attract more international developers into the market.

The current mid-to-long term stability offered by the kingdom, along with the government and domestic banks opening up to outside investments earmarked for the real estate sector; coupled with the significant housing shortage gap for years to come, place the current opportunity cost equation in favour of more international players entering the Saudi real estate market, it said in its report.

In its presentation at the Jeddah Economic Forum, JEG underscored the residential real estate potential in the sprawling Dammam-Al Khobar-Dhahran conurbation, the kingdoms third-largest population centre.

There is a preference for quality apartment developments in Dammam and Al Khobar. A fitting example would be the Al Hamraa District (also commonly known as Shobily High Rise) in Al Khobar, which is a prime location for quality apartments, it stated.

Most home buyers in the district believe in the investment potential of their purchases, particularly with the expected forthcoming completion of the Shobily Masterplan, which has been on hold for several years, the report added.

Stark contrasts are observed between mid-scale developers operating in Dammam and Khobar and those in Riyadh and Jeddah. Developers in Dammam and Khobar are more active with multiple ongoing projects and have a higher number of units per project, JEG noted.

The Eastern Province [real estate market] is attractive because of its proximity to the other Gulf states, and the presence of major companies like Aramco and Sabic, says the executive from Mada, whose projects represent a total investment of about SR560 million. His company, which recently handed over a 48-villa project in Al Khobar, is now working on two more residential projects in Dammam and Al Khobar, a total of 138 villas. Although he believes the shortage of real estate stock could last over the next five years, he believes the new mortage law is positive.

We are certain that the new mortgage system will create a promising real estate market, he says.

Omar al Kadi, chief executive and managing director of Injaz Development Company, said last November that real estate auctions, which he called the only trusted product by industry players in Saudi Arabia, had helped sustain Eastern Province real estate growth.

The growing number of real estate auctions in the kingdom, including the Eastern Province, reaffirms the dynamism of the entire real estate market and is a factor in addressing problems related to housing and accommodation, he said.

In light of real estate regulations and the Saudi mortgage law, these real estate auctions will help drive the sales of residential and commercial projects in the region, he continued.

In a rapidly changing social, economic and demographic environment, there appears to be significant potential in the Eastern Province for shrewd developers, local or international, who know their client base.

Key Residential Projects (Completion Year) Type Housing Units
Murcia Apartments (2012) 78
Murjana (2014) Luxury villas 400
Masaken Homes (2014) 250
Dammam Hills (2015) Villas for mid to high segment 700
Abraj al Salam (2015) 12 luxury villas, rest areapartments ?for mid to low segment 850
Khobar Lakes (2016) 2,100