http://www.businessweek.com/articles/2013-03-28/saudi-arabias-affordable-housing-shortage

Real Estate

Saudi Arabia's Affordable Housing Shortage


Construction in Riyadh. Some 40 percent of the city consists of empty lots

Photograph by Waseem Obaidi/Bloomberg

Construction in Riyadh. Some 40 percent of the city consists of empty lots

Saudi Arabia’s King Abdullah is paying a price for his own generosity. In 2011, as the Arab Spring swept across the region, the 89-year-old monarch earmarked 250 billion riyals ($66.7 billion) to build homes across the kingdom. A growing housing shortage was a potential source of unrest: Analysts estimate the existing shortfall at 500,000 homes. The government also vowed to expand the availability of mortgages.

Two years later, Saudi Arabia has little to show for its efforts. Generations of Saudis have directly petitioned their king for land. The result has been the distribution of plots in cities throughout the kingdom, with roads, water, and power thrown in for good measure. Years of giving away land have left the government with almost no space of its own to develop in urban areas, according to Adnan Ghosheh, an adviser to the Housing Ministry. That will delay building as the government chooses between buying back city plots whose price has been inflated by speculation or paying a premium to build in the desert.

In addition to grants from the monarchy, the Ministry of Municipal and Rural Affairs has distributed around 2.2 million plots to widows and males over 18, regardless of income or economic status, according to broker CBRE Group (CBG). “I visited all 13 provinces of Saudi Arabia and mayor after mayor told me that the lack of government-owned land is the main reason for the housing shortage,” says Ghosheh. “Around 50 percent of land within some cities is vacant, while the government is being forced to look to the edges of the desert to build.”

Plots in cities are considered a status symbol, with a few wealthy and influential owners keeping them empty for decades for use by their sons and grandsons. The absence of property taxes makes this easy and divorces land prices from their true value, according to Kristian Syson, director of property broker Cluttons in the Middle East. Wealthy Saudis “continue to favor land as a long-term investment vehicle, inflating residential land prices and consequently excluding low-cost housing from vast areas of the Kingdom,” Mike Williams, CBRE’s head of Middle East research, wrote in a March 17 report.

Land prices in most Saudi cities jumped 50 percent over the last few years on “pure speculation,” says Syson. Neither the market nor the government can pressure landowners to lower their prices or sell their undeveloped urban plots, which are known as “white land.” The wealthy families who have acquired this land over the years have little need to raise cash.

The lack of affordable land for development will add time and costs to both public and private efforts to build more homes in a country where about 60 percent of the population lives in rental housing and fewer than 4 percent of homes are bought with mortgages. Land commonly accounts for 50 percent of the cost of building a home in Saudi Arabia, compared with about a third in Europe, according to Syson of broker Cluttons. The expense deters private developers from building middle-income homes.

Expanding into the desert outside the cities isn’t an attractive option because of the cost, according to Mohammad Alwazir, senior economist at National Commercial Bank. The government would have to build infrastructure, as well as schools, hospitals and shopping centers in areas as far as 80 kilometers (49 miles) from city centers, says Ghosheh. The government, which set the construction budget at 500,000 riyals per home for King Abdullah’s initiative, would have to more than double that amount if it had to build in the desert as well.

Saudi authorities plan to address the lack of available urban land as part of a national housing strategy that has been submitted for approval to the Shura Council, the kingdom’s consultative body. Mohammed Alzumaie, spokesman for the Housing Ministry says the strategy includes measures to combat land speculation and incentives to build, such as development financing, partnerships with builders, and simplified planning regulations.

Even with the limits on land, there are signs that the decision to make mortgages more accessible are lifting home purchases. Real estate financing jumped 83 percent to a record 48 billion riyals in the fourth quarter from a year earlier, according to data compiled by the central bank. Saudi authorities have finally approved the first nine projects to be built under the King’s housing initiative, engineering and construction firm Parsons said on March 3. Seventy thousand homes will be built.

To prod landowners into developing their plots, the kingdom could levy a “betterment fee” that charges landowners for the government-provided infrastructure that has helped drive up the value of their land, Ghosheh says. Imposing such a fee for undeveloped land would probably run into opposition by both land-owning families and other Saudis concerned about the precedent it would set for other forms of taxation. “The Saudi government has contemplated in the past imposing tax against undeveloped plots,” says Syson. “It fell by the wayside because of a huge uproar, as it’s often wealthy and influential people that own most of the land.”

The bottom line: To meet its affordable housing needs, Saudi Arabia must either build in the desert or force urban landowners to develop their empty lots.

Fattah is a reporter for Bloomberg News in Dubai.

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