Real estate developers in Saudi Arabia will capitalize on the robust demand for properties as the population grows and initiatives in the government’s Vision 2030 program boost the real estate sector’s growth. With substantial investments in infrastructure projects and a focus on increasing homeownership, the sector is witnessing steady expansion and opportunities for growth.
In its latest report, S&P Global Ratings outlines the opportunities and challenges that Saudi Arabia’s developers will experience in light of the evolving real estate market conditions.
Vision 2030’s role
Under the Vision 2030 program, the Saudi government aims to stimulate economic diversification and boost the non-oil economy. The emphasis on infrastructure development and housing initiatives is fueling demand for real estate, with the goal of increasing homeownership by Saudi nationals to 70 percent by 2030 from 63.74 percent in 2023. Investments in new cities, residential projects, and development projects across Saudi Arabia are contributing to the sector’s and developers’ growth trajectory.
High interest rates impact growth
As Saudi Arabia accelerates on its growth and transformation trajectory, opportunities for developers are increasing but so are challenges. First, demand for real estate in Saudi Arabia is sensitive to high interest rates. In 2023, amid rising interest rates, the number of real estate transactions dropped by 16 percent and new mortgage lending also declined.
Moreover, Saudi Arabia’s citizens and residents highly rely on mortgage loans (30-40 percent of Saudi nationals own properties secured by a mortgage). Therefore, high interest rates are dampening new mortgage lending. Tighter liquidity and interest rate hikes, therefore, led to a 33 percent decline in the number of new mortgage contracts in 2023, with mortgage lending growth slowing to 10 percent in 2023 from 23 percent in 2022.
With the high capital intensity of real estate development, S&P expects funding and refinancing needs in the sector to remain high. Therefore, increasing and broadening funding sources is one of the key hurdles the agency foresees for property developers in Saudi Arabia.
In addition, S&P highlights that the concentration of the population in major cities like Riyadh and Jeddah negatively impacts the real estate sector in smaller cities across Saudi Arabia.
Economic growth and development
S&P Global expects Saudi Arabia’s gross domestic product (GDP) to reach 3.4 percent on average annually in 2024-2027. Moreover, it expects the non-oil sectors, which account for about 60 percent of the GDP, to drive economic expansion of 2.2 percent in 2024.
Amidst this economic expansion, the risk of fiscal pressures related to the economic transformation program arises. However, S&P expects the government’s net asset position to remain relatively robust, supporting that growth.
Part of Saudi Arabia’s initiatives to transform its economy is investments in real estate and infrastructure projects which currently exceed $1 trillion in value. These projects include new cities like NEOM, Diriyah Gate in Riyadh, and others. By investing in real estate, the report expects the sector to increase its contribution to the GDP from 6 percent to 10 percent by 2030.
Government support and banks provide a solid foundation
The report expects mortgage lending to continue to expand, albeit slower than in the past due to market maturity. Moreover, it expects a rise in corporate lending as projects related to Vision 2030 are implemented, and tighter banking system liquidity.
Government initiatives, such as the MoMRAH Sakani program and support from the Real Estate Development Fund (REDF), are instrumental in stimulating real estate demand and facilitating access to mortgage loans. The Saudi Real Estate Refinance Company (SRC) is also playing a crucial role in attracting alternative financing sources, further supporting the sector’s growth. The government has also set up the Saudi Real Estate Refinance Company (SRC) to help attract alternative financing sources for the sector.
Therefore, S&P expects that healthy demand will continue to drive Saudi Arabia’s developers’ revenue and profits in 2024-2025, with marginal relief from lower interest rates. In addition, as projects scale up, the report expects them to demonstrate steady profitability, following the improvement seen in 2023.
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Meeting funding needs and sustainability goals
Securing adequate funding remains a key challenge for developers across Saudi Arabia, particularly amid tighter liquidity in the banking system. Alternative funding sources, including local and foreign capital markets, are essential to support the sector’s growth trajectory. Additionally, there is a growing focus on sustainability, with regulations encouraging greener buildings and sustainable construction practices.
Therefore, S&P expects Saudi Arabia’s developers to increasingly use sustainable practices in construction and the choice of building materials, while also aligning with local and international certifications, such as the Mastadam Certificate and LEED.
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