Rapid Development of Saudi Real Estate Market

Interview with Majed Al Hogail, Managing Director of Rafal Real Estate Development Co.

What is your overall assessment of the real estate sector in Saudi Arabia?

There is no doubt that the outlook for the real estate sector is for growth, due to the young population age, demand and supply. These factors have created lots of potential for continued growth. There is a lot of potential in the real estate sector particularly in residential, education and general services projects. The Saudi market is currently facing a very short supply of real estate properties, which will fuel the demand over the next few years. The gap we need to fill about 1.2 million units over the next 5 years, which shows you the size of our inventory and the potential for growth within the market.

The gap we need to fill about 1.2 million units over the next 5 years, which shows you the size of our inventory and the potential for growth within the market.

There are some excellent macroeconomic indicators, for example, 70% of the population is under 25 years of age and they need housing. The Ministry of Housing is trying to build homes for this demand. How can private companies capitalise on these opportunities?

The government´s plan is based on the Royal decree to develop and provide 500,000 units. There are plenty of opportunities for both the private sector and the government and both sectors are working together to build upon these opportunities. We see the potential as significant. There is limited development in the country right now and the government´s capacity to develop such quantities in such a short amount of time is limited. The government is starting to change many regulations in order to ease the processes for development. However, this is a new industry with new regulations and so it is a bit of a challenge to follow these developments.

What is the outlook for property prices in five years’ time? We have seen tremendous appreciation. Where do you see the prices of real estate heading?

When I look at the pricing appreciation of real estate in Saudi Arabia over the last fifteen to twenty years, I see we have had reasonable growth. When I look at the past five years, I see huge growth. The question is whether the residential prices are affordable. Currently with the prices as they are, there is a huge difference between property prices and people´s income. There is a large gap in terms of affordability. We hope the government will interfere and help find tools and vehicles to reduce this gap.

Do you see the prices increasing in the future?

Over the last 3 or 4 years, the pricing acceleration was quite aggressive so I do not think we shall see much higher prices. We see that the gap between purchasing power and the supply price is becoming very large, and that is why we think price acceleration will be slow. However, land prices represent 20% to 30% of the total price and building materials and the costs of developing housing have also increased significantly.

Can you tell us a bit about Rafal Real Estate? What makes you different from the other real estate companies in the market?

Rafal Real Estate began nearly six years ago. It is not a very old company. However, the shareholders of the company have more than 60 years’ experience in terms of business conduct in Saudi Arabia. The company began with the objective of being a leader in community innovation. We believed that the real estate development in Saudi Arabia was not up to the standards we saw worldwide. Most of the development was quite poor or very traditional. Our objective was to develop the concept of community and improve the lifestyles in the homes of Saudi Arabia, taking into account affordability.

We have developed different communities with the concept of lifestyle improvement. The differential we have is that we are community innovators and not homebuilders. We are the only developer in Saudi Arabia that is a community innovator. We use our local and international team experience to create a different community development for our customers. We have developed horizontal and vertical communities and we are quite aggressive in terms of innovating new projects and communities for our customers. For example, we have one of the highest residential towers in Saudi Arabia. This building has just been completed and is a mixed-use tower. The tower is 307m tall and it has a 5 star Kempinski hotel with 357 rooms as well as 440 apartments and a boulevard.

We are developing other similar projects. We are developing two new towers and we are developing horizontal projects with on average 300 to 500 units in each project. Some of these projects are finished and others are currently under construction. There are also some community projects to be done soon.

What is the company’s philosophy in terms of corporate social responsibility?

Social responsibility has become something that most Saudi companies have on their agenda. Part of what we are contributing in this regard is the education of new developers. We aim to help encourage new small developers to come into this sector. We believe there is a gap in the market and we think that if we do not encourage small companies to enter this industry then the future of the industry will be hindered. We also contribute with a non-profit organisation in terms of business conduct and improvement of corporate governance.

As a private company, what do you feel are the major challenges that you face when it comes to doing business?

As in any emerging market, regulations are not black and white. Here in Saudi Arabia, we have regulations but the interpretation and the implementation of these regulations represent quite a challenge for doing business here.
Another challenge we face is human resources, particularly in a virgin industry like real estate in Saudi Arabia. Finding local experts to help the organisation move faster is one of the challenges that real estate developers face in Saudi Arabia.
The market is very bullish and it is quite large. The real estate sector is lacking a leader for its organisation. The industrial sector for example has an authority or regulators that are specialised in industry. We need such a body to help grow the real estate development companies here.

In terms of the future, do you have an appetite for more projects? Do you have international ambitions? Given the market conditions, what is your outlook and your strategy?

In terms of geographic expansion, we will be focusing on Saudi Arabia during the next five years. We think the Saudi market is a very attractive market. We see lots of growth for the future, especially because Saudi Arabia is such a large country. Every district will offer huge opportunities. Our strategy has recently been defined; geographically we have decided to expand into a different region in Saudi Arabia whilst at the same time adding additional services to help our communities, such as facility management and property management services. This will help us to improve our post-sales services.

In terms of the combined value of your investments, are you able to disclose a figure? Where will you direct your future investments?

We are looking to develop more than 5,000 units over the next two years, which represents almost 3 billion riyals.

We are looking to develop more than 5,000 units over the next two years, which represents almost 3 billion riyals.

How do you approach financing? Is it a challenge to get financing for projects of this scale?

The good news is that now Saudi Arabia is very strong in terms of liquidity available in the banks. However, the banks are very selective regarding whom they finance. Banks are only starting to finance development because they see the gap in the market and have evaluated the risk associated. As we have developed a lot of trust in our brand over the last five years particularly due to our capability of finishing projects on time, we are able to get financing quite easily from the local banks in Saudi Arabia.

Could you tell us a bit more about the group?

The two main business groups that own Rafal Real Estate are Abunayyan Group and Al Muhaidib Group. Both are conglomerate corporates in Saudi Arabia. Each has over 60 years of experience in Saudi Arabia. They are both quite aggressive in retail, services and infrastructure such as power and utilities. These groups give us strong support in terms of ensuring corporate governance within our organisation, chairing knowledge and they allow us to have more purchasing power in the market. Being part of this group means our customers have more confidence not only in our company but also in the group as a whole.

How important is reputation in the real estate market?

Reputation is the number one element for success for any real estate development company. The financial structure for any real estate development depends on pre-sale, debt and equity. The success of the pre-sales determines the success of the project. The driver of pre-sales is trust and reputation; this depends on whether the brand is strong, if they deliver on time, if they deliver quality and if they deliver post-sales services. At Rafal, most of the projects we have started have finished on time, and we deliver the quality that our customers expect. Part of our strategy is ´walk before you talk´. We never go to aggressive media marketing before we start a project. For example, we currently have three projects ongoing that we have not communicated to the media just to be sure that we can ensure the elements of timely delivery and quality. We believe that in the long term, the more you ensure these key elements, the stronger your brand will become and consequently your financing will be lower and you will be able to deliver more successful projects to the market.

What is your vision for the company?

Our vision is to continue being the leaders in community innovation. We want people to be proud of our communities. The more that Rafal Real Estate innovates in terms of community, the more we are contributing to the country. We want to continue providing not only shelter but also social activities and lifestyle which people in Saudi Arabia whether locals or expats can be proud of.
The real estate industry is very attractive because it includes aspects of art, lifestyle, society etc. and these elements are included in every stage of our developments.

How much do you estimate the real estate sector will grow over the next few years?

We are currently seeing between 8 to 10% growth, currently the stock is about 4.2 million and the market needs about 5 to 7%. As you mentioned earlier, we are a young demographic. Currently the average household in Saudi Arabia represents about 5.9 people. We are shifting to have smaller families and this will be reflected in the people per household. Therefore we are expecting that more young people will enter the housing market and also the number of units will increase because there will be smaller units as household numbers decrease. We think we will see growth of about 5 to 7% until the government puts in ways to finance housing, once that is in place we expect to see double digit growth.

You are referring to the mortgage law, which has been on the table for the past ten to fifteen years. Do you see any progress?

We think that before the year has ended we should have the mortgage law. It is now in an advanced phase; the government has given licenses to some companies. The mortgage law exists; it is just a matter of finalising the smaller issues and the implementation by law. I think we are very close to seeing it active by the end of this year.

Is there anything that you would like to add?

I would like to mention the new regulation regarding off plan sales. The new Ministry of Commerce introduced off plan sales to ensure safe development growth in Saudi Arabia. Off plan sales have become very active now in this market. This is aiding the quality of developments by having to acquire consultants, accountants etc. to ensure that all the money is going towards the project. I think this is a very positive development for Saudi Arabia.
As you mentioned the mortgage law is going to be implemented, as well as a real estate development fund, which will offer different products both for the developers and for the end users. This will allow developers who struggle to get financing from the local banks to get access to financing.