Saudi Real Estate Market Tripled in Last 4 Years: Mizat Real Estate

Interview with Mohammad Al Saja Chairman of Mizat Development Company

“While the government claims that 60% of Saudis own a home, private estimates put the number at more like 30%,” so there is a tremendous lack of housing. There is a 19 year waiting list to get financing for house. This is a major challenge for society at large so the government dedicated billions of dollars to new projects. The question remains what has been done to date. We know that many plans have been announced and then rescheduled. What is the general situation in the real estate sector regarding prices, speculation, valuations, availability of land and availability of financing?

In the real estate market in Saudi in the last three to four years, the prices doubled or tripled. As you know, the population growth in the country is becoming very high. This is one of the reasons that suddenly the government realized there is high demand for land, or in other words, a high housing demand. The other point was the stock market in 2005, 2006 and 2007. After this time it went down. In this country you have two channels for investments – either the stock market or real estate. So when the stock market goes down, you find people shifting to real estate. There is plenty of cash and the government spending is also going toward real estate.

In the real estate market in Saudi in the last three to four years, the prices doubled or tripled. As you know, the population growth in the country is becoming very high. This is one of the reasons that suddenly the government realized there is high demand for land, or in other words, a high housing demand.

Speculation started in 2009 and 2010; too much money was going into real estate and the stock market was going down. What happened in the stock market is happening now in real estate. So yes, the pricing is too high these days. There was too much speculation, although not this year. Many real estate properties are over-valued. If we look back at last year, I think things are settling. The Ministry of Housing made some announcements which made people think twice about not pushing real estate or the land prices. There is definitely land availability. Saudi Arabia is a big country and you can see it everywhere; however, the availability doesn’t mean these lands are ready to start construction for either commercial or residential development. You have prime locations that are ready and large areas of land for which the government needs to provide utilities in order to get the land onto the real estate market.

Do you think the government is serious about putting up substantial funds for housing?

Yes, definitely. In March 2011 there was the announcement about transferring the housing commission into a ministry and then allocating 250 billion riyals to fund public housing projects. What tells you that the government is serious is that they announced there would be a housing commission, which was maybe 2008 and it started at that time on a smaller scale, but in 2011 the government realized there was a high demand and it was a major issue for the people. So at that time they decided to upgrade it from a commission to a ministry and allocate those big amounts at that time. They started to look for bigger solutions to the problem because they know there is a high demand and there is about 70% demand. Different studies say the demand is 60 to 70% for individual housing units.

The concern is how fast the Ministry of Housing can move. They have too many challenges and it seems there are too many obstacles which is why they are not moving as they are supposed to be. In the media, you can see many programs and announcements coming here and there but on the ground, they are still moving slowly. Different programs have to move faster in order to catch up. Look at the announcement from the government in 2011 of 250 billion riyals to develop 500,000 units.  If you take the annual demand, because of the population growth, of about 100,000 units, the number now is about 700 to 800,000 units which need to be built. The 250 billion riyals is not enough anymore; you have to add another 50 or 100 billion riyals. These are things that I hope that the ministry is aware of and tries to work in all directions in order to satisfy the demand.

One of the major challenges is the availability of financing. The government is pushing for a new mortgage law but it’s still uncertain as to what’s happening with this legislation. Can you give us the latest developments in regard to this?

They announced what they call the Real Estate Finance Laws which consists of five divisions, one of which is the mortgage law. Since the mortgage law is not final, SAMA, which is responsible for all financial services companies, started giving licenses to a number of different mortgage companies. Each bank here, and we have around 13 banks, will definitely have a subsidiary to provide mortgage financial services. There are independent real estate and mortgage financial services companies, some of which already have their license. About 8 to 10 are officially licensed and there are a similar number in the pipeline.

Banks used to give real estate financing before announcing the law which tells you that there is real estate financing but using a different formula. Now it’s more regulated. Maybe the one effect that will result from announcing the mortgage law is that it’s going to be a little bit cheaper than what is available now and more regulated. But it’s happening; what is happening now is a kind of a mortgage. With the 250 billion riyals plus the available cash with the banks and the new companies, so far it is going okay. There is still more that has to be provided.

If people will be able to secure financing, that will further increase the real estate prices because there will be more investors moving in and then regular people will want to purchase from these speculators.

There is one major point that we have to consider. I don’t think that the purchasing power that the people have now will match the real estate prices of houses nowadays. Even if there is a mortgage, it doesn’t mean I will be approved to get mortgage financing because the average salary here is about 8,000 riyals. In order to apply for a mortgage, they need to deduct around 30% of that. Then you have other expenses. The 8,000 may be good enough to get into the mortgage but what about the others whose pay is less than 8,000? That’s a big percentage of the population and for sure, most of them are the people in need of housing. The rest can manage to find it in different ways.

The average is 25,000 and what is the average price of a house?

When you say a unit, which is an apartment, we are talking from 500,000 to 700,000 riyals. That’s the minimum I think.

So it seems that the market is largely overvalued.

Definitely, and the major point is the land. The land is too expensive. Land should be a maximum of 30% of the unit cost but in Saudi it is nearing 50%. That’s why these arguments and discussions are happening about land availability. Land is available but it’s too expensive. There is cheaper land in the suburbs or outside of the cities but there are no services or utilities so you can’t use it. That is why there is a demand. Many people cannot understand why there is such a demand in Saudi Arabia with this large country. I was in Istanbul last week; the population of Istanbul is 13 million and in Riyadh there are 5 to 6 million but it’s almost the same size crowd in the evening rush hour. What will happen in Riyadh when the population is 10 million or more?

It is a very interesting sector. What does it mean for private real estate companies? How do you play this sector and what are you trying to do with all the challenges?

As a real estate company, many people say we are at the right time and the right place. That is true in that to serve the housing sector in general is interesting and the demand is high. The challenges that we have are the land prices and the purchasing power of the people. We focus on a niche market which is the upper income class and we are doing okay with that but there are limits if we want to grow on a bigger scale for a mega project similar to the other regional companies.

The challenges are government bureaucracy and getting licenses with municipalities. The demand is there and since we are targeting a class that can pay or can find financing for our units, we are okay but so far we don’t see those mega housing projects as happens in other countries and I think that is because of the government regulations. It takes you a long time in order to develop the land while the land prices are going up. Economically, it is better to sell the land than to build on it and then sell it.

Of course the government realizes this and are putting some taxes on it? They don’t want the speculators to hold the land.

Yes there is much talk about how something will be announced but nothing is happening yet. It’s going to be a minimum fee that will push landowners, especially of large land parcels, to think about either developing the land or selling it. This will move things towards lower prices so the wheel will start moving again on a bigger scale.

Also one of the major problems is that these lands sometimes belong to the Ministry of Defense or the Ministry of the Interior. Both ministries own land and these are controlled by the powerful powerbrokers within Saudi Arabia. They don’t just want to have their prices of land slashed in half so there might be resistance coming from the government itself to reduce the prices of land. At the same time, they have to take into consideration the people’s needs for housing.

The Ministry of Municipality already announced that they gave the Ministry of Housing around 250 million square meters of land. From the other side we keep hearing that it was announced but on the ground it’s not happening. There are some legal issues taking some time. There is no shortage of land, especially government lands. I will repeat myself by saying are these types of projects ready to start or not? It seems not.

Regarding your own units, what is the ratio of your clients? Are your clients investors or families who want to move into the units?

Most of them are end-users. The units are for themselves. Some of them are for investments but that is the minority.

Of course these end-users can choose between many different companies and properties. What makes you stand apart? There is also a lack of quality standards and no ethical guidelines.

We always claim that it is the quality that we are providing and Mizat Development is known for the quality of its products. When I saw quality that includes the location, construction, building materials, and hopefully the delivery schedule.

Can you give us more details on your most prestigious project or projects and how are they different from what we see in the market?

A small number of developers are providing good quality products or housing units. The project we are involved in consists of around 100 residential units – villas. It starts from 350 up to 600 square meters of land. It was designed carefully, in a way that would fulfill a mid to upper class Saudi family’s requirements. The finishing materials are carefully selected and it’s a higher quality project. The product that you receive is almost ready to use so we provide the A/C units, kitchen closets, etc.; you just need to add the small parts and then you can use it from the second day. This is considered so far a uniqueness that we have at Mizat Development.

Can you chart out the growth of the company over the past few years and what are your strategic targets for 2014/15?

In the last four years, the business volume was 30 million riyals and now we are talking about 300 million riyals. The plan that we have and the projects under review and to be executed very soon will double the size of business that we have, if not triple it. We are targeting 500 to 600 million in the coming two or three years. In the pipeline, we also have another bigger project which would take it higher. If we are involved in 100 units now, the second project is supposed to consist of more than 130 villas and the other project will be above that number until we finalize our master plan and detail design. So our numbers are doubling and tripling in the next three or four years.

What is your long-term vision for the company? Would you like to be the leader in the market? Or do you want to keep more profitability and sacrifice growth?

We are balancing that. It’s a joint stock company. One of the exit strategies in the long-term is going public of course but there are too many real estate companies in the market and real estate is one of the major investment sectors so everybody is involved in real estate by all means – either lands or development or commercial, residential or retail. In terms of the long-term vision of the company, we have set up the company with a good management team, the size of the business is going up and even more in the mid-term which would cover other areas, and it may include projects other than the housing sector. So offices and retail could be part of our projects because many of the locations that we study consist of commercial areas. The idea is that we cover the whole land to provide housing and the related services.

Would you like to stay in Saudi Arabia or do you think the Saudi entrepreneurship and the homegrown entrepreneurs could compete on the global scale? Is that your target?

For the time being, Saudi Arabia is enough. We have the market just next door, as they say. Riyadh itself is big enough to consider. In the mid-term, it’s Riyadh and Saudi Arabia at the maximum. If we have an investment opportunity, we can move as an investor but not to be a sole developer – co-developer maybe in the regional market, but not more than that.

What has been the average profitability in the real estate sector and how do you compare to that average number, if that’s a public figure?

In real estate you have to distinguish if it’s land or a construction project such as housing. The average annual return, though, is 10%. What I said in the beginning, that some of the land has doubled in the last two or three years, shows a 30% annual return but that will definitely not continue. That was for specific reasons.

In real estate you have to distinguish if it’s land or a construction project such as housing. The average annual return, though, is 10%. What I said in the beginning, that some of the land has doubled in the last two or three years, shows a 30% annual return but that will definitely not continue. That was for specific reasons.

Do you think the prices are going to stabilize in the country or remain the same or are we going to see a correction on the horizon?

All of the above. Some locations will go up – these are the prime locations. There is a shortage of good residential areas so the price in these areas will stay as is if not increase. In the long-term, real estate always goes up anyway. Now, the land that is located further out like the suburbs or if you go 20 km from the center of the city, much of that was speculation which is already slowing down. I believe some correction will happen for that land but not that much. We will wait for the announcements about the new regulations and fees and then we will have another discussion about that.

For example, which materials and what kind of contractors are you using? All those things play a significant role.

If I take a contractor as an example, we are using Class A contractors. The designers are well-known international or regional designers. For building materials, we are using the international well-known brands in different building and finishing materials. So when you check the brochure or the manual you will see that we have high-quality products included in the unit you will buy.

All the consumer brands are going to Saudi Arabia to sell their products. So Saudi consumers are very demanding and sophisticated. How do you think Saudi consumers are different from other countries? What is it that they want?

It’s a very competitive market. All kinds of materials are available – high quality and low quality. I don’t think the Saudi consumer is different from other areas or countries. It’s the price at the end. Some of them consider quality to be an important issue and others do not. I believe the minority consider quality to be an important matter but for the rest the cost or the price of the material is the key factor.