Housing Opportunities & Challenges 17 Sep 2014

Agenda

1

1 The demand

2 Demographics

3 Household income distribution across KSA

4 Demand drivers

5 Supply developer share

6 Constraints on supply of affordable housing

7 Shortfall of affordable housing : Potential solutions

8 What more can we do …

The Demand

The housing demand driver

3

Source: Central Department of Statistics – 2013

• Current fertility rates of 3.3 suggest that this

will continue, albeit at a reduced pace

• The Saudi population grew from 27.5m in 2010

to 30.7m in 2014, a CAGR of 3.04%

• Share of expatriates has increased from

31% to 33%

• Saudi Arabia has the youngest population in

the GCC, with 42% (43% for Riyadh) of the

population between the age of 20 -34

• urban migration, housing sizes

and preferences trends are influenced by this

young population

•

• Challenge of affordability acts to slow down

the pace of reduction in average household

size

• Saudi households shrinking but expatriates

expanding as they secure permissions to

include families

• The trend towards smaller family sizes driven

by Saudi’s younger generation which see

smaller families as better avenues to a better

quality of life

Strong population growth Overwhelmingly young population In millions Falling household sizes

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

24.00

26.00

28.00

30.00

32.00

34.00

2010 2011 2012 2013 2014 2015 2016

Population YoY Growth 60+ 1

55 - 59 .5

50 - 54 .8

45 - 49 1.1

40 - 44 1.5

35 - 39 2.0

30 - 34 2.3

25 - 29 2.3

20 - 24 2.1

15 - 19 2.2

Marriage Age/First

time home buyer

group

Male Female

2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010

4.4

4.6

4.8

5.0

5.2

5.4

5.6

-1.99%

Millions

Estimated Forecast

Demographics

4

Source: Central Department of Statistics – 2013

• Population of Riyadh is 5.9

million out of 30 million in KSA

Riyadh Pop Vs. KSA

• 2.5 million expatriates in Riyadh

• 600,000 expatriate households in

Riyadh

Riyadh - Saudi vs expat pop.

• Expatriates have much lower

wages than Saudis

• Majority of expatriates are

labourers or service workers

Riyadh - Saudi vs expat wages.

• Bottom income segment

accounts for most of expatriate

households

• Top four categories can be

considered to be predominantly

Saudi households

Total household income

distribution (‘000)

20%

KSA

Riyadh 59%

Saudi

Expat

4,306

2,166

3,236

Avg Saudi Expat

24.2%

Working

High

Upper Middle

Middle

Lower Middle

125

122

210

186

378

38.8%

37.0%

To determine realistic market size, we need to include expatriate as financing has improved the

expat access to the product.

80% 41%

Credit for real estate financing has showed a stable

increase since 2009

5

Source: Saudi Arabian Monetary Agency

• Currently Saudi's Real estate consumer finance is only a mere 2% of total credit and less than 0.9% of GDP

• Credit for Real Estate financing has been on a steady increase since the onslaught of the credit crisis in 2008, with bank

financing drying up (particularity among the international banks)

Real Estate Financing (Mortgages)

28,211 32,978 42,314

53,576 70,334

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2009 2010 2011 2012 2013

Consumer Loans (Real Estate Finance) (SR Million)

CAGR 25.6%

Following liquidity squeeze in 2009 on private sector and

construction industry. Banks confidence in RE is improving

since 2010

6

Source: Saudi Arabian Monetary Agency

• Banks financing to developers in the terms of debt and equity is improving

• Financing to construction sector has reduced slightly in Q4 2013 but still higher than the levels in 2012

Lending to construction sector

44,741 55,644

69,796 75,381 76,555

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2009 2010 2011 2012 2013

Bank Credit to Building and Construction Sector (SR Million)

CAGR 14.4%

Household income distribution across KSA

7

In comparison to other KSA regions, Riyadh has higher affordability

Income Jeddah Riyadh Makkah Madinah Dammam Overall

High Income 16,000 and above 10% 12% 6% 7% 10% 10%

Upper Middle 12,001-16,000 10% 12% 4% 14% 8% 10%

Middle Class 8,001-12,000 17% 21% 15% 31% 23% 19%

Lower Middle 5,001-8,000 13% 18% 16% 22% 22% 17%

Working Group 5,000 or less 50% 37% 58% 26% 37% 44%

Total 100% 100% 100% 100% 100% 100%

Income Groups and % of population for Major cities of KSA (includes both Saudi & Expatriate households)

30% 39% 31% 53% 45% 36%

Source: IPSOS Survey of 24 K Households in the KSA

Household income distribution across KSA

8

In comparison to other KSA regions, Riyadh has greater share in high income groups

Income Jeddah Riyadh Makkah Madinah Dammam Overall

High Income 16,000 and above 28% 46% 7% 7% 7% 100%

Upper Middle 12,001-16,000 24% 44% 5% 12% 5% 100%

Middle Class 8,001-12,000 22% 39% 9% 14% 8% 100%

Lower Middle 5,001-8,000 19% 39% 11% 12% 8% 100%

Working Group 5,000 or less 29% 31% 16% 5% 6% 100%

Total 25% 36% 12% 9% 7% 100%

Share of each City within each Income Group in KSA (includes both Saudi & Expatriate households)

Source: IPSOS Survey of 24 K Households in the KSA

Supply

Supply developer share

10

Source: JLL Analysis

• Saudi’s residential supply is

dominated by smaller size players

(the unorganized supply) who focus

primarily on stand alone units with

projects valued less than USD 5mn

• Although difficult to quantify (due to

information limitations it is estimated

that these smaller players account

for nearly 85% of the current total

supply in the KSA and in Riyadh

• As supply from larger sized projects

are limited compared (and expected

to remain low for the foreseeable

future), substantive opportunities

for new and existing professional

developers to capture attractive

market share

Riyadh housing supply Riyadh Housing Units Supply Forecast 2009 -2015

Developer vs Unorganized Supply - Includes all unity types (Villas, Apartments & Public Housing)

JLL research indicates that Saudi’s Residential Supply is dominated by small unorganized players

leaving attractive “market opening gap” for professional developers

Historic supply for housing units in KSA and Riyadh 2010-2014

Riyadh KSA

2010 YE 857,000 4.64 million 3.04% CAGR of population between 2010-2014

2014 YE 1,000,000 5.99 million 2.56 CAGR of residential units between 2010-2014

Un-organized Supply Active Developer Pipeline

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2009 2010 2011 2012 2013 2014 2015

Saudis have large households: Riyadh is a “villa city”

11

Key housing

statistics for

Riyadh

11%

31% 34%

19%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

East. Prov.

35%

9%

36%

1%

Madinah

9%

5%

49%

4%

Makkah

11%

7%

50%

2%

Riyadh

40%

22%

25%

2%

Other Apt Flr in a villa Villa House

• Riyadh and the Eastern Province have the highest preference for

villas at 40% and 35% of total accommodations

• As compared to the national average of 33%, Saudi nationals in

Makkah & Madina have higher performances (50%) for

apartments

• 2 and 3 bedroom units account for 54% of the housing in

Riyadh, even though the average household size is about 5.0

people (excluding the laborer population)

Saudi nationals breakdown by accommodation type Riyadh housing stock breakdown by number of bedrooms

(Saudis & Expats)

Source: HSBC Equity Research

0% 5% 10% 15% 20% 25% 30%

1 BR

2 BR

3 BR

4 BR

5 BR

6 BR

7 BR

How to Take The Vision Forward!

Constraints on supply of affordable housing

Affordable housing

13

Construction technology

Social/Cultural

Land and infrastructure

cost

Developer business model

Permits and approvals

Financing for developers

Management/ price control

Mortgages

Can professional housing delivery increase market supply?

14

• Large scale development sites in new

suburban areas

• System building

• New investors (e.g. REIFs) looking to invest in

resi sector

• New developers entering the market

• PPP

Supply side opportunities

• Little experience among local players

• Few capable contractors for large projects

• Scarcity of credit

• Escrow laws

• Permits and Approvals

• Delivery of services

• Low transparency on land registry

Barriers to entry

• Growing population

• Declining household size

• Young population / changing tastes

• Growing middle class

• New mortgage law

• Low financing rates

Demand enablers

• Saudis wary of off plan purchases

• Cost/Affordability

• Acceptance off plan sales

• Diverse design requirements

• Cultural acceptance of community developments

• Accommodation alternatives: rentals, parents

• New laws of higher down payments for

real estate financing

Demand inhibitors

Shortfall of affordable housing- Potential Solutions

Affordable housing

15

Address social issues

Small block sizes

Reducing infrastructure

cost

P. P. P. Arrangements

Increase access to finance

Improve the national registration

system

Use of system building

solutions

Access to raw lands

Innovative design

solutions

What more can we do …

16

Relaxation of development guidelines – Welcome Creativity

Designate the permitted use of land - Update the urban plan to include new areas

Expedite Setting up Investment and Funding Structures dedicated to the housing market

Increase the density of housing units in a given area along with the associated infrastructure

Release Raw land to private developers with basic infrastructure by expanding urbanization

Conclusions

17

Shortage of affordable housing in all major KSA markets

Current shortfall (over 1.0 million units) will increase over next 5 years-200+ units are needed annually

More active government intervention & support is essential to ensure sufficient supply

Requires range of new business models/JV’s between Government and Private sector

It requires a re-think of the traditional approach to development

The greatest opportunity facing the development industry in KSA over next 5 years