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Saudi Arabia is expected to see higher off-plan sales, which will boost revenue and profit of developers, S&P said in a new report.
Off-plan development has the potential to reduce the sector’s funding needs as it offers the convenience of pre-financing construction by accelerating cash collection and de-risking developers, the rating agency said.
Off-plan transactions increased by 52% in the kingdom in the first half of 2023.
“We expect the strong growth will continue, supported by a reported 9% increase in off-plan developer numbers over the same period.”
Saudi Arabia introduced the regulation of off-plan sales under the government-initiated Wafi programme five years ago.
Although this segment is expanding, it is not disrupting the market, owing to many buyers’ preference for a fully completed home, lack of trust and awareness of the process, and rising interest rates, S&P added.
Given the unprecedented size of Saudi Arabia’s announced real estate projects and expected population growth, financing needs will be significant by the end of the decade.
S&P expects all market participants to undertake new funding, leading to significant annual debt issuances by the sovereign, various government agencies, including the Public Investment Fund, and real estate companies.
Consequently, the agency sees that Saudi corporates will continue diversifying their funding sources, accelerating domestic capital market development and increasing contributions from international debt.
The rating agency believes Saudi Arabia’s real estate market is inherently more stable than Dubai’s, alleviating the risk of swift demand swings that could lead to pricing pressures.
The demand for real estate stems from the kingdom’s larger and more stable population, the report noted.
Expats make up a lower share of the population in Saudi Arabia (42%) than in Dubai (over 90%). Therefore, a potential drop in the expat population, particularly during cyclical troughs, will likely have a lower material impact on house prices in the Kingdom.
Moreover, the demand for housing is underpinned by the government and its various initiatives, especially its flagship Vision 2030 target of 70% home ownership by Saudi nationals.
“We therefore expect the government will continue to support new housing supply and the funding for it,” S&P stated.
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