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Saudi Arabia: Real Estate Deals for Small Residential Units Increased by 151%

A building offering small housing units in Riyadh. (Dar Al Arkan Real Estate)
A building offering small housing units in Riyadh. (Dar Al Arkan Real Estate)
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Saudi Arabia: Real Estate Deals for Small Residential Units Increased by 151%

A building offering small housing units in Riyadh. (Dar Al Arkan Real Estate)
A building offering small housing units in Riyadh. (Dar Al Arkan Real Estate)

The Saudi real estate market has recently seen an increased demand for small residential units, ranging in size from 30 to 65 square meters, with real estate transactions for these units surging by 151% during the first three quarters of 2024 compared to the same period last year.

In comments to Asharq Al-Awsat, real estate experts and specialists attributed this trend to four main factors. They pointed out that the future in major cities like Riyadh, Makkah, Madinah, Jeddah, and al-Dammam lies in small residential units, which will create new investment opportunities for developers, allowing them to expand their portfolios.

Real estate expert and appraiser Engineer Ahmed Al-Faqih stated that the future in major cities is for small apartments with an average size of 35 square meters. He added that most sales by developers and marketers in large cities are concentrated in small units, consisting of one or two rooms and studios.

Al-Faqih attributed this shift to four main reasons: changes in the demographic structure of major cities, especially Riyadh and Jeddah, due to large-scale migration, improved quality of life, and increased job opportunities.

These households tend to be smaller, with an average of three members. Additionally, new social groups are emerging, including women (either divorced or working women from outside the cities) and men who prefer independent living.

The third reason is a shift in social habits, with newlyweds and young families opting for fewer children and often waiting more than three years to have their first child, after achieving financial and housing stability.

The fourth factor is the rising cost of housing in major cities, leading smaller families and individuals to prefer smaller units, he explained.

Al-Faqih supported his points with data, indicating that real estate transactions for units sized between 30 and 65 square meters doubled, with the number of transactions rising from 242 units in the first three quarters of 2023 to 608 units during the same period this year, signaling a strong preference for this type of housing.

Real estate advisor and expert Al-Aboudi bin Abdullah described small residential units as a “rising star” in the Saudi real estate market.

In an interview with Asharq Al-Awsat, he said these units have successfully attracted both developers and investors, offering an innovative and intelligent solution to the growing demand for housing. This trend aligns with the dynamic transformations in the Saudi real estate market and combines flexibility, efficiency, and sustainability.

Abdullah emphasized the need for diverse housing options driven by social and economic shifts in the Kingdom. He noted that younger generations of Saudis increasingly prefer independent, flexible living arrangements that meet their individual needs at prices suited to their purchasing power.

Abdullah also pointed out that population growth and the increasing influx of employees from international companies and investors have significantly boosted demand for small units in key cities like Riyadh, Jeddah and al-Dammam.

Demand for such units is expected to continue rising, which will reduce pressure on larger housing units and open up new investment opportunities in the real estate sector, he noted.

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Year of War Creates Cracks in Israel's Borrowing Strength

The Bank of Israel building is seen in Jerusalem June 16, 2020. REUTERS/Ronen Zvulun/File Photo
The Bank of Israel building is seen in Jerusalem June 16, 2020. REUTERS/Ronen Zvulun/File Photo
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Year of War Creates Cracks in Israel's Borrowing Strength

The Bank of Israel building is seen in Jerusalem June 16, 2020. REUTERS/Ronen Zvulun/File Photo
The Bank of Israel building is seen in Jerusalem June 16, 2020. REUTERS/Ronen Zvulun/File Photo

Israel's economy has for almost a year ridden out the chaos of a war that risks spiralling into a regional conflict, but rising borrowing costs are starting to strain its financial architecture.

The direct cost of funding the war in Gaza through August was 100 billion shekel ($26.3 billion), according to the finance ministry. The Bank of Israel reckons the total could rise to 250 billion shekel by the end of 2025, but that estimate was made before Israel's incursion into Lebanon, which will add to the tally.

That has led to credit ratings downgrades, which are amplifying economic effects that could reverberate for years, while the cost of insuring Israel's debt against default is near a 12-year high and its budget deficit is ballooning, Reuters reported.

"As long as the war continues, the sovereign debt metrics will continue to worsen," said Sergey Dergachev, portfolio manager at Union Investment.

Although Israel's debt-to-GDP, a core metric for economic health, stood at 62% last year, borrowing needs have blown out.

"Even if Israel has a relatively good base, still it will be painful on the fiscal side," Dergachev said, adding: "And over time, it will put pressure on the rating."

Israel's finance minister has said the economy is strong, and the country's credit ratings should rebound once the war has ended.

The cost of the war is steep due to Israel's Iron Dome air defenses, large-scale troop mobilization and intensive bombing campaigns. This year, debt-to-GDP hit 67%, while the government deficit is 8.3% of GDP, well above the 6.6% previously expected.

While the core buyers of Israel's international bonds - pension funds or major asset managers lured by its relatively high sovereign debt rating - are unlikely to shed the assets at short notice, the investor base has narrowed.

Privately, investors say there is increasing interest in offloading Israel's bonds, or not purchasing them, due to concerns over the ESG implications of how the war is conducted.

Norges Bank sold a small holding in Israeli government bonds in 2023 "given increased uncertainty in the market," a spokesperson for Norway's sovereign wealth fund said.

"What you do see reflecting these concerns is obviously the valuations," said Trang Nguyen, Global Head of Emerging Markets Credit Strategy at BNP Paribas, adding Israeli bonds were trading at far wider spreads than similarly rated countries.

Asked about rising borrowing costs and investors' ESG concerns for this story, Israel's finance ministry did not immediately respond to a request for comment.

While Israel's domestic bond market is deep, liquid and expanding rapidly, foreign investors have pulled back.

Central bank data shows the share held by non-residents declined to 8.4%, or 55.5 billion shekels, in July from 14.4%, or nearly 80 billion shekels, in September last year. Over the same period, the amount of outstanding bonds grew by more than a fifth.

"Israeli institutions actually are buying more during the last few months and I guess some global investors sold bonds because of geopolitics and uncertainty," a finance ministry official said, declining to be named.

Equity investors are also cutting back. Data from Copley Fund Research showed that international investors' cuts to Israel funds, which began in May 2023 amid disputed judicial reforms, accelerated after the Oct. 7 Hamas attacks.

Global funds' ownership of Israeli stocks is now at its lowest in a decade.

Foreign direct investment into Israel dropped by 29% year-on-year in 2023, according to UNCTAD - the lowest since 2016. While 2024 figures are not available, ratings agencies have flagged the war's unpredictable impact on such investment as a concern.

All this has amplified the need for local investment, and government support.

The government in April pledged $160 million in public money to boost venture capital funding for the crucial tech sector, which accounts for some 20% of Israel's economy.

This adds to other costs, including housing thousands displaced by the fighting, many in hotels vacant due to the steep drop in tourists.

The displacements, worker shortages due to mobilization and Israel's refusal to allow Palestinian workers in, are hindering its agriculture and construction sectors.

The latter has been a key factor curtailing economic growth - which plunged more than 20% in the fourth quarter of last year and has yet to recover. Data from the three months to end-June show seasonally adjusted GDP remained 1.5% below pre-attack levels, Goldman Sachs calculations show.

Israel has thus far had little trouble raising money. It sold some $8 billion of debt on international capital markets this year. Its diaspora bond vehicle, Israel Bonds, is targeting a second annual record haul above $2.7 billion.

But rising borrowing costs, coupled with rising spending and economic pressure, loom.

"There is room for Israel to continue muddling through, given a large domestic investor base that can continue to fund another sizeable deficit," said Roger Mark, analyst in the Fixed Income team at Ninety One.

"However, local investors are looking for at least some signs of consolidation efforts from the government."