As Saudi Arabia pushes forward with its ambitious development projects, the capital city Riyadh is encountering a significant “capacity crunch” that is inflating costs and worsening the housing shortage, industry experts have told Arabian Business.
Impact of Megaprojects on Resources
The surge in demand for office spaces and residential units, spurred by the headquarters (HQ) mandate, has led to numerous projects in both the private and public sectors. This rapid expansion is contributing to high construction costs in Riyadh, making it the most expensive city to build in the Middle East at an average of $2,593 per square metre, according to a recent Turner & Townsend report. This is considerably higher than in other regional cities such as Dubai ($1,874) and Abu Dhabi ($1,844).
“Riyadh’s high construction costs can be primarily attributed to the construction industry’s output which is supported by the government’s focus on the ambitious development of major mixed-use cities [giga and mega-projects] in a bid to diversify its economy from oil as part of the Kingdom’s Vision 2030 initiatives,” said Dean Furey, head of real estate for Saudi Arabia at Turner & Townsend.
Effects on Housing Affordability
The intense focus on large-scale developments like NEOM, The Line, and the Diriyah Gate is not only reshaping the physical landscape but also redirecting resources within the construction industry, resulting in higher costs and limited availability of materials, plants, and labor. This diversion of resources may make affordable housing projects less feasible, further exacerbating the existing housing shortage in Riyadh.
“As a result of resources being diverted to these large-scale developments, there is a possibility of affordable housing projects becoming less feasible,” Furey revealed. This issue is particularly pressing in a city with a growing population due to increasing job opportunities from the HQ mandate.
Strain on Skilled Labor
The Kingdom is facing a shortage of skilled labor needed to execute its most ambitious projects. This shortage is contributing to the overall strain on the construction industry, inflating costs and making it challenging to meet the demand for both commercial and residential properties.
HQ Mandate and Real Estate Demand
The Saudi government’s HQ mandate, which requires international companies to establish regional headquarters in the Kingdom to qualify for government contracts, is intensifying demand for commercial and residential real estate in Riyadh. This policy aims to boost Riyadh’s status as a business hub but is also adding pressure to the already strained real estate market.
“The HQ mandate has stimulated increased demand for office spaces and residential units, leading to numerous projects in both the private and public sectors,” noted Imad Damrah, Managing Director for Saudi Arabia at Colliers.
Market Adaptation and Government Initiatives
Despite these challenges, the market is adapting. Developers are shifting towards smaller units, such as apartments and townhouses, to help keep prices reasonable. This shift could provide relief for young professionals and small families priced out of larger properties.
The Saudi government has also introduced initiatives to address the housing shortage. The Ministry of Municipal, Rural Affairs, and Housing (MOMRAH) is exploring different construction methods and regulations to balance affordability with quality development, particularly in the northern parts of the city.
Long-Term Solutions
Addressing the high construction costs and housing shortage in Riyadh will require a multifaceted approach. Furey suggests enforcing local content mandates to create capacity in the local market, increasing capability, and expanding affordable housing programs while streamlining regulations. Implementing innovative building techniques and investing in local resources and vocational training could also help reduce costs and increase the skilled labor pool.
Future Outlook
As Riyadh continues its ambitious journey toward becoming a regional hub, balancing the development of megaprojects with the need for affordable housing remains a critical challenge. The city’s ability to innovate, adapt, and grow sustainably will be crucial in addressing these issues.
For now, with construction costs remaining high and inflation forecasted at 5 percent through 2024, affordable housing in Riyadh remains an elusive goal for many residents.