Defining the new 'sweet spot' in the Jeddah residential market

Real estate insight by Susan Amawi, Director, Strategic Consulting , JLL, Jeddah

The majority of new residential supply in Jeddah remains in the form of low-rise villas, with a limited number of extremely high-rise (and equally high priced) projects being developed along the Corniche. Smart developers are however beginning to recognize that neither of these product categories match the changing expectations of consumers. “It is likely that the Jeddah residential market will witness a shift to the middle ground over the next 10 years, as developers respond to the current ‘sweet spot’ in demand for mid-rise apartments in mixed use projects at more affordable prices”.

Like the rest of Saudi Arabia, the Jeddah residential market is experiencing a remarkable transformation from its previous reliance upon unorganized low-rise standalone villa developments, to more mid and high-rise multi family apartments. As recently as 2018, villas accounted for almost 60% of the total residential stock The Saudi Future Cities vision envisages a major shift, with apartments and town houses accounting for the majority of the housing stock by 2030. While the family remains a central pillar of Saudi Arabian society, family structures are changing, with the proliferation of single person households and smaller nuclear families. As Saudi culture evolves, it has become more acceptable for the younger generation to move out of family homes to seek work in the major urban centers. This has resulted in a gradual but very noticeable decline in the average household size in the Kingdom over the past 30 years.

With many younger Saudi’s having experienced high-rise urban living overseas, there is likely to be continued demand for denser and more urban mixed use projects. Further demand for this product will be generated by the growing number of older empty nesters seeking to downsize, and the increased number of expatriates (that currently comprise around 50% of the population of Jeddah).

Younger Saudi families and first time home buyers are typically more cost conscious than previous generations, so it is unsurprising that they are turning to apartments in relatively greater number. Apartments are typically smaller and more affordable than villas, with JLL’s latest research showing that apartment asking prices are typically up to 70% below those for villas in Jeddah.

These demographic shifts are driving an increase in demand for mid-rise and higher density mixed use projects, offering residents a greater connection to the ‘hustle and bustle’ of the city than either of the two product types that currently dominate the supply pipeline (super high rise and low density villa compounds). A number of savvy developers have recognized the ideal scale for these projects is in the range of 8 to 15 stories.

Increasing the density allows developers to cater for changes in demand by including a greater range of facilities within the project (including support retail, leisure facilities such as pools and gyms, gardens and playgrounds). There is also increased interest in mixed use projects, combining elements of retail, leisure and hospitality along with the residential component, not just in Jeddah but across the Kingdom. Although these projects also provide a higher level of parking than traditional residential developments, they are generally more environmentally sustainable and in keeping with the government initiatives to create more livable and sustainable cities.

The changing demographic patterns are also impacting what consumers are expecting from the units themselves. While the average unit size being demanded in Jeddah has certainly declined over the past 10 years, it remains above that being experienced in other cities across the MENA region. While the specifics of demand vary between projects, the sweet spot in the current ‘for sale’ market appears to be for two bedroom units of between 120 and 150 sqm. The rental market is typically seeking smaller one and two bedroom units of around 90 and 100 sqm respectively 

Affordability is an increasingly important consideration for consumers, with most looking for units priced at between SAR7,000 and SAR10,000 per sqm (compared to SAR25,000 - SAR30,000 per sqm in some of the super luxury high-rise projects along the Jeddah Corniche. The current shortage of affordable supply, is attracting interest from developers intent on developing more mid-rise projects aimed at plugging this gap.

The major constraint, limiting the supply of smaller and more affordable residential units in mixed use projects is the artificially high land values currently associated with sites along the Corniche and in other prime central locations within Jeddah. Despite the strength of demand, this makes it difficult for developers to make projects stack up financially. The most realistic chance of achieving this relates to those sites which have been in developers ownership for many years (in some cases across multiple generations).

Despite the impact of White Land Tax (which is seriously penalizing those land owners who leave sites vacant for extended periods), the book value of residential land typically remains well above the current market value., . Developers are therefore placed the difficult position of having to accept a significant ‘haircut’ on the book value of their land holding, in order to create the type of product being demanded at the right price point.  

A number of savvy developers are now recognizing the need for creative financial structures to address this problem and allow them to close the current disconnect by offering the kind of product the market is demanding while at the same time achieving a sufficient level of financial return. Their success in achieving this balance will be instrumental in determining the extent to which Jeddah is able to reduce the current disconnect between demand and supply and create a more livable and sustainable city.