By Sinead Cruise and Daryl Loo
LONDON, Dec 4 (Reuters) - Robust economic growth prospects and escalating real estate demand have put Saudi Arabia in pole position to replace overbuilt Dubai as the Gulf's new magnet for international property investors.
Saudi Arabia's alluring property market remains largely closed to direct foreign investment but that hasn't stopped non-Saudi companies from planning investments amid rumours the Kingdom could loosen restrictions on firms who could help relieve its national housing shortage.
"We see that there will be a movement away from Dubai now ... and the market that fascinates us more than any is the Saudi market," Andrew White, head of Middle East operations at UK-based investor Kenmore Property Group told Reuters.
Kenmore is one of just a handful of British real estate companies to extend its investment footprint to the Middle East after launching operations in Dubai in 2006.
Using Dubai as a base, White says the firm has aspirations to invest widely across the Gulf and the overdue Dubai slowdown could open investors' eyes to colossal opportunities in nearby Gulf territories.
"The drivers of the market in Saudi ... are very different to those in Dubai. They have a huge young population who require housing, shops and offices. That demand has really not caught the attention of the international investor yet," White said.
While growth in Dubai's economy relies on a nascent financial services sector and a burgeoning expat workforce, Saudi Arabia's vast oil reserves have provided more than enough ballast to its economy in global credit market turmoil.
DUBAI LAGS
Data from the World Bank showed Saudi gross domestic product (GDP) reached $382 billion in 2007, nearly three times the 2007 GDP of United Arab Emirates.
In contrast, house prices in Dubai are likely to fall almost 28 percent from this year's peak, according to a Reuters survey published Thursday.
While fluctuating oil prices are expected to compress economic growth in 2009, experts at global property broker Jones Lang LaSalle said demand for residential and commercial property would continue to outstrip supply next year.
"We believe the opportunity for our business in the Kingdom of Saudi Arabia (KSA) is vast," said John Harris, head of KSA operations for Jones Lang LaSalle, who last week confirmed plans to open offices in Riyadh and Jeddah.
"The Kingdom is the world's fastest growing large country with a current population in excess of 25 million people," Harris said. "In addition, almost 50 percent of the total population is below 20 years old and the country is also one of the world's fastest urbanizing countries," he said.
As a result, Saudi Arabia is suffering a massive national housing shortage running at around half a million homes and this demand is expected to double by 2012 as new mortgage reforms make it easier for people to buy homes, JLL said.
Apartment prices in Riyadh have surged 16 percent per annum between 2003 and 2007 but are still among the lowest in the Gulf region. According to JLL, apartments in Riyadh are currently priced at $943 per square metre on average -- around one-fifth of Dubai prices and less than one-sixth of prices in Abu Dhabi.
Benoit Bellerose, chief financial officer of developer Dar Al Arkan, Saudi Arabia's largest real estate firm by market value, has encouraged more international developers to expand into the Kingdom to help relieve the supply shortage.
"Prices are going up, and the only reason is because of the shortage and nothing to do with speculation," said Bellerose.
"We hope that other developers will come, because it is not healthy for the country to have such a shortage of homes," he told reporters on the sidelines of a conference held in London.
While unable to accumulate Saudi bricks and mortar assets, foreign investors keen to gain a foothold in the market before the expected boom have been allowed to buy shares in Saudi firms through swap arrangements with local brokers since August.
The rules have so far helped Saudi Arabia avoid a Dubai-style market bubble fuelled by foreign speculators but they have slowed supply of commercial and residential property in the Kingdom. Bellerose feels these restrictions could be further relaxed in the future.
"It is a long-term process... Going to the swap mechanism is a good start. They want to monitor it and make sure it is working well before it becomes a free market. There is no doubt that in the long run, that is where they want to be." (Editing by Chris Wickham) (See www.reutersrealestate.com for the global service for real estate professionals from Reuters)