In early July 2012 Saudi Arabia’s cabinet approved a legislative package that is expected to completely overhaul the Kingdom’s mortgage market. The new mortgage framework, which has been in development for more than a decade, is expected to be put in place by the end of 2012, though it could potentially be pushed to early 2013. The legislation has the potential to boost home ownership rates dramatically over the course of the coming decade, in addition to positively impacting the construction and financial sectors, among others. In particular, it is widely expected to be a boon for Saudi’s insurance industry, which will likely benefit from a substantial uptick in property, home and construction underwriting as the mortgage market begins to take off in the coming years.
Demand for housing throughout the Kingdom has grown substantially over the past few decades, driven in large part by one of the fastest population growth rates in the world. At the same time, steadily increasing real estate prices have had a deleterious impact on purchase rates in many areas.
While the government has invested heavily in residential real estate projects over the course of the past decade – particularly after the 2008-09 international economic downturn and the Arab spring protests, which began in early 2011 – housing demand continues to outstrip supply. With rapid population growth expected to continue through 2020, ensuring that the Kingdom’s expanding populace is able to find and afford housing is one of the government’s chief concerns moving forward. The recently introduced mortgage law was designed with this in mind.
A Balancing Act
Between 1975 and 2009 the Kingdom’s population more than tripled, increasing from around 7m to 25m, according to data from the Central Department of Statistics and Information (CDSI). Similarly high growth rates are expected to hold for the foreseeable future. According to a late-2012 report released by the Saudi-based National Commercial Bank (NCB), the largest bank in the Arab world in terms of total assets, the Kingdom is expected to be home to some 37m people by 2020, up from around 27m at the end of 2011.
Around 66% of the current population lives in one of three regions, namely Makkah, Riyadh or the vast Eastern Province, the latter of which is home to the great majority of the Kingdom’s oil reserves. These three areas, which account for around 67% of occupied homes in the country, are expected to benefit the most from the new mortgage legislation.
As of the end of 2010 – the most recent year for which housing data was available at the time of publication – the nation’s total stock of occupied housing had reached 4.6m, up from 3.4m in 2000, which represents growth of around 121,000 new units per year. Traditional Saudi households are quite large, with a full extended family often living under one roof in a villa or complex. However, according to the NCB report, the average size of Saudi households has dropped over the past decade, from 6.1 people per unit in 2000 to 5.8 people per unit in 2010. This shift is in line with a regional trend towards single-family units, and is especially prevalent among the Kingdom’s large youth population.
With this change in mind, annual demand for housing in Saudi is expected to jump from around 195,000 units in 2011 to 264,000 units in 2020. According to NCB forecasts, meeting this demand will cost around SR1.3trn ($346.5bn), which works out to investments of around SR240bn ($64bn) on an annual basis. The government is expected to provide the bulk of the Kingdom’s new housing supply over the course of the coming decade. Indeed, between 2010 and 2014 alone the state plans to spend SR1.4trn ($373.1bn) on physical and social infrastructure as part of the country’s ninth development plan, with a substantial percentage of this funding going towards housing projects. In March 2011 the government created a new government ministry, the Ministry of Housing, to oversee the Kingdom’s residential development initiatives. Soon after it was formed, the ministry launched a new project designed to build 500,000 affordable homes at a total cost of SR250bn ($66.63bn).
A Key Piece Of The Puzzle
While the state is working to build the homes, the new mortgage law is meant to ensure that citizens will be able to afford to buy them. Current estimates put home ownership in Saudi at 25-35%, compared to nearly 70% in the US and most other post-industrial countries.
The low rate is closely linked to the lack of a comprehensive mortgage law in the Kingdom. A number of local banks and other financial institutions currently offer salary-linked mortgages, where repayments are deducted directly from a homebuyer’s monthly salary. Under the new system, however, local lenders will be allowed to use the property itself as collateral against a loan, which will allow a much larger percentage of the population to purchase property.
According to a recent report from Fitch, the international ratings agency, mortgage debt in Saudi is currently equal to around 2% of GDP, compared to around 70% in the US and the UK. Additionally, only around 3.5-4% of housing purchases in the Kingdom make use of mortgage lending. Indeed, most Saudis rely primarily on their savings or on financial assistance from family members to buy a home.
Under the new regulations – and so long as future housing supply matches demand – the government has estimated that home ownerships levels in the Kingdom could potentially rise to 80% by 2024. Provided everything goes according to plan, some forecasts project that the mortgage market could eventually be worth as much as $32bn on an annual basis (see Real Estate chapter).
The new mortgage package is made up of five discrete pieces of legislation. The Saudi Arabian Monetary Agency (SAMA), the Kingdom’s central bank, issued the first three laws – covering real estate financing, leasing and the supervision of financial firms – in late November 2012. The remaining two laws, which cover mortgage registration and the enforcement of foreclosures, are expected to be issued before the end of the year or in the first few months of 2013. The laws will change the local real estate market in a variety of ways. According to draft releases, the legislation will result in the creation of a number of new private mortgage lenders, in addition to a state-run refinancing company – known as the Saudi Real Estate Refinancing Corporation (SRERC) – along the lines of Fannie Mae and Freddie Mac in the US.
According to local media reports, the company will be licensed to package mortgages and real estate into sukuk (Islamic bonds) and other sharia-compliant securities, which could then potentially be issued to investors on the secondary market. This is a common practice in developed financial sectors around the world.
Together, the new laws are expected to result in a substantial amount of growth in the insurance market, as borrowers will likely be required to obtain both property and life (protection and savings) coverage in order to benefit from mortgage lending, in line with a number of international standards.
Additionally, the insurance market could be one of the major beneficiaries of increased mortgage securitisation in the Kingdom in the coming years. According to a September 2012 report released by Clyde & Co, a multinational law firm that operates in Saudi, mortgage-backed securities will likely require financial guaranty insurance, which is currently unavailable in Saudi. Additionally, increased complexity in the local financial services sector has the potential to boost demand for professional indemnity and directors and officers’ liability insurance at banks and other similar entities. If local insurers are able to adapt quickly in order to best take advantage of this rapidly changing environment, the industry stands to benefit substantially from the new mortgage law.
While many local insurers are optimistic about opportunities for expansion in mortgage- and real estate-related segments in the coming years, key questions remain, which is perhaps to be expected as the laws are gradually being rolled out.
As of early December 2012 the government had only formally issued three of the five mortgage-related laws and the legislative package as of early 2013 still was considered to contain a number of grey areas. For example, according to the Clyde & Co report, it currently remains unclear how SAMA plans to detect fraud and related illegal practices in complex mortgage-backed securities and other new real estate-related financial products. Additionally, the role of insurance brokers, agents and other intermediaries is currently unclear in terms of the new mortgage market.
Many of these issues will likely be worked out as the new laws are put in place and tested over the next few years. In the meantime, some percentage of local insurers are expected to take a conservative approach as they adjust to a new operating environment with new regulations and, potentially, new competitors. That said, most local players are looking forward to substantial expansion over the course of the coming decade.
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