Saudi Arabia: Introducing mortgages

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The real estate sector is set for a boost after new legislation allowing banks to offer mortgage products to home buyers was given final approval, a move that should encourage many young Saudis to shift from renting to ownership. It may take time, however, for both banks and customers to acclimatise themselves to the conditions of the Kingdom’s new property market.

The new law was approved in early July but is not due to come into effect for another few months while the Saudi Arabian Monetary Agency (SAMA) – the Kingdom’s central bank – finalises its regulations covering mortgage financing. The agency will have to ensure the rules take into account the need for products to be sharia-compliant, as well as clearly identify procedures to deal with loan defaults and subsequent legal proceedings.

However, once these regulatory hurdles are passed, the sector should see a marked acceleration of activity. While banks have offered loan packages to buyers in the past, until now there has not been the option of securing loans against the value of the property being purchased. Lending for homes has also been limited, with home loans representing just 2% of the overall portfolio of the Saudi banking sector.

With some estimates putting the annual requirement for new homes at around 250,000 per year – despite state efforts to boost housing stocks – demand for loans should be strong. The government has estimated that home ownership levels will rise to 80% by 2024, greatly strengthening the base of the economy.

Indeed, in a statement issued after the law was ratified, ratings agency Moody’s said it would also serve as a major boost to the Saudi banking sector, explaining, “We expect it to enhance their asset growth potential, strengthen the profitability of retail franchises and increase loan book diversification”.

Though Moody’s was upbeat about the prospects of the new mortgage law on banking and other segments of the economy, the agency did forecast it will not have a significant impact immediately.

“However, the growth in mortgage loans will likely be gradual, as we expect Saudi Arabia’s conservatively supervised banks to exercise caution and continue relying on strict affordability and underwriting criteria, in addition to the usual salary assignment taken by the lender, especially until the foreclosure process is tested in the courts,” Moody’s said.

Another international ratings agency, Fitch, gave a similar assessment, stating that the mortgage law will boost home ownership and promote social stability, as well as strengthen and diversify the banking sector. While Fitch did caution that property prices may rise due to a spike in demand fuelled by improved access to credit, this should be offset by a number of factors.

“The rise in house prices will be tempered by planned property developments that will help meet demand. Tight regulation on mortgages, as well as a cautious approach by the banks, will also help to dampen price rises,” the Fitch report said.

But the sector also needs to build houses that are within people’s price range.

“Meeting housing demand will require that the supply of homes is more closely aligned with the spending ability of prospective home owners,” Raeyed Al Dakheel, the CEO of Mawten Real Estate, told OBG. “In the recent past, property developers have focused on upscale properties, overlooking the middle-income families who represent the majority of potential buyers and the real opportunity in the Saudi market. If the real estate sector can cater to this key demographic, the outlook for the residential market looks positive and promising for both domestic and international investors.”

The new mortgage law may also bring with it an increase in foreign property and development firms on the domestic market, giving rise to greater competition.

“Many real estate companies have been looking to invest in the Saudi real estate market,” said Aziza Mansour, the chairperson of Aziza Mansour Company, a local real estate firm, in an interview with Arab News on July 28. “I expect tough competition in the Saudi real estate market between local and foreign investors.”

The mortgage law will have a knock-on effect throughout the economy. While the real estate sector and the construction industry will be the main beneficiaries – along with Saudi lenders – sales of home insurance policies, building materials, and furnishings and appliances are all expected to leap as the property market surges.

If regulations for mortgaging finance are brought out within 90 days of the cabinet’s signing off on the new law, Saudi Arabia’s real estate sector could see a new wave of prospective home owners flowing into the market by the last quarter of this year. That being the case, 2013 could be a busy year for residential property in the Kingdom.

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