As housing remains one of the most important segments in Oman’s real estate sector, financing plays a critical role in the development of the overall property market. A number of lending changes, such as lower interest rates and simplified loans processes, are making it easier for Omanis to own a home, and this should have positive effects across the sector.

Market Leaders

There are three major commercial banks involved with home mortgages: the National Bank of Oman, Bank Muscat and the Oman Arab Bank. A fourth bank, HSBC Oman, joined the list after it merged with the Oman International Bank in July 2012. Another major player in the home lending market is the government-backed Oman Housing Bank (OHB). Set up in 1977, OHB works to increase access to home ownership for Omanis by providing mortgages with interest rates as low as 1%. While in the past most Omanis secured home financing through OHB, many nationals are now turning to commercial banks, partly due to the high quality of service and the ease of banking at such institutions.

Interest Rates

According to property consultancy Cluttons, mortgages in Oman generally run for 20 to 25 years, and banks often provide a loan for up to 80% of the property’s value, though this can fluctuate substantially depending on the property and the buyer., another consultancy operating in Oman, recently reported that average interest rates for a residential mortgage are between 4% and 5%, representing a significant decrease from two years ago when interest rates averaged between 6% and 7%.

While interest rates have dropped, banks are selecting borrowers more carefully. This is partly due to a major demographic trend: many of those looking to buy a home are relatively young and inexperienced first-time borrowers. Often the only collateral these buyers have is a new job or their education, and explaining prudent borrowing practices has become a priority among bankers as a result. Lenders also understand, however, that the loan selection process for potential homeowners can be a relatively complicated task. The local Bank Dhofar, for example, found that the paperwork involved in taking out a mortgage was a major source of frustration for borrowers. In order to facilitate the procedure, Bank Dhofar has set up a call centre to guide buyers through the loan approval process, and in April 2012 the bank reported it had reduced the processing time for paperwork to five days.

Closing The Gap 

In addition to simplifying and accelerating the mortgage approval process, steps are being taken to increase options for lower-income families. In mid-2012 OHB was instructed to cut banking and administrative fees by 75%, resulting in a strong demand for mortgages from OHB across the sultanate. Qualifying loan applications submitted to the bank during one week in late August 2012 reached almost 80, according to Muscat Daily, an English-language broadsheet.

A total of 27 of the applications, with a combined valued of OR1.2m ($3.12m), were filed in Muscat during this short period. The Rustaq branch received 12 applications worth close to OR600,000 ($1.56m), and applications in the northern city of Sohar totalled 11 at a combined value of over OR400,000 ($1.04m). OHB also approved loan applications at its branches in Dhofar, Sur, Nizwa, Buraimi and Ibra during the same period.

Another key to providing affordable home financing is the Ministry of Housing’s Housing Loan Programme, which offers soft, interest-free loans to nationals and is operating with a budget of around OR49m ($127.7m) for the five-year period from 2011 to 2015. Loans come directly from the government, and the maximum loan amount offered is OR20,000 ($52,121). To qualify for the programme, an applicant should earn OR301-400 ($784-1042) per month at the time of application and no more than OR500 ($1303) at the time the loan has been granted. Families with a dual income are qualified to participate in the programme if their combined earnings do not exceed OR600 ($1563) per month.

Recent data provided by the Ministry of Housing notes that as of mid-September 2012, a total of 525 families had benefitted from the Housing Loan Programme in 2012. This represents a significant increase in assistance from the year before when roughly 300 families received housing grants. In addition, loans provided in 2012 reached a combined total of almost OR10m ($26m) by mid-September compared to around OR5.5m ($14.33m) worth of loans granted in 2011. As of mid-September 2012 the programme had provided a total of almost OR70m ($182.4m) in loans to over 4800 families over the programme’s entire history.

Meeting Demand 

Demand for assistance from the Housing Loan Programme has grown tremendously in recent months. The Ministry of Housing reported that at the end of 2011, around 14,500 families had applied for the programme and were in the queue to receive assistance. This is up from around 300 families at the end of the previous year. The dramatic increase in applications can be attributed to a number of factors, including relaxed admittance standards.

Efforts by the government to expand access to home financing should decrease the number of lower-income families in Oman without affordable housing. Jones Lang LaSalle (JLL), a real estate consultancy, noted in a September 2011 report that around 300,000 such families lived in Oman as of September 2011.

Islamic Finance

One of the most important developments for Oman’s banking sector is the expected introduction of Islamic financial products. First authorised by the government in 2011, plans to prepare a legal framework began in late 2012 (see Islamic finance and banking chapters). Islamic banking and real estate fit well together as Islamic principles stipulate that a physical asset be involved in any transaction.

Two banks have been authorised to introduce sharia-compliant financial products. Bank Nizwa, the first to receive authorisation, held an initial public offering (IPO) in May 2012, raising $156m to finance its new services, according to international press reports. The bank had planned to start operations during the third quarter of 2012, but was waiting on legislative changes to go through. The IPO of Al Izz Islamic Bank opened in late September 2012 and closed four weeks later.

The bank attracted bids worth OR46m ($119.9m), according to a Reuters report. Al Izz stated that the float represented 40% of the bank’s planned capitalisation of OR100m ($260.6m). A total of 400m shares were sold at OR0.10 ($.026) per share.

While some details on the role of Islamic banking are still being worked out, the development should ease access to financing within the property market. Fahad Al Ismaili, the executive director of Tibiaan Properties, a local real estate services company, told OBG. “The introduction of Islamic financial instruments should give local investors greater borrowing confidence. In addition, all types of lenders should be affected by the new form of banking, from single families borrowing to build a private villa to groups of investors in search of funding for large-scale commercial developments.”