In November 2014 a new mortgage law was introduced for loans covering residential real estate transactions in the Kingdom. This imposed a 70% loan-to-value (LTV) rule on residential mortgages.
A study by the Saudi Arabian Monetary Agency (SAMA) published in the first quarter of 2015 showed that the regulation put citizens of Saudi Arabia on the same footing as those in Qatar and Kuwait, but that the average LTV in the GCC was 74%, with Bahrain having no limit at all. Citizens borrowing in the UAE and Oman are required to save a 20% deposit. The study found average LTV ratios of 80% in the MENA region, 73% in OPEC countries outside MENA, and 82% in G20 countries, where the most challenging ratios for borrowers were in South Korea (50%), Italy (56%), China (70%) and Turkey (75%). The most relaxed LTV ratios in the G20 were the UK (unlimited); South Africa, Brazil, France and Japan, all 100%; Canada and Mexico, at 95%; and the US, at 90%. The study suggested the LTV ratio in Saudi Arabia was somewhat stricter than some countries of similar income levels, but that it did not apply to commercial transactions.
The introduction of the mortgage law in 2014 was a response to high levels of lending for residential real estate, which was seen as a potential threat to the wider economy. SAMA noted in its “Financial Stability Report 2015” that real estate lending grew by over 30% in two consecutive years, 2013 and 2014, with retail, as opposed to corporate, real estate lending accounting for 63.3% of all property loans. SAMA described the 70% LTV rule as a macroprudential measure, noting in its report that the implementation of the LTV ratio was expected to curb excessive leveraging in the real estate sector.
A financial stability committee at SAMA has reappraised the LTV regulation at quarterly meetings since its introduction, but its members may be more concerned about preventing a property bubble than avoiding a downturn in the residential segment.
Loans For Citizens
The government has created a vehicle through which Saudi citizens can access finance to cover the 30% deposit required for new homes. The Real Estate Development Fund (REDF), the most significant specialised credit institution (SCI) in Saudi Arabia, was established to provide loans for citizens wishing to buy property. At the end of 2014 the volume of outstanding real estate loans had increased for both the REDF and commercial lenders. Between 2011 and 2014, the volume of REDF loans had risen by 65% from SR79bn ($21.1bn) to SR130bn ($34.7bn), while commercial bank loans had grown by 113% over the same period from SR70bn ($18.7bn) to SR149bn ($39.7bn). In the first three quarters of 2015, the fund’s loans totalled SR21.3bn ($5.7bn), local daily Al Eqtisadiah reported.
The REDF’s funds come directly from the Ministry of Finance, but this may be about to change. In October 2015 Reuters reported that Yusuf Zughaibi, the director of REDF, had told a local newspaper the fund would be turned into a bank. According to its website, the REDF is worth SR183bn ($48.8bn), and it already has a 40-branch network across the Kingdom. As a bank, the fund’s managers would work with the private sector to offer a broader range of loans and home finance options. The REDF has been restricted to maximum loans of SR500,000 ($133,000), which are paid directly to developers building new properties, but as a bank it could also consider making loans to cover the 30% deposit on homes that have already been built.
Another new lender moving into the home loans space in Saudi Arabia is Bidaya Home Finance, a non-bank lending institution created as a joint venture between Islamic Corporation for the Development of the Private Sector of Jeddah, and another state-owned SCI, the Public Investment Fund.
Granted a mortgage finance licence by SAMA in December 2015, Bidaya Home Finance has starting capital of SR900m ($239.9m). As well as financing home purchases by Saudi nationals, the lender has a mandate to educate the public in what they can expect from a mortgage. The agency plans to use through technology, and especially employ social media to reach out to the population.
“Only 30-35% of Saudis own their own homes, which is low from a global perspective, but we believe it is a basic right of every national to aspire to own their home,” Mohamed Badat, chief commercial officer at Bidaya, told OBG. “At the same time purchasing a property is the largest investment most individuals will ever make, so it’s a huge responsibility to provide housing finance to prospective buyers.”
Bidaya is opening branches in Riyadh, Jeddah and Dammam. It began operations at the end of the downturn in the Saudi mortgage market. In 2014 the 13 commercial banks providing home loans increased their collective mortgage book by SR24bn ($6.4bn), according to Bidaya, but in 2015 that mortgage book rose by just SR7bn ($1.9bn). The slowdown was based on the new LTV ratios introduced in December 2014, but also on uncertainty around the new land tax, which was passed by the Shura Council in December 2015.
Although the tax on undeveloped land will only be levied at a rate of 2.5%, confusion about the details of implementation have sowed doubts among landowners, property developers and consumers. Landowners are waiting to find out if any distinction is made based on the size and location of land parcels or on how much of a specific plot must be developed to avoid taxation. This lack of clarity has made owners and developers reluctant to roll out new schemes without clearer direction from the government. At the same time, buyers are being cautious.
According to Century 21, some 40% of the land in Riyadh is undeveloped and thus large numbers of owners may suddenly find themselves liable to pay the tax. If this prompts widespread selling or development of the land for residential purposes, the value of the land, and consequently property across many large cities, could fall. Many potential buyers may be hoping to see cheaper housing in the months and years ahead and are deterred from buying a property that may fall in value. “We don’t know what the full impact of the white land tax will be yet, but I do know that consumers currently feel that it is a good time to wait and see what transpires,” Badat told OBG. “Personally, I think the new tax could be good for the real estate market in the medium term, because you will no longer see prime land standing empty.”
Another potential source of new housing supply in the Saudi market is the government itself. The Eskan fund was created by the Ministry of Housing in 2014 to work with the private sector in order to provide affordable homes.
At the end of 2015 work had commenced on two schemes that were designed to deliver 28,000 homes before 2023. The smaller of the two projects is being built 5 km from King Khaled International Airport in Riyadh. Although the new community of 3000 homes, 76% of them villas, will be 30 km from the main business district, it will be relatively close to the new metro system due to be operational in 2018.
The Salman Bay project outside Jeddah will not enjoy rapid transit links, but it will be a more sizeable community with 25,000 residential apartments in 1250 buildings. The first 46 blocks of flats were completed by the end of 2015 with starting prices of SR248,000 ($66,100) for apartments. This first phase of the Salman Bay project cost SR1.5bn ($399.9m), with the community due to be completed by 2023.
According to a SAMA report in 2015, four years earlier King Abdullah created a SR250bn ($66.7bn) fund to pay for affordable housing for Saudi citizens. Although the money has not yet been utilised, this pot of funding could be used to work with private developers to build properties that go some way to meeting the country’s demand for housing.
“Vision 2030 addresses both home ownership and affordability and aims to increase the rate of home ownership to 52% by 2020,” Abdulrahman Bajunaid, CEO of Rafal Real Estate, told OBG. “There are huge opportunities for developers who will take part in constructing the thousands of affordable units within the private-public partnership programme established by the Ministry of Housing. This building plan will have a positive impact on the development of the real estate sector in Saudi Arabia.”
A growing number of Saudis are also renting their homes. In its report on the Saudi property market in 2015, real estate agent and research consultancy JLL noted a 5% decline in property transactions compared to the previous year. “We have witnessed a shifting demand in the residential market in both Riyadh and Jeddah, as the trend moves towards property rentals from sales,” said Jamil Ghaznawi, national director and country head of JLL in Saudi Arabia, in a press release accompanying the launch of the report.