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28 March 2024

Saudi mortgage law faces delay

The real estate and construction sector's contribution to Saudi GDP stood at around 7.2 per cent in 2009. (AFP)

Published
By Nadim Kawach

Saudi Arabia's plan to enforce its first mortgage law could prompt domestic banks to end more than a year of moratorium on normal lending but the world's dominant oil power could delay its approval, a key Saudi bank said yesterday.

Speculation had been high that the kingdom, which controls over a fifth of the world's recoverable oil deposits, could launch the landmark mortgage law this year after a long delay because of the market turmoil.

"Despite the heightened anticipation, there are no clear signs that the law will gain final approval this year. Those who have seen the law say it lacks details about implementation mechanisms, among other areas," the Saudi American Bank Group (Samba) said in a study.

It said Saudi authorities are also understood to be concerned that the law, the organised mortgage legislation in the region, would trigger a price bubble.

"Part of this concern centres around the possibility that property developers will continue to ignore the low- and mid-level housing segment, and partly around the fact that land prices in the kingdom have themselves risen sharply in recent years as a result of speculative investment," Samba said.

In recent press comments, a Saudi official said the mortgage law would curb sharp increases in property prices, spur bank credit and encourage investment in the sector, one of the key components of the country's economy.

Hassan Akeel, Under-Secretary of the Ministry of Trade and Industry, said the mortgage law has become crucial to stabilise the property and construction sector, adding that it would bridge a widening gap between housing demand and supply caused by relatively low supply and population growth.

Akeel estimated the total credit extended by Saudi Arabia's 12 banks to the real estate sector at around SR6.5 billion (Dh6.5bn) in the first quarter of 2009.

He gave no data for the rest of the year but said investment chances in the property and construction sector would be encouraging after the approval of the mortgage law. He said the real estate and construction sector is one of the main drivers of the kingdom's economy and is the second-largest component of GDP after oil.

His figures showed the sector's contribution to GDP stood at around 7.2 per cent in 2009 and that it expanded by a staggering 50 per cent during 1999-2008, an annual growth of five per cent. In 2009, the sector contributed by around SR55bn to GDP and it accounted for 9.5 per cent of the non-oil GDP.

"Consumer lending remains capped by mandated borrowing limits for individuals – confined to a third of an individual's salary. It is understood that mortgage lending will not be bound by these limits and banks are awaiting the final approval of the mortgage law with considerable anticipation," Samba said. "In the first instance, the law would allow banks to tap into considerable pent-up demand for housing among Saudi Arabian nationals, the majority of whom do not own their own home. It is hoped that developers will respond to the release of this demand by refocusing their efforts on low and mid-level residential supply, a segment that has been overlooked in recent years," it said.

Like in nearby Gulf nations, high rents in Saudi Arabia were among the key reasons for soaring inflation in 2008 along with a surge in imported products, food prices and strong domestic demand due to high oil prices. Despite a sharp decline in inflation in the kingdom in 2009 from a record 9.9 per cent in 2008, they remained relatively high due to rising rents.

Analysts expect high rents to remain the main reason for inflation, albeit lower, this year.

"Rents will remain the main source of domestic inflation, as the supply of new property fails to keep up with demand. Greater provision of real estate should ease rental inflation through the year," Jadwa Investments said. In a recent study, Saudi Arabia's largest bank, National Commercial Bank (NCB) expected banks in the kingdom to reverse several months of a tight credit policy and open up their lending coffers after the mortgage law is released.

NCB said the mortgage law offers a huge investment potential to the country's banks and this could allow them to "end their strict credit approach and entice them to invest more at home after accumulating record funds abroad".