GCC states need active mortgage market

Gulf oil producers need to develop an active mortgage market to regulate real estate activities as the sector begins to recover from the repercussions of the 2008 global fiscal crisis, a Saudi investment firm said on Wednesday.

In terms of their size, the mortgage markets in the six-nation Gulf Cooperation Council (GCC) remain extremely underdeveloped by global standards, said NCB Capital (NCBC), an offshoot of National Commercial Bank.

Its figures showed the total mortgage industry in the GCC nations is estimated at around $60-70 billion, slightly more than five per cent of their combined GDP.

Mortgage penetration--mortgages as a percentage of GDP-- in the UAE was only four per cent in 2005, but is estimated to have surged to around 14 per cent in 2009 while Kuwait and Qatar it stood at around 14 and nine per cent.

In Saudi Arabia, mortgage penetration is only around 1-3 per cent while it is estimated at nearly 4.5 per cent in Bahrain.

According to NCB, these figures do not necessarily capture government or personal loans used for home purchases but do appear broadly indicative of the current state of affairs. The report showed mortgage market penetration in the developed economies such as the United States and Britain is estimated at nearly 50 and 70 per cent respectively.

“An active mortgage market in the GCC is now the need of the hour…while sharp corrections in some GCC real estate markets highlight the need for greater regulation, the demographic imperatives, especially in Saudi Arabia militate for speedy reforms,” NCBC said in its 20-page study.

Its estimates showed some SR1.2 trillion in house financing demand is expected over the next 10 years in Saudi Arabia, the largest Arab economy.

With well over half of the population still relying on rental housing and over 60 per cent below 30 years of age, the pressures are likely to remain intense, it said.

At present, developers tend to favor high-end real estate, which relies minimally on debt-based sales, and commercial property, which in some markets is supported by a looser regulatory framework, the study noted.

“Both factors leave the markets vulnerable to short-term speculation without further regulatory intervention. Addressing these anomalies will in part

necessitate the establishment of widespread mortgage markets that ensure greater access and affordability,” it said.

“The international experience suggests that such steps can be highly effective in

improving access to housing by large segments of the population. The state can

play an important role in the process, as demonstrated by the US experience. Even with penetration levels extremely low, however, strict regulation is needed to prevent excesses and the emergence of the kind of credit spiral that ultimately

undermined the stability of the housing sector in the US.”

NCBC said it believed the “Continental European” model, less inspired by universal home ownership, serves as an example of greater market stability. “Even with mortgages, the development of the GCC housing infrastructure will inevitably have to involve an element of government-sponsored affordable housing. Nevertheless, options should be considered by gradual privatization and even partial ownership where circumstances warrant this.”

Although mortgages in the GCC are lagging, lending to real estate emerged was an increasingly important element of bank credit in the pre-crisis years, it said.

The report showed that during 2003-2008, GCC bank credit to the real estate sector increased from around $2.1 billion to $8.4 billion while real estate firms raised as much as $4.7 billion from the equity markets.

“Growth was particularly dynamic in the UAE where mortgage lending more than doubled from about Dh56.5 billion to Dh125.8 billion in the course of 2008. It continued its upward trajectory even during the crisis to reach Dh141.7 billion in 2009 and Dh162.2 billion in August 2010,” the report said.

It showed the share of real-estate mortgages in total loans expanded from around 13.6 per cent in 2008 to 14.8 per cent in 2009. Real estate loans in Kuwait constituted about 26.3 per cent of banks’ loan portfolios in 2009.

In Saudi Arabia, the world’s oil powerhouse, the share of real estate loans in the total credit fell consistently from three per cent in 2005 to two per cent in 2008 and subsequently increased to 2.4 per cent in 2009. 

The value of the real estate loans has steadily increased by 19.8 per cent to SR17,860 million in 2009 from SR14,906 million from the previous year.

“While most lending is undertaken by commercial banks, the regional is also home to a growing number of specialized mortgage lenders whose role is particularly important in the UAE,” the report said.

“The global economic crisis in 2008 however put the brakes on the growth of the

nascent mortgage sector. Since the beginning of the turmoil, liquidity flowed out of the regional economy as the capital markets collapsed. While the fall in demand for real estate was broad based, losses were more severe in economies such as the UAE and Kuwait due to a heavy reliance on foreign capital and regulatory shortcomings. Real estate transactions stalled across the region.”

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