Saudi mortgage law to boost property sector

The enforcement of the long-awaited mortgage law in Saudi Arabia will give a strong boost to the real estate sector but its impact is expected to take time, a key Saudi bank said on Tuesday.

The absence of a clear mortgage law framework to govern property ownership, property repossession, forced eviction and asset liquidation in the case of delinquency has been a key deterrent for banks in expanding lending in this segment, Banque Saudi Fransi (BSF) said in a study sent to Emirates 24/7.

BSF described Saudi Arabia’s real estate sector, the largest in the region, as a solid sector based on a foundation of ample demand among the country’s young population, short but growing supply of apartments and villas and the imminent introduction of the mortgage law that would gradually enhance the availability of financing for potential homebuyers.

“But while it is hoped the law’s passage will allow much wider access to property ownership, this reality could take time. At least in the medium term, the law is not poised to benefit the majority of Saudis whose monthly income stands below SR8,000. Paying SR464,167 for a large apartment and SR1.06 million for a small villa – the median country-wide prices in the BSF survey – is simply out of reach for most young people. As a result, we do not envision the law revolutionizing Saudi Arabia’s property sector all at once,” the study said.

“Banks are likely to take a measured approach to home financing once the law is passed. They already offer home finance products, which raises the question about which category of potential homebuyers the law would encourage banks to open up to. Prudence must be exercised to avoid extending mortgages at low interest rates to low-income individuals.”

The study noted that at present, many prospective homebuyers turn to the kingdom’s Real Estate Development Fund, set up in the 1970s to support property finance, but there is a limit to how much the fund is able to contribute.

Its figures showed total outstanding loans of the fund stood at SR77.1 billion at the end of the third quarter of 2009, up 2.9 per cent from the year earlier.

A recent royal decree enables the Fund to abolish a rule that individuals must own land to qualify for a soft loan of SR300,000, a step that should open up home ownership to a bigger cross-section of the population, it said.
The decree also stipulates that each region should receive equal portions of the fund, it noted, adding that there are drawbacks, though – particularly the 15-18-year wait for the body to approve an application.
“Expanding the Fund’s capital could help rectify this,” the study said.
It showed that property financing accounts for only about two per cent of GDP in Saudi Arabia and real estate finance for just 2.8 per cent of total bank loans.

In terms of economic contribution, the construction sector accounted for 7.2 per cent of real GDP in 2009, and the finance, insurance and real estate sectors for 12.9 per cent. “The market is thus ripe for expansion in the coming years, particularly as Saudi private sector activity regains momentum.”

The report projected growth in the non-oil private sector at around four per cent this year, steered by stimulatory state spending and a more robust macro-economic backdrop in the wake of higher oil prices.

“But sharp turns in prices in some neighborhoods in the BSF Survey has highlighted the urgent need for an improved regulatory framework to govern the Saudi housing sector and protect homebuyers against arbitrary rises in home prices by estate agents and traders,” it said.

“A housing regulator with enforcement powers should be established for the country. The state could improve the sector’s competitiveness by giving developers access to cheaper land or using state funds to invest in low to mid-income housing. Enforcing high building code standards is also crucial if we are to promote more energy-efficient construction.”

The study said nearly 70 per cent of homes suffer from inadequate insulation at present, adding that another test for Saudi authorities will be to contain land speculation as investors have tended to buy land and flip it for a profit, with no intention of developing it. “Charging fees for empty plots would help alleviate this problem and promote the sector’s progress.”

Referring to the surge in property prices, BSF said it highlights a supply-demand mismatch which Saudi developers “should strive to bridge in the coming years.”
He noted that the Saudi government is targeting the construction of one million houses in its latest five year plan to meet 80 per cent of the expected demand.

“The state’s goal is to provide about 266m square metres of land for the development of housing projects by the public and private sectors over this five-year period. This is a step in the right direction because prohibitive land costs are currently stretching the cost of housing to levels that prevailing incomes cannot accommodate,” said John Sfakiankis, BSF’s chief economist.

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