Sep 05 2012
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Mortgage law effect
05 September 2012
Saudi real estate and mortgage lending jumped 83.4% in the second quarter year-on-year in anticipation of the new mortgage law coming into effect, according to EFG-Hermes data.
"The Saudi banking sector's consumer loans grew by 27.0% year-on-year in 2Q2012, driven by real estate/mortgage lending, which jumped 83.4% year-on-year," said EFG-Hermes. "Other categories of consumer loans also maintained robust growth trends, with personal loans and car financing both rising 20% year-on-year."
In July, the Saudi Council of Ministers finally approved the draft of five laws that constitute the legal framework for mortgage lending in Saudi Arabia. The five laws provide a blueprint for mortgage registration and foreclosure processes, and regulating leasing and financing companies, including those active in real estate.
"The law clearly permits foreclosure of properties in the case of insolvency, with a significant focus on enforcement and implementation of decisions through the help of law enforcement entities," noted SICO in a report. "Moreover, mortgages will be structured in the form of Ijara agreements, which will be allowed to be refinanced."
"Mortgage demand is expected to be strong because a growing young population has faced rising rents over the last four years," noted Fitch Ratings. "This has led to a drop in living standards among the lower-income population. The rent subcomponent of the CPI has risen by 47% in the four years to May 2012, more than twice as fast as overall inflation. Total mortgage lending is a mere 2% of GDP and home ownership is only 30% of the population."
However, the jump in demand to buy houses has the potential of triggering house-price inflation, similar to Dubai's real estate boom of 2004-2008.
However, tight regulation on mortgages as well as a cautious approach by the banks will also help to dampen price rises.
Housing supply will need to catch up and fast. Jones Lang La Salle, expects close to 23,000 additional residential units coming to the market - to bring the total stock to just over 900,000 units in Riyadh alone by the end of 2012.
"The majority of the supply will be delivered through small projects comprising 20 less than 20 units," said JLL in a July report, adding that 130,000 units are set to be build before the end of 2015.
In Jeddah, JLL expects to see 80,000 new housing units coming on line by the end of 2015.
"Governments and semi-government entities are working on different projects to develop affordable housing in Jeddah as the private sector is finding it challenging to provide solutions for the lower income households."
Well-capitalised Saudi banks should have little trouble in offering mortgage loans and expect banks with better-established mortgage lending businesses, such as SABB, Al Rajhi, Samba and Riyad Bank, to benefit substantially, with their ability to expand faster, benefiting from previous experience and an existing client base.
"As mortgage business develops, it would support mortgage backed securities market, which could be a major boon for the Saudi capital markets," the bank said.
The banks' have barely scratched the surface when it comes to mortgage lending business, which is expected to blossom once the law come into effect - officials hope that the law could come into effect as soon as October.
But local media reports suggest that the new regulations will not affect 60% of existing housing units as they were not built in line with 'the code of Saudi construction regulation,' which could pose a problem for the industry.
There is still a long way to go. Last year, King Abdullah bin Abdulaziz Al Saud pledged to build 500,000 affordable housing units at a cost USD67-billion, a plan that has yet to kick off.
A CB Richard Ellis report suggests the Kingdom is planning initial work on the first batch of the 500,000 units on various sites totalling 32 square kilometres.
While there is no doubt that the mortgage law has turned the Kingdom's real estate industry on its head, the authorities will need to keep a sharp eye on rising inflation and prices of raw materials such as cement and steel. © alifarabia.com 2012
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