Gulf oil producers need to introduce mortgage laws that should involve government incentives to control the real estate sector and prevent damaging speculation, a key Saudi investment company said yesterday.
NCB Capital (NCBC), an offshoot of Saudi Arabia's largest bank National Commercial Bank, also urged more government support for small and medium enterprises (SMEs) to create jobs for the rapidly growing population. In a study sent to Emirates Business, NCBC said major challenges are getting access to capital, along with investment opportunities for investors in vitally important areas such as residential mortgages, SME development, and long-term infrastructure projects in the GCC.
"While the governments have typically helped ensure continuity, turning capital markets into an effective bridge between the structural economic needs and private capital remains one of the great opportunities facing the region," it said.
"What do we need?... The relatively young age and uneven development of the non-banking financial sector has created a paradoxical situation where the ability of investors and even financial sector institutions to take part in some of the most attractive structural growth opportunities in the region is severely constrained."
At the same time, it has led to recurrent misallocations of capital: while some sectors with considerable convergence potential have struggled to attract funds, others have received too much capital, leading to periodic bubbles, it said.
The study said the "extraordinary" real estate boom of the past decade has done little to address the needs and to cater to the resources of large segments of the region's rapidly growing population. This discrepancy underscores the pressing need for a financing mechanism that boosts real demand in the lower and middle segments of the market by making housing more affordable, it added.
"A properly defined and regulated mortgage system has historically been the most obvious way of doing this. This will also improve maintenance standards, since owner occupiers have the best incentive to protect the value of their property. At the same time, structural factors leading to higher costs should be controlled where possible. This means fostering competition in the construction sector, but also efforts to curb speculative bubbles in the land market," said the study.
The study said the GCC governments can increase the resources available for affordable housing projects by reviewing what it called "zoning regulations" and offering funding, guarantees, or even land. Turning to SMEs, NCBC said creating a mechanism for mobilising its rapidly growing human capital base remains a key policy priority for the GCC.
"The massive investments made in education in recent years must be channelled into more jobs and value creation, where the track record of SMEs is unrivalled by international standards. The case for this is particularly compelling in the Gulf, where the oil-related sectors tend to be capital-intensive while labour-intensive activities have often become critically dependent on low-cost expatriate labour."
It noted that although the GCC matches the global norm of large numbers of small firms that make a significant contribution to job creation and the broader economy, SMEs in the region are often caught in a low productivity trap.
Its figures for the UAE showed the SMEs' share of jobs is about 86 per cent, but their contribution to GDP is only around 30 per cent.
"While growing attention is being paid to attempts to enable the creation of SMEs, taking small companies to the next level remains a challenge. It is particularly difficult to attract long-term equity capital, partly because of the limitations of the financial sector, partly due to cultural resistance in many family-owned businesses to a perceived loss of control," NCBC said.
"Better credit information and more government-sponsored advice are urgently needed. The small size of the regional venture capital and private equity industry, which has been further hit hard by the global crisis at a critical stage in its development, has further complicated the situation."
The study said it believed partial privatisation of key government firms would bring in new sources of capital, knowhow and ideas.
"Debt capital financing would create stable long-term investment opportunities, especially for the region's growing institutional investors who still lag behind their international peers in access to safe local long-term fixed income investments. Growing private sector participation would also help accelerate the transition toward more efficient modes of operation," it said. "Moves toward a less distorting fiscal system are under way and clearly needed in areas where rapid capacity growth is needed in the face of input limitations."
Carrot-and-stick policy
The NCB Capital study suggested a penalty-incentive policy for boosting real demand and preventing speculation in the real estate sector.
"The most logical mechanisms [for this] would be fiscal incentives. Government levies can be used as a way of discouraging purchases that are short-term or not made for clearly identified development purposes. Hence, the governments can penalise proceeds from short-term holdings of land, something that can be defined on a sliding scale. At the same time, purchases made by developers and supported by clear plans should receive preferential treatment," the report said.
By Nadim Kawach
© Emirates Business 24/7 2010
