Sep 18 2012
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Saudi mortgage law a step in the right direction
Although Saudi Arabia announced a new mortgage law it stopped short of announcing specific regulation and analysts say speculation will remain rife until the specifics are announced
Whilst housing finance has been available for some time in Saudi Arabia, generally lenders have been conservative with their loan standards, resulting in a low mortgage penetration.
Currently, mortgage debt accounts for a mere two per cent of gross domestic product in Saudi Arabia (excluding government housing loans), which compares with approximately 15 per cent penetration in the UAE and more than 70 per cent in developed markets such as the US and UK.
Saudi authorities say the new mortgage law will include a package of five separate laws and reform the home finance market including the creation of mortgage lenders, the foreclosure process and the oversight of lenders. Finance Minister Ibrahim Al Assaf said within three months Saudi will announce regulation required to implement the law.
"There will still be speculation until measures are in place and then we know what the impact is," said Matthew Green of CBRE, a real estate brokerage firm, though agreeing that new laws are a step in the right direction. "There are no guarantees made to banks yet on foreclosures and how banks and lenders will seek recourse on that. Until we know the specifics, everything is up for speculation."
However, the mortgage law attempts to codify the foreclosure process, thereby giving housing finance providers greater confidence to lend. Currently the majority of mortgages are provided by the state's Real Estate Development Fund, which offers interest-free loans to low-income buyers.
"As a result, an effective implementation of the mortgage law will likely provide a significant boost to the long-term loan growth of the Saudi Arabian banking sector. Moreover, Saudi Arabian banks are capable of growing their lending books aggressively in a favourable and transparent regulatory environment as they are currently well capitalised and have liquid balance sheets," said Khatoun.
Athmane Bezerrough of Deutsche Bank mirrored Khatoun's sentiment, adding, "The issue is still the same, until there are clear regulation to protect lenders then we could only speculate."
A Balancing Act
According to Saudi Arabia's finance minister, regulations required for the law's implementation will be issued within three months with many analysts unable to speculate on the specific provisions at this stage.
The question looming over the Saudi authorities is how well could they integrate the new laws with social and real estate development in light of low household income.
"The issue as a whole is regulatory, it ties in to other areas not just mortgage laws, but how to make housing affordable for the majority of Saudis as on current salaries and going prices housing is still unaffordable for the majority of Saudis - only a minority of Saudis can afford the going mortgage rates," said Green. "Saudi needs to approach it from the top down, by protecting lenders, making housing affordable and have the regulations in place for a whole system."
Local and regional lenders are reportedly interested in the sector while the majority of local banks have looked to build their mortgage business over the last 18 months in anticipation of the law change. Green said local banks have the advantage over regional players as they to understand the market and have the inside track. However once regulations are passed more regional lenders will look to move into the sector.
For example, Tamweel shares rose 2.9 per cent to the highest in more than two months in July amid investor speculation that the Dubai-based mortgage provider may expand into Saudi Arabia following the law's passage.
Khatoun believes that the mortgage opportunity is sufficiently large for all banks to benefit in the long-run. "As it stands, banks that have a wide branch network and a strong retail franchise will be able to target potential customers more easily."
Islamic banks also appear to us to be well-positioned to take advantage of the new law. Their fully Shari'ah-compliant product offering will likely appeal to the mid-income segment of the population that currently dominate the 250,000 unit annual demand for housing in the Kingdom. "Finally, banks that have established meaningful links with major real estate developers may also benefit disproportionately," he said, adding, "It is anticipated that mortgages will be structured like an Ijara, which is similar to an Islamic lease agreement, the terms of which allow the lessee to derive temporary benefit from property ownership with the option of eventually owning the property outright.
"We expect the regulation to govern a broad array of areas including the creation of mortgage providers, a framework for the enforcement of mortgage contracts, the establishment of foreclosure procedures and the oversight of lenders."
Key to Economy
Saudi Arabia's population quadrupled over the last 40 years to 28.7 million, creating a housing shortage.
And they are in an ideal position, learning from mistakes that took place during the financial crisis in the Dubai real estate sector where rampant speculation created a real estate bubble that brought the market down.
The Arab world's largest economy needs to build 1.25 million new homes by 2014, according to the country's development plan. In March 2011, King Abdullah announced a plan to spend SAR 251 billion ($67 billion) to build 500,000 homes in order to tackle the shortage at a time of heightened political tension in the Middle East. The country's Housing Authority was turned into a ministry with a budget of SAR 15 billion ($4 billion) to remedy the situation.
"We view the passage of the new mortgage law as a long-awaited step forward that is, hopefully, indicative of Saudi Arabia's ambitions to modernise its financial industry and its regulatory framework," Khatoun said.
In addition to the banking sector, growth from the real estate sector will be potentially boosted by the new laws. An important provision of the law would be to accommodate mortgages for off-plan purchases. The result of this would be to reduce funding constraints on developers that will likely lead to a more timely execution of projects and the development of larger projects.
If Saudi Arabia announces the right regulatory policy to accompany the law then all parties, lenders and consumers stand to benefit, said Khatoun.
"It is thought that less than half of the population currently owns their own home, primarily because those on low and middle incomes have been unable to afford property," he said, adding, as such, the absence of affordable housing has become a central issue for many. "The new law will facilitate home ownership for these income segments with the banking sector playing a substantial role."
Moody's says the growth in mortgage loans will likely be gradual, and expects Saudi Arabia's conservatively supervised banks to exercise caution and continue relying on strict affordability and underwriting criteria, in addition to the usual salary assignment taken by the lender, especially until the foreclosure process is tested in the courts.
"Under the laws, mortgages will be based on a finance-lease concept, which effectively means that the ownership remains with the bank during the lease period, which will assist foreclosure enforcement," Moody's said in a research note.
Further, a new court will handle disputes related to real estate finance and foreclosed properties will be sold through an auction system, it noted. "We view SAMA's regulatory approach as generally cautious and hands-on. Therefore, we expect the policy push for home ownership to be balanced against the need for prudent lending criteria that will prevent future systemic issues."
For now, Saudi Arabia has the strictest regulatory limit on consumer lending in the GCC (see table), although the country is expected to relax those limits somewhat to allow for the growth in the new mortgage market.
© Banker Middle East 2012
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