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May 28 2011

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Saudi mortgage sector to reach SR904b in 10 years

Housing industry demand will reach to 230,000 units by 2013
JEDDAH: In anticipation of the Saudi mortgage law being approved this year, Credit Suisse forecast in a study that 52 percent of Saudi households pass the affordability threshold/test, and 17 percent would be potential mortgage seekers (average income of mortgage seekers will be SR11,160).

It further said the overall size of the mortgage sector could amount to as much as SR904 billion or 23 percent of GDP in 10 years, with our base case assumption at 16 percent of GDP (up from 1 percent currently), estimating "sector penetration to reach 10 percent of GDP in 5-6 years, growing at a 5-year CAGR of 46 percent."

Credit Suisse moreover forecast that the mortgage business could translate into 17-20 percent or SR75 billion of accretive value to the overall banking sector, with incremental profitability of SR6 billion in current prices, 20 percent of overall sector profits.

However, the study also anticipated potential pitfalls.

"Enforceability of the law, need to intensify development of 'white lands', asset/liability mismatch and the need for other sources of funding (albeit in the long term)," it noted.

The analysis added that Al-Rajhi Bank will be the main beneficiary "with over one third of the retail market share and the largest branch network," with Arab National Bank having a "clear strategy to grow this segment" and Riyadh Bank seen to get "10 percent market share."

According to data released at the Arabian World Construction Summit in Abu Dhabi, Saudi Arabia has swept the United Arab Emirates off the top spot in the regional construction race with plans to generate higher funds toward the Kingdom's construction sector.

The Kingdom plans to generate nearly $450 billion in construction contracts in the next five years compared to $400 billion in the UAE, Over the last five years, the UAE accounted for $380 billion in projects, while Saudi Arabia generated $225 billion, research by data analyst Meed Projects found.

Only last year, the UAE was the biggest construction market in the GCC. It had $28.5 billion projects while Saudi Arabia had $24.5 billion.

At its peak in March 2009, the whole GCC project market was worth $2.6 trillion. Today, it is valued at $1.9 trillion by Meed analysts.

But while UAE projects market collapsed, Saudi Arabia bucked the trend and its market doubled in size last year, Meed found.

Saudi Arabia has an annual GDP of $622 billion, and a GDP per capita of $24,200.

Saudi Arabia has a fast-growing population, currently estimated at 25 million.

A number of UAE construction players have opened Saudi offices as their interest in the Kingdom gains.

UAE developer Emaar and construction company Arabtec already have established projects in Saudi Arabia.

Al Jaber Group, the Abu Dhabi construction company, will soon open an office in Riyadh, its first in the kingdom, said Fatima Obeid Al-Jaber, the company's chief operating officer.

The new branch will focus on infrastructure projects, she said during the summit.

"We are just trying to test the market," Al-Jaber said. "There's a lot of interest in Saudi Arabia."

The Saudi Arabian housing industry has emerged as one of the most vibrant segments of the real-estate industry. Young population-base, government funding, and booming economy have facilitated the region's housing industry to become one of the fastest growing housing industry in the Middle Eastern region. It is expected that the demand for Saudi Arabia housing industry will reach to 230,000 units by 2013, growing at a CAGR of around 20 percent during 2011-2013, RNCOS said in its "Saudi Arabia Housing Sector Outlook" report.

It said the government's assurance toward the improvement of the housing industry and constructive policy framework will result in the high-level of investments in the Saudi Arabian housing industry.

The report forecast that in the coming years, majority of developers will focus on affordable housing projects, instead of luxury villas and projects. Demand for these affordable housing units will account for over 90 percent of the total housing industry's demand in the Kingdom, it added.

The RNCOS report anticipates that the new mortgage regulation in Saudi Arabia will change the real estate market as it will promote young buyers, who presently find it hard to attain finance to acquire property.

"Furthermore, acceptance of the law will open the domestic market, with apparent and definite funding channels giving an additional boost to the sector."