Saudi mortgage growth rates soften, but likely to hold steady

Higher real estate prices, reduced tenor and Ramadan seasonality are factors, says Al Rajhi Capital

Image used for illustrative purpose. Riyadh, capital of Saudi Arabia.

Image used for illustrative purpose. Riyadh, capital of Saudi Arabia.

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Saudi Arabia's mortgage growth rates have halved in the past three months compared to the previous six months, but they are likely to hold steady around current levels, according to Riyadh-based investment bank Al Rajhi Capital.

After clocking an average of 15 billion riyals ($4 billion) in monthly disbursements for six months till April 2021 May, June and July saw lower disbursements, an average of 8.2 billion riyals; a level that is likely hold steady, the investment bank said in a recent note.

"We believe that the disbursements of around 8 billion to 9 billion riyals seen in the last few months is more of the normalized trend for the rest of 2021," the report said.

There are multiple reasons for the decline, according to Al Rajhi Capital. The most important being gradual increase in real estate prices, reduction in maximum tenor of mortgages and Ramadan seasonality.

"Increasing prices of commodities and materials is now reflected in higher real estate prices. Contribution of self-construction has picked up to offset this pricing increase. Ramadan seasonality and gradual relaxation of travel restrictions have also contributed to moderation in growth," the investment bank said.

Even though the market grew by 54 percent year-on-year (y-o-y) in first half of 2021 and 60 percent in 2020, the market expected growth of approximately 30 percent for three years starting 2020 end, which implies an average of 10 billion riyals in monthly disbursements compared to 12.2 billion year-to-date, the report said.

The investment bank increased its forecast from earlier this year of a 30 percent growth in 2021 to 36 percent followed by 21 percent in 2022e and 14 percent in 2023e with the later stages of growth to come from off-plan projects.

"We also believe the growth to be disproportionate to some players given their active market positioning. The upside risks are favourable regulatory changes, higher than expected increase in supply of real estate, increase in tenor (with subsidy) and cooling of real estate prices," Al Rajhi Capital concluded.

The report said over the long-term, the market potential is massive and hence while the growth has slowed, for Saudi banks there is abundant long-term growth potential.

(Writing by Brinda Darasha; editing by Daniel Luiz)

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