FINANCE
HOME COMFORTS ON THE HORIZON?
Te road to home finance has been a long one for the Kingdom, but with its highly anticipated mortgage law edging ever closer to ratification, would-be homeowners and financial institutions are gearing up for a new era of opportunity.
mortgage law by the country’s Shura Council earlier this year, has all but cleared the final hurdle on the home straight to approval by the Council of Ministers and royal assent. After a decade of debate over the legal ramifications of home ownership, and following intense deliberation and refinement of the proposed mortgage law by the Special Finance Committee, would-be house buyers and financial institutions across the Kingdom are set to benefit from the establishment of a structured mortgage system. According to the Saudi-headquartered Capitas International Group, the enactment of the law has the potential to create an estimated US$32 billion per year mortgage industry in the next 10 years, which could represent up to 23 per cent of GDP. According to financial services firm Credit Suisse, around 52 per cent of Saudi households currently meet the affordability threshold for purchasing residential property, with 17 per cent identified as potential mortgage seekers. Mortgages are already available in the Kingdom but have been off limits
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to most, due to the requirement for large down payments, short-term availability and a general reluctance on the part of lenders to offer funds without a legislative framework in place to govern property ownership. Research conducted by Deutsche Bank puts incremental housing demand in the range of 55,000 new homes per year, coming on the back of the release of the new mortgage law. Te absence of a clear mortgage law has long been a deterrent to foreign
banks looking at Saudi Arabia, and also to private developers keen to take advantage of untapped potential. Te new mortgage law will cover five key areas: mortgage registration, real estate funding, finance companies, financial leasing and enforcement, laying out clear steps for the facilitation of bank ownership and repossession of properties. Although the full remit of the law has not, as yet, been disclosed, the
Saudi Monetary Agency (SAMA), the country’s central bank, is expected to control the number of companies allowed to offer home finance, with Sharia-compliancy extending to the rights of the mortgage holder, and not just the actual mortgage finance agreement. Part of the Shura Council’s discussions was the clarification of the definition of loan providers as owners of a property, rather than simply the borrower, which, it is hoped,
ith just two per cent mortgage penetration in its real estate market, caveat approval of the final amendments to the draft
will make for a smoother foreclosure process, stimulating bank lending. Te council also resolved issues surrounding mortgage securitisation and approved penalties for rule violations. If administered properly, banks and the real estate industry as a whole
are poised to gain, with the mortgage law making the market more attractive to banks, finally allowing for more competitive mortgage interest rates. It is also hoped that enactment of the law will lead to the formation of specialised mortgage companies and the subsequent release of available funds, which will open the floodgates of opportunity for contractors working on private sector as well as Government contracts, and high profile developers such as Dar Al-Arkan, the country’s leading developer of low- to-middle income housing in the country, and Emaar Middle East, the joint venture between UAE-based Emaar Properties and Saudi-headquartered real estate company, Al Oula. But not everyone is confident that the new law will transform the market
overnight. “I am not sure when the mortgage law will be enacted, and am not sure how much of an impact it will have in the short term,” says Radwan Hariri, Head of Development & Operations, Oger Real Estate. “Currently, there are several mortgage finance providers in addition to the banks, and all of them are not witnessing significant demand from consumers. Te reason is definitely not the lack of an enacted mortgage law, but is because of the lack of suitable housing products on the market in addition to social and religious boundaries - especially in the case of a conventional mortgage. In the long term, the mortgage law will encourage the creation of an institutional real estate investment market,” he adds. Khaled Madkhali, founder of Sogouf Real Estate, is even less convinced that the law will have a significant impact on the market, as he explains: “Saudi Arabia is not yet ready for such a law, given the fact that in order for a mortgage law to work effectively it needs a whole package of harmonious supportive laws and rules and regulations such as appraisal procedures, a deeds verification process and, of course, mortgage product compatibility with Sharia law”.
“All of these issues, and many others, have not been solved or developed in a way that will ensure that the mortgage law will work smoothly. Tat’s why we believe that the mortgage law, if it comes without the proper preparation, will harm the real estate industry and the end user, and not the other way around” l
20 I CITYSCAPE I NOVEMBER 2011
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