MORTGAGE
MORTGAGES: SOLVING THE KINGDOM’S HOUSING BOTTLENECK?
Increased access to housing finance is seen as a critical component to providing more affordable housing in the Kingdom.
and middle income sector, housing has emerged as a key policy focus area in Saudi Arabia. According to the independent investment company NCB Capital, “mortgages are seen as critically important for broadening access to housing. Historically, home purchases [in the GCC region] have depended heavily on personal/family resources as well as subsidised loans from special government funds.”
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Demand for housing remains high According to the November 2011 NCB Capital
research report on
Affordable Housing in Saudi Arabia, the young and growing population in the Kingdom, coupled with the decline in average household size will lead to a rising demand for housing units over the coming years. NCB estimates that the country will need an additional 973,000 units over the next three years and a total of 2.1 million units over the coming decade (215,000 units per year) while indicating that the government’s estimates are even more aggressive with 1.2 million units needed over the next five years (250,000 units every year). In recognising this need, King Abdullah bin Abdul-Aziz Al Saud has announced a SAR 250 billion ($67 billion) stimulus package in 2011, committed to providing a further 500,000 affordable housing units to the market. Te package alone however is far from solving the shortage, as recent market research shows.
Mortgages – a prime obstacle to affordable housing According to the February 2012 GCC Economic Review by NCB Capital,
“getting mortgages right is one of the most important challenges facing the GCC region,” especially in the light of the region’s fast growing population. In Saudi Arabia, limited financing options have become one of the major hurdles to home ownership. Although official statistics suggest a home ownership rate of some 60%, the actual figure is estimated to be closer to 30-40%, NCB reports. “Part of the discrepancy may be due to informal ownership, the still widespread reliance in parts of the country on sometimes sub-standard traditional housing, and difficulties of accounting for potential demand. Some aspiring homeowners live in larger multi-generation households not by choice but by necessity. Tey would live separately if home ownership was
ith a rapidly growing population, 60 per cent of which is under the age of 30, and an acute shortage of residential units for the lower
accessible but recent estimates suggest that the majority of households would struggle to afford the cheapest villas available. Tis is partly due to land price inflation running at up to 20% a year while considerable upward pressure persists on input prices.” Today, the government’s Real Estate Development Fund (REDF) is the Kingdom’s main provider of housing finance. Set up in 1974, the fund currently holds a capital of SAR 40 billion ($10 billion) after the latest injection in 2011. Te fund issues 25-year loans for home construction or purchase and has disbursed a total of some 700,000 loans worth some SAR 172 billion since its inception until 2010, the NCB report states. Although there has been a marked pick-up in new loan disbursals since the middle of the past decade, “the fund has a large backlog of demand with waiting period before the latest initiatives peaking at 18 years,” NCB reports. While the REDF is currently undergoing significant changes such as
increasing its maximum loan size and removing the precondition of owning land as a requirement for a loan, real changes to the Saudi mortgage market will be made through the eventual implementation of the eagerly awaited mortgage law, NCB said. “All components of the new legislation will be in compliance with Shariah
law. Its key provisions will regulate the following five main areas through separate laws: 1. Mortgage registration, 2. Execution, 3. Financial leasing, 4. Real estate finance, 5. Finance companies.” (NCB) According to Banque Saudi Fransi (BSF), the enactment of the mortgage
law will act as a catalyst for the domestic real estate sector, enhance the market’s sophistication and widen funding options for middle and low- middle income groups if applied and enforced. Although the potential market for low- and middle-income housing is large, enthusiasm should be tempered, experts believe. Te Shariah structure for Islamic mortgages is new and untested, and housing market forces as well as low wages and entrenched cultural traditions may prevent widespread middle-market lending from taking root, the global intelligence and advisory firm Ergo believes. Nearly ten years in the making, the law is expected to be passed this year. However, it is not just the lack of a coherent mortgage system which
makes the availability of affordable housing in Saudi Arabia an issue. Te prime hurdles to the provision of affordable units are the high land and construction costs.
12 I CITYSCAPE I JUNE 2012
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