3 Abraj Al Bait, Makkah 4 Madinah 3 Kingdom Tower, Riyadh
LEGAL VIEWPOINT
Alan Hall, special counsel, Al Tamimi & Company, Riyadh
Will the release of the mortgage law be a precursor to other real estate legislation?
The mortgage law, as it is known, is a package of related legislation comprising five laws dealing with the registration of mortgages, the regulation of finance companies, real estate funding, financial leasing and, importantly, enforcement and execution. To its credit, the approach of the government has been to adopt a comprehensive reform of the real estate finance regulatory regime in one consolidated package. I understand that the laws are
currently before the Shoura Council and may soon be sent to the Council of Ministers for approval. Once approved, the laws will be the subject of a Royal Decree, at which time they will become effective. Within 90 days, the Saudi Arabian Monetary Agency (SAMA) will issue regulations for each law. As is the Saudi practice, the regulations will contain the detail of the application of the laws. Saudi Arabia currently has a
comparatively low private home ownership rate. A combination of an unregulated non-bank lending sector, higher building construction costs, an ineffective enforcement regime in respect of evictions, some speculative investment (albeit minimal) and limited access to credit financing has aggravated the housing deficit, increased the cost of finance products, driven rents higher and required developers to fund buyers rather than new developments. With no mortgage law, developers
are concerned as to the market for projects and are therefore reluctant to start new projects or be ambitious or creative in planning developments. They, and financiers, are also concerned by the difficulties of enforcing security, and in obtaining vacant possession. The imminent package of laws is designed to address these issues.
Will this create a more transparent market and boost investment?
As a general rule, in my view, an increase in the scope and detail prescribed in the published regulatory regime usually leads to greater transparency in the relevant process. I fully expect this to occur in the Kingdom’s real estate lending industry as a result of the package of mortgage laws. The mortgage laws should provide
some comfort to lenders in relation to the registration of securities and the removal of current difficulties associated with enforcing security and obtaining vacant possession. Addressing these concerns should
encourage financial institutions to lend on a more frequent, and hopefully less expensive, basis. There is already a high level of interest from local and offshore institutions which are waiting on the laws and regulations with great anticipation. Evidence of the importance placed on these new laws can be found in the recent announcement by the Public Investment Fund (the Ministry of Finance’s investment arm) that it plans to take stakes of up to 40 percent in new mortgage lenders.
The mortgage laws will also assist
banks with off-balance sheet financing through the capital markets. It may be possible for registered mortgages to be securitised through sukuk issuance which will create the liquidity required for financing further investment.
What other forms of regulation are being developed by the government?
The government has sought to increase the effectiveness of the regulation of the real estate sector by embarking on a number of reforms designed to stimulate investment activity and protect the market from prejudicial speculative and uncontrolled conduct.
Key measures include:
Modernisation of the title identification and land registration system
In an effort to inject both efficiency and transparency into the land transfer and registration process, the government has initiated the massive and ambitious task of identifying all KSA land (and all property interests in particular parcels of land) and incorporating that information into a real estate register for each designated realty area.
Tightening of controls over off- plan sales
In March 2009, the Council of Ministers resolved under Resolution 73 to protect off-plan purchasers against fraud and unfair contractual conditions by introducing a number of controls over such sales in respect of residential, commercial, office, service and industrial units. Resolution 73 is an interim measure pending the enactment of the proposed Real Estate Developers Guarantee Account Law.
Regulation of real estate investment funds
Recently, the Council of Ministers appro- ved the establishment of a committee to oversee the offering of shares in projects.
How easy is it to navigate the Kingdom’s legal system as an overseas investor and is this getting easier?
In general terms, the establishment of SAGIA some years ago has unquestionably encouraged foreign investment and injected efficiency into the practical processes of that investment. This assistance from SAGIA has included the passage of a number of foreign investment laws, including the previously referenced real estate laws, which are readily available in both English and Arabic. Also, SAGIA is constantly updating and issuing lists of its requirements for the granting of particular investment licenses. These steps, combined with the
ongoing reform of the judicial system, have combined to simplify and facilitate legal due diligence and inject greater transparency into the regulatory regime which in turn make the Kingdom a more attractive country to potential foreign investors.
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A company statement said that housing units in the Kingdom were expected to hit 4.6
million in 2010 and rise to an estimated 6.2 million by 2020, thereby offering good long-term growth prospects. Dr Saleh Bin Abdullah Al Habib, CEO, said: “Jiwar will particularly focus on developing premium quality, affordable housing projects that target the middle income group across the country.” “Up to 60 percent of Saudi’s residential real estate market belongs to the affordable
housing segment, while demand is expected to remain high within the next years, representing a significant business opportunity for our planned venture,” he added. Another developer, Injaz Development Company, has reported that the first phase of its
Riyadh project has sold out. The successful advance sales for the Cluster 7 district of the Al Gamra Project, located in what is being termed the ‘New Riyadh’ area, has prompted Injaz to initiate sales of Cluster 9. Emaar Middle East, the Dubai developer’s Saudi Arabian subsidiary, also has work underway on its second residential village in Al Khobar Lakes – the Al Ghadeer Village. Work on Al Nada Village, its first village, is also reportedly nearing completion. ➔
With no mortgage law, developers are concerned as to the market for projects and are therefore reluctant to start new projects or be ambitious or creative in planning developments
jun-sep 2010
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