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High default rates and lack of home loans bedevil Saudi property sector

Mohammed Kamal, Arqaam Capital’s director of research, discusses Saudi Arabia’s housing problem.

Mohammed Kamal, Arqaam Capital’s director of research, discusses Saudi Arabia’s housing problem.

Despite renewed funding commitments and the passing of the mortgage law, Saudi Arabia’s housing problem seems as serious as ever. Do you agree and, if so, what needs to be done?

Commercial lending in the residential real estate sector in Saudi Arabia has remained subdued since the approval of the mortgage law. Default rates on housing loans administered by the real estate development fund remain high, and the enforceability of foreclosure laws remains in question. In the absence of a developed mortgage industry, property developers may withhold the release of substantial volumes of new residential product. Government-administered housing schemes [for which funding totalling 250 billion Saudi riyals, or Dh244.73bn, has been approved since 2011] will require time – rendering housing costs and rentals subject to upside risk.

How big a concern are rising construction costs? It is said that profit margins for developers are already very low in the kingdom.

The Saudi construction sector is highly sensitive to labour and staffing costs. The implementation of changes to minimum local hiring requirements has tangibly impacted the operating margins of most contractors active in the kingdom. The impact is typically split between ‘qualification costs’ linked to training and development of new hires and the occasionally higher wage packages paid to local hires. Contractors would likely have to absorb the cost escalation in the near term. The potential to pass on the cost increase to the end client [in many cases they are the various arms of the Saudi government] should improve with time.

How big an issue is project finance and what is your outlook generally for the year ahead?

Project-based lending across the Mena [the Middle East and North Africa] region has been in decline over the past three years. We expect Saudi-based contractors to continue to reflect margin pressure in the fourth quarter, but see a stabilisation by the first half of next year.   

 

business@thenational.ae

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