Analysis It is the world's largest oil exporter and the biggest economy in the Gulf, but only one in five of its citizens owns a home.
Saudi mortgage market primed for action
It is the world's largest oil exporter and the biggest economy in the Gulf, but only one in five of its citizens owns a home. That is soon to change as Saudi Arabia prepares to introduce its first mortgage law, which is expected to attract lenders from across the region seeking to join the Gulf's largest new housing market. The kingdom may represent the last great opportunity for the Gulf's battered mortgage market, struggling under the burden of falling property prices, restricted lending and bad home loans that could rise to as much as Dh24 billion (US$6.53bn) in the UAE alone, according to data from Credit Suisse.
Saudi Arabia's first mortgage law, set to be enacted by the end of the year, is expected to increase demand for housing by up to 50 per cent, according to a report by the Kuwait Financial Centre. Companies now providing home finance in Saudi Arabia include the Arab National Bank, SABB and Al Rajhi Bank, as well as Saudi Home Loans, a venture backed by Dar al-Arkan Real Estate Development, Saudi Arabia's largest developer by market value.
They could be joined by UAE lenders looking to generate new revenues during a severe housing slump at home. Amlak, the UAE's largest Islamic home lender, announced plans to expand in Saudi Arabia before the UAE Government announced that it would be restructured along with Tamweel, its nearest competitor, last November. Noor Islamic Bank, a Sharia-compliant lender formed last year, is also looking to expand in the region.
"Saudi Arabia is a key market to have a presence in," says Hussain al Qemzi, the group chief executive at Noor Islamic Bank. "If opportunities become available for Noor to be present in Saudi Arabia, then we would certainly extend our range of Sharia-compliant banking and takaful [Islamic insurance] services to the Saudi market." Dubai Islamic Bank, the oldest and largest Islamic lender in the country, may also consider a move to the kingdom.
"The Saudi mortgage market is a big business avenue," says Mohammed al Sharif, the chief financial officer at Dubai Islamic Bank. "But we will have to discuss the option of going there internally first, as we will have to adopt Saudi standards and methodology." Saudi Arabia produces about 10 per cent of the world's oil and is ploughing multibillion-dollar budget surpluses into major infrastructure projects to service a rapidly expanding population. The kingdom needs to spend about $180bn by 2015 to build new homes, according to the National Commercial Bank, based in Jeddah.
Saudi Arabia is also attracting increased interest from UAE developers, led by Emaar Properties, the region's largest developer. Its Saudi unit is exploring a large master-planned development in Riyadh, but has yet to make a final decision on the project, the company said this month. Emaar Middle East, a venture between Emaar and the Al Oula Group in Saudi Arabia, is already developing the Jeddah Gate and Al Khobar lakes projects.
Analysts expect that the virgin market appeal of the Saudi mortgage sector will draw interest from lenders throughout the Gulf. "We probably will see a lot of focus on the Saudi market from Gulf lenders," says Miles Payne, a partner at the international property consultancy Strutt and Parker. "The main driver is that the Saudi market is untapped; it hasn't really had a mortgage market up to this point. The country has such a young population and the drive for home ownership is huge."
The Saudi government is already preparing to pump liquidity into the banking system to try to prime the market for a sudden rise in demand for finance. The International Finance Corporation (IFC) and three Saudi Arabian government funds will provide Dh1.46bn in Islamic financing to help Saudi banks increase mortgage lending. Amlak Finance has formed a partnership with the Saudi Investment Bank and will receive $100 million from these funds. SABB, Saudi Arabia's third-largest bank by market value, will receive $150m, as will Saudi Home Loans.
The IFC - which is the private industry lending arm of the World Bank - the Public Investment Fund, the General Organisation for Social Investment and the Public Pension Agency will provide $100m each in 12-year loans to the banks. The loans will have a grace period of six years. Saudi Home Loans has also committed to providing 700m riyals (Dh686m) in mortgages, according to Walid al Murshed, the Saudi country manager for the IFC.
While trillions of dollars worth of projects have either been shelved or scaled down in other GCC states, the Saudi Arabian construction and property sector has come through the financial crisis in better shape than most of its neighbours. There is a shortage of 2 million homes in the country and it needs another 1.4 million housing units over the next 10 years, according to a report from the property consultancy CB Richard Ellis.
The country's population is expected to grow by another 33 million by 2020. Analysts expect the long-term population trends in Saudi Arabia and the housing shortage to offer better long-term prospects for the mortgage sector than other Gulf states. "There are already quite a few companies looking to move into Saudi Arabia as the mortgage law is close to being enacted, providing lenders with a lot more peace of mind in protecting assets," says Chris Dommett, the chief executive of John Charcol, a mortgage advisory firm based in Dubai.
"I know of at least three bodies looking to set up independent mortgage companies in Saudi now. The market will be booming in the next five years." But some analysts have warned that the fledgling mortgage market should avoid the mistakes that created the speculative property bubble in the UAE. "In a region where we went through a huge boom and bust cycle in real estate, a lot of plays are being replicated in Saudi Arabia," says John Sfakianakis, the chief economist at SABB.
Dr Sfakianakis says a major concern is that Saudi real estate will be oversold to the international market, fostering speculation. "The tendency will be for foreigners to overplay real estate stories and overshoot, causing local prices to go up, which could create certain challenges for locals actively seeking to buy houses," he says. "Unless the mortgage law has real teeth to protect the lenders coming in, it will be a difficult environment."
* Bloomberg @Email:email@example.com firstname.lastname@example.org The UAE plans to rouse activity in its stalled housing market with the establishment of a new Dh10 billion (US$2.72bn) development bank. The Government will provide half of the capital to establish the Emirates Development Bank, which will combine Emirates Real Estate Bank and the Emirates Industrial Bank (EIB). It is also planning to restructure Tamweel and Amlak. Options under consideration include merging the two home financiers, injecting funds or buying part of their loan books.
Gulf banks have been hit by tightening liquidity after foreign investors withdrew capital from the region last autumn. Local lenders are now considering merging with other banks as a way of strengthening balance sheets and competing against larger international rivals. The Government said last November that it planned to establish a new lender by combining Emirates Real Estate Bank with EIB, while also merging Amlak Finance and Tamweel.
Analysts are expecting an imminent decision on the fate of the two lenders, more than six months after the Government intervened and trading in the shares of both companies was suspended.