Home sweet home: Reforms to the mortgage law and a major supply shortfall are set to transform the sector

Restricted by regulatory uncertainty and underdevelopment over the past two decades, the Saudi Arabian real estate market is poised for a breakout in the coming years as long-awaited mortgage law reforms and more than a million new units planned for construction look set to transform the domestic market.

Growing Demand

A rapidly expanding population has driven strong demand in recent years. The Kingdom’s population has roughly doubled over the past two decades from 15.2m in 1990 to 29.2m in 2012, according to data from the Saudi Arabian Monetary Agency (SAMA). With an average growth rate of 2.3% from 1990-95, Saudi’s population expansion outpaced that of other developing countries, OECD nations and the world as a whole, which averaged 1.7%, 0.7% and 1.6%, respectively. An estimated 68.2% of the population was aged 15-64 years in 2012, along with 28.8% aged 0-14 years, according to the CIA World Factbook. The median age also landed in the prime home-buying aspirational range at 25.7 years. Housing shortages are becoming more acute near metropolitan areas as the population becomes increasingly urbanised. An estimated 82.2% of people lived in built-up areas in 2010, according to the CIA World Factbook.

While indicators allude to a slowdown in recent years, the young population, influx of expatriates and continued growth will continue to exert pressure on the housing market. Euromonitor International predicts the population will increase to 30m by 2017 and 36.5m in 2030, while the Saudi government estimates a total population of 36.5m in 2020 with a growth rate of 1.9% from 2010-15.

New Homes

In order to meet this demand, some 1.25m new units will be needed by the end of 2014, according to state projections. Estimates from other sources showed similar needs, with Banque Saudi Fransi calling for the annual construction of 275,000 new units through 2015 for a total of 1.65m homes, while financial services group Credit Suisse calculated the country would require an additional 2m homes by 2014.

The resulting pressure has had a strong prolonged inflationary effect on housing and rent prices across the country. Housing and related items led all major categories in inflation rates at 8.1% in 2012, according to data from the Central Department for Statistics and Information. This far outpaced the overall inflation rate of 4.5% and every other economic category, the next closest of which was food and beverages at 4.4%. This comparatively high rate is by no means a temporary outlier and has in fact declined in recent years from inflationary rates of 17.5%, 14.2% and 9.5% in 2008, 2009 and 2010, respectively, with 2011 inflation slightly lower at 7.8%. If successful, the building and financing plan should alleviate this pressure, allowing citizens access to housing that was previously out of reach.

These problems are compounded by the fact that the vast majority of new home purchases in the GCC’s largest housing market are purchased primarily through savings or financial assistance from family members. Just 2% of homes are currently financed by mortgages in Saudi Arabia, compared to 17% in the UAE and 70% in the UK, according to the CBRE Group. Another widely utilised financing avenue is the Real Estate Development Fund (REDF), which offers interest-free loans to lower-income Saudi nationals.

Building Binge

The state has embarked on a massive building spree and accompanying financial regulatory changes designed to relieve upwards pressure on the housing market. The country’s ninth development plan (2010-14) includes rectifying the housing shortage and calls for the construction of 1m new homes. As part of these efforts to meet 80% of expected new housing demand over this time period, the government is planning to provide approximately 266m sq metres of land for the housing projects, all of which will be overseen the Ministry of Housing. Keeping true to recent government expenditures on social welfare programmes, roughly one-quarter of these units will receive funding from the government. The Ministry of Housing will finance 66,000 units, REDF another 109,000 and various other government entities will pick up the tab for another 50,000. This will still leave ample room for the underutilised private sector to step in and offer more loan services for the remaining 775,000 homes.

This will further supplemented by the construction of another 500,000 new homes at a cost of SR250bn ($66.62bn), as decreed in a March 2011 announcement by King Abdullah bin Abdulaziz Al Saud. In order to assist citizens looking to move into these newly built units, the state allocated SR40bn ($10.66bn) to the REDF to finance an additional 130,000 loans as well as increased the maximum loan value from SR300,000 ($79,950) to SR500,000 ($133,250).

Money In The Bank

Seeking to facilitate the purchase of new homes, the government has also implemented a slew of new laws. Cabinet Law 12/8/1433 contains regulations for real estate finance, refinance companies, lease finance and rent contracts that provide banks with a new framework to bankroll real estate projects. Other issues covered by the law include codes governing the activity of mortgage finance, organising government support and mechanisms of repayment, and registering the contracts of lease finances as well as controlling and reviewing prices.

The five laws created to collectively reform the mortgage sector include: the Real Estate Finance Law, which provides for the authorisation and licensing of banks and finance companies to enter the real estate finance market among other things; the Finance Companies Control Law, which lays out a framework for sharia-compliant finance firms; the Registered Real Estate Mortgage Law, which provides a new framework for security over real estate, including, for the first time, provision for second-ranking mortgages; the Finance Lease Law, which codifies the rules surrounding finance leasing; and the Enforcement (Execution) Law.

SAMA also announced its intention in November 2011 to establish a real estate refinancing company similar to US firm Fannie Mae. Designed to develop a secondary domestic real estate market, the Saudi Real Estate Refinancing Corp will have a minimum registered capital of SR2bn ($533m) and be majority state-owned, with real estate financing companies allowed to take on a combined share of up to 30% of the firm. SAMA also indicated it would create a real estate price index to create benchmark and reference prices comparable to a market index, which it hopes will mitigate wholesale drops in the real estate markets similar to those that precipitated the housing crisis in the US.

Early Returns

Early indications are that the measures have so far yielded positive results, with mortgage lending up 83.4% in the second quarter of 2012, compared to the same period in 2011, according to figures from SAMA. In spite of this success, it will likely take longer for the full effect of new lending and construction to manifest itself in terms of reduced home and rental prices, and ultimately on inflation as a whole. Other technical issues will also need to be worked out.