A boom in bank lending in Saudi Arabia may have reached its peak as tighter credit conditions and weaker private sector activity could curb loan growth this year despite a long-term undersupply of property for sale in the Saudi Arabian market.
The latest data issued by the central bank, the Saudi Arabian Monetary Agency (SAMA), showed that the pace of bank lending growth to the private sector eased in December to 11.8% year-on-year (y-o-y) from 12.2% in November, the first time the rate of lending has slipped back in two years.
This trend could extend well into 2015 as private sector growth slows, according to a report issued by Jadwa Investment in mid-January. “Continuation of this growth is expected to be curbed by the commencement of new consumer credit rules and the start of compulsory compliance with SAMA’s Finance Companies Control Law,” the report noted. Jadwa estimates growth of credit to the private sector reaching 11.7% y-o-y by the end of the year. The investment firm also forecasts growth of 4% for the financial services sector this year, down from 4.5% in 2014.
Other experts agree that lending is likely to slow this year. “It [lending in Saudi Arabia] will be in the high single digits [this year],” said John Sfakianakis, regional director for the Gulf for London-based fund manager Ashmore Group. “I don’t think it will creep up to levels that we have seen in 2014 and 2013 because the economy is slowing down.”
New consumer lending rules include caps on bank fees to around either 1% or SR5,000 ($1332) whichever is lower. A more controversial rule introduced last year is a cap on the loan-to-value (LTV) ratio, which has set loans at a maximum of 70% of a property’s total value.
These moves by SAMA were put in place in a bid to help ensure long-term stability in the market by curbing overly aggressive lending and therefore preventing the emergence of a bubble, according to Naif Al Baz, CEO of Deutsche Gulf Finance. “The LTV will stop aggressive, speculative lending and therefore create a healthier, more sustainable sector. It is better for the economy as it will prevent the creation of a bubble,” he told OBG in mid-January.
The new LTV ratio is also having an effect on prices. Jeddah sales prices went down by 3.2% in the final quarter of 2014, a trend that was also felt in Riyadh where growth in apartment and villa sale prices eased, according to real estate consultancy JLL. Overall property values increased in the capital last year, however: “2015 may see subdued price growth in the residential market," according to the report.
The tightening of regulation has also led some industry participants to question if the minimum deposit has been set too high. “The new loan to value ratio will impact the affordability of buying a home − the minimum deposit required is too high for this market,” Abdulelah Al Shaikh, Saudi Home Loans’ CEO told OBG. “There should be some protection in place but SAMA needs to recognise that borrowing to invest in a home is a saving and should be treated as such,” he added.
There could also be additional pressure from an expected rise in interest rates later this year. This would in part be a response to the recovery in the US economy but also from continued strong consumer demand at home, which will add to the borrowing costs from conventional lenders.
Another key factor limiting lending growth is a shortage of housing stock, according to Al Baz. “The demand is there, financing is there, but we need enough supply to link buyers with financers,” he said. “It is the biggest issue…currently holding back the home financing segment.”
With an estimated shortfall of 1m units in housing supply, at least 200,000 residential units must be added annually to keep up with demand and prevent the gap from widening, according to a separate JLL report. A shortage of suitable blocks in urban areas is creating bottlenecks, due to many plots being held by speculators. In mid-January, Housing Minister Shuwaish Al Duwaihi again floated a proposal for a tax to be levied on undeveloped land, a move that could prompt some owners either to sell their plots or open them up for development.
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