THE SMOGGY SUN-DRENCHED view is from the top floor of the castle-like headquarters of Sabic, the biggest company listed on the Saudi Arabian stock market. Constrained on all sides by nothing but desert plateau, Riyadh stretches out on the rocky ground for as far as the eye can see. It is like a vast, bloated body digesting a rich, oily lunch: its veins freeways with SUV blood cells.
Housing finance companies are preparing to feast on Riyadh, eventually being supported, it is hoped, by a much stronger securitization market.
Flush with petrodollars from the commodities super-cycle, Saudi Arabia is booming. Construction, propped up by government-funded infrastructure projects, is at the forefront of this. At $27 billion, investment in real estate in 2007 was more than double the amount of 2006. But many Saudi Arabians are finding it difficult to find somewhere to live.
Almost 60% of Saudi Arabia’s population of 27 million is aged under 25. These baby boomers are beginning to come to marriageable age, and they are more reluctant than the previous generation to stay at home after tying the knot. About 270,000 new housing units will be needed this year and, over the next decade, 200,000 units will be needed annually: a total of about 2 million units at a cost of about $300 billion. But high land prices and a shortage of labour and raw materials such as steel and cement are already increasing costs.
Almost 50% of housing units are rented, and the proportion of tenants is increasing. With about 1 million new expatriates arriving last year, house prices and rent are going through the roof.
This has not failed to arouse the concern of those in power.
Economists say rents are the main cause of high inflation in Saudi Arabia, with the rental element of the consumer price index having risen 18% in the 12 months to February. High global food prices are also contributing to higher inflation. But the central bank’s ability to combat rising prices is constrained by the riyal’s peg to the dollar. Indeed, Saudi Arabia has had to follow interest rate cuts by the US Federal Reserve when there is ample scope to do the opposite.
"The main risk to the positive outlook stems from inflationary pressures," says a report on the Saudi economy issued in March by Samba, one of the country’s biggest banks. Inflation, in fact, is at a 27-year high of more than 8%.
The feeling in the finance industry is that the country’s private mortgage market is not doing enough to help ease pressures. Mortgages account for less than 1% of GDP in Saudi Arabia, compared with 50% or more in many western countries, 11% in Jordan, 7% in Morocco and 4% in Oman. Banks in Saudi Arabia allocate less than 1% of their lending to housing finance, and the country lacks a land registry and specific laws regulating mortgages.
That is about to change.
Necessity’s child
In the midst of high inflation, a gaping housing deficit and an almost non-existent mortgage market, only a small minority of Saudis – and one that is getting even smaller – can afford to pay for their homes up front. So the government is initiating or reinvigorating schemes to multiply the number of homes and homeowners.
Extra money is promised, for example, to the Real Estate Development Fund, an arm of the ministry of finance that offers interest-free loans to individuals building houses. Since its establishment in 1974, this fund has financed about 600,000 homes. Reports say the finance ministry will increase its capital by $7 billion in 2008, whereas at the end of 2007 its cumulative disbursements for the previous 30 years had barely reached $20 billion.
 |
|
"Increasing housing stock has become a pressing issue in Saudi Arabia. So strengthening the mortgage industry is a big part of our work here"
Walid Al Murshed, IFC |
"The state is taking care of the lower end of the housing market," says Jean Marion, managing director of Banque Saudi Fransi, the country’s sixth-largest bank. But others question this judgement.
"A drop in the bucket" is how John Sfakianakis, chief economist at Saudi British Bank (SABB), describes the activities of the Real Estate Development Fund. Others say applicants for the fund face a 10-year waiting list, and the $80,000 it lends to each individual is no longer sufficient to finance the construction of a house.
The Saudi government is creating a National Housing Agency to make sure the private housing industry gets more support. But perhaps the most important initiative is a set of new laws covering the mortgage market.
Mohammed Al Jadaan is a Saudi lawyer who helped draft the laws. He says they are awaiting approval by the Shoura (the advisory body to the king), from where they will go to the council of ministers, eventually being passed by the end of the summer, all going well.
At the moment, it is difficult to get a mortgage without being able to assign to a bank salary payments from a governmental or quasi-governmental employer. This is because enforcing an eviction can be difficult, in part because courts can hold the contracts to be against the principles of Islam, and so null and void.
Consequently, the new laws answer previous unknowns such as who can provide mortgages and who regulates the market – it will be the central bank. They also encourage Islamic mortgages and provide for the creation of a special housing finance judiciary committee that will provide easier access to collateral, allowing lenders to loosen their purse strings.
"We are counting on the laws being passed by June. It is a very important aspect of our business model," says Wasim Saifi, chief executive of Tamweel, a Dubai Islamic housing finance company. Tamweel plans to apply for permission to set up a subsidiary in Saudi Arabia in partnership with local developer Al Oula.
The good news for the kingdom’s mortgage market is that several housing finance companies are being set up. Amlak, Tamweel’s main competitor in the UAE, has already begun to book mortgages in Saudi Arabia through a joint venture with a total capital investment of $266.6 million. Amlak’s local partners in the venture include the investment and development firm Dallah Al Baraka, as well as the Saudi Investment Bank.