Mortgages set to rise on Saudi construction boom

Property funding in Saudi Arabia is expected to surge in the coming years as housing demand is rapidly growing and the world's largest oil exporter is pursuing plans to issue a mortgage law, the largest Saudi bank said yesterday.Given the rapid growth in its population, the kingdom needs to construct nearly 158,000 houses every year between 2010 and 2020, a total 1.58 million new housing units, the National Commercial Bank (NCB) said.In a study sent to Emirates Business, the bank estimated investments required for these projects at nearly SR79 billion (Dh78.2bn) annually."For establishing long-term supply-demand equilibrium in the housing market, Saudi Arabia is required to build about 158,000 new housing units with an estimated investment need of SR79bn each year between 2010 and 2020. The conventional funding sources are the Real Estate Development Fund (Redf), commercial banks' consumer loans for real estate and individual's own savings," the study said, referring to a steady increase in the population and expansion in the non-oil economy, mainly industry.Its figures showed that in the past three years, REDF's disbursements of new housing loans averaged SR4.2bn annually, while those from the commercial bank averaged SR600 million a year. Funding from the traditional sources were nearly six per cent of the aggregate cost of building new housing facilities and the remaining 94 per cent were mobilised from personal savings, said NCB."The substantial gap between funding needs and the available resources points towards the existence of a huge potential market for mortgage financing in the kingdom. Saudi Arabian Monetary Agency (Sama) is in the process of drafting regulations for mortgage financing in the light of a cabinet decision whereby a developer will be required to register with authorities and deposit development finance and off-plan sales receivable into an escrow account," said the study."The implementation of regulations will create secure mortgage businesses for Saudi banks and act as a catalyst to boost confidence of investors." The study expected housing investments to support growth in the non-oil economy and ally with the planned enforcement of a mortgage law to give a strong push to one of the largest property sectors in the Middle East."The real estate and construction sector in Saudi Arabia is on the threshold of significant growth and we believe it presents one of the most attractive investment opportunities in the region," it said. The report noted that rents in Saudi Arabia had sharply increased over the past few years to become one of the main drivers of high inflation in the kingdom, where it peaked at nearly 10 per cent in 2008.Commercial rents also soared by nearly 15.2 per cent annually over the past five years but the report noted that they remained low compared with rentals for prime office space in neighbouring Dubai or Doha. "We expect that the government will expedite the proposed mortgage law, which will unlock significant demand. By 2012, we estimate the mortgage market could grow five fold to SR86.5 billion – a mortgage to GDP ratio of just 4.4 per cent in 2012 compared with one per cent at present," said NCB.In a previous study, NCB said plans to build six large economic cities constituted another major factor in the kingdom's construction boom. It said these cities would require an overall investment of SR260bn.The report said the construction boom and the surge in rents because of strong demand in 2008 had prompted the government to expedite the issuing of the long-awaited mortgage law, which is expected to further boost the sector, ensure market discipline and provide better protection for dealers."We believe the government will not delay on the announcement and implementation of the legislation given that it has highlighted the passing of the mortgage law as one of the key items in its inflation mitigation plan."Figures released by Sama showed the kingdom's population had increased by at least 500,000 people annually over the past few years, a growth of 2.3 per cent. The rate is higher than many other countries but is far lower than the seven per cent growth in the UAE.

Source: Business 24/7