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Facing Housing Crunch, Saudi Arabia Edges to Allowing Mortgages

Shura Council approves legislation amid drive to encourage home-building

The day a Saudi will be able to walk into a bank and walk out with a mortgage is getting
closer after the country’s Shura Council this week approved a much anticipated mortgage law.

Getting a mortgage industry up and running has wide-ranging implications, not just for ordinary Saudis, for whom home ownership is beyond the financial reach of many, but for the economy and its building industry, which analysts say will benefit from the resulting surge in demand and construction.

“One of the many things it would do is encourage new housing development,” Matthew Green, associate director of Middle East research at CB Richard Ellis, a U.S. property services firm, told The Media Line. “Saudi Arabia has an undersupply in residential property. It would encourage developers into the market. It would allow those who cannot at the moment afford to buy their own home.”

The mortgage law is one of a host of reforms the kingdom has undertaken in the past several weeks as it nervously tries to douse any potential flare-up of unrest of the kind that has spread across the Middle East. While the kingdom has shunned political change, the country’s housing shortage has emerged as a target area for people-pleasing action.

King Abdullah announced plans earlier this month to spend $15 billion to build 500,000 new homes and fund more generous government loans to buyers as part of a massive economic stimulus program. Last Friday, the Saudi state news agency announced the establishment of a Ministry of Housing to tackle the growing crisis.

Already the most populous nation in the Gulf, the number of Saudis has grown 20% since 2002. Demand for homes is going to swell in coming years as the country’s young population reaches the stage in life when they marry, start a family and want a home of their own. Some 47% to the country’s current indigenous population of 18.5 million are under the age of 18.

But the government’s plan to develop 500,000 units won’t come close to addressing demand, according to Banque Saudi Fransi. They forecast the country will need to add 1.65 million new homes to its stock by 2015. Credit Suisse estimated demand is even bigger, saying the country will need some two million more units by 2014.

More than half of all Saudis rent due to the high prices of land and housing, which have become unaffordable for low- to middle-income families because mortgage lending isn’t an option for financing a home purchase. Ordinary bank loans entail substantial down payments, short terms of no more than 15 years and high interest rates. As a result, most people have to draw down on savings.

CB Richard Ellis says Saudi tiny mortgage market, not counting government home loans, equals 1% of gross domestic product, compared with 7% in the United Arab Emirates and 16% in Bahrain.

Not surprisingly, given the limited options for home buyers, home-building is geared toward the wealthiest. Jones Lang LaSalle, a U.S. real estate services company, estimated in a report March 27 that 70% of all new homes were built for people in the top 10% income group. Aside from the lack of financing for low- to middle-income families, new construction is typically done on a small scale of five units or less, which is more expensive, it said.

Indeed, CB Richard Ellis estimates about 15% of the country’s housing is vacant because the people who need homes can’t afford the ones being built

“There’s a long-term problem in Saudi Arabia with shortage of housing partly related to inability for people to get mortgages,” Daniel Kaye, senior economist at the National Bank of Kuwait, told The Media Line.

Officials have been dragging their heels for years on establishing a mortgage market, but Shuaa Capital, a Dubai-based investment bank, said growing pressure for reform should speed up the process.

“Of course, the proposed law will not be implemented overnight,” Shuaa analyst Roy Cherry said in a March 29 report. “We expect the Shura Council’s approval to require a number of follow-up steps including the king’s signature before it actually becomes enacted. However, given the heightened reform friendliness of MENA governments over the past couple of months – this should not take long (at least in relative terms).”

Shuaa cited eight companies, among them Dal Al-Arkan, Saudi Arabia’s biggest developer, and builder Arabtec Holding as the companies most likely to benefit.

The downside for consumers is that the law will make it possible for lenders to repossess homes if the borrower falls behind in his mortgage, a process that is virtually impossible under the current law. The government’s Real Estate Development Fund, which current dominates the residential real estate finance market by offering shariah-compliant interest-free loans, is rumored to have a significant default rate.

Home prices will probably also rise. Even before the mortgage legislation was announced, Jones Lang LaSalle said it expected rents and land prices in Saudi Arabia to climb 10% over the next two to three years as the housing aid and other stimulus measures boost demand and purchasing power.