Saudi Arabia Mortgage Finance Review by Dr A S Johan & Angus C K Pun
Oct 01, 2007 -- /prbuzz/ --According to Saudi Arabia’s leading consumer bank, NCB, the upcoming Saudi Arabian Mortgage Law will accelerate activities in the KSA housing market as many currently unclear aspects of Mortgage lending will be addressed by law.

KSA’s Ministry of Finance (MOF) has already announced that a completed draft mortgage law is already in place and is expected to be approved by the end of this year or at the latest by early next year.

Currently the Saudi housing mortgage finance market is virtually nonexistent. This is due mainly to the absence of a clear mortgage system governing property ownership, property repossession, enforced eviction and asset liquidation in the case of delinquency.

The KSA’s per capita GDP increased by 168 per cent from SR32,900 in 2002 to a staggering SR55,198 as at 2006, its highest level since 1981. Residential building expenditure reached SR39 billion in 2006.

Strong continued growth is expected in the sector through to the end of the decade. Residential real estate related spending is expected to rise by 38% from SR47 billion in 2007 to SR65 billion by 2010.

Given the average construction cost of about SR500,000 per housing unit, the currently projected investment available for such housing investment is expected to fall far short of requirements. The solution to this shortage has to be met by a very substantial outlay of mortgage financing.

By 2020, the average size of the Saudi household is expected to converge to 5.21 persons per occupied housing unit, suggesting that an aggregate housing stock of 6.5 million units will be required. This basically means that to accommodate the projected population growth over the period from 2007 to 2010, an additional 2.2 million new housing units will be required.

Assuming a gradual rise in the share of new residential units purchased through housing loans from 10 per cent in 2007 to 55 per cent by 2010, we estimate that the total size of outstanding housing credit is likely to rise from SR4.0 billion in 2007 to about SR46 billion by the end of the decade.

Bank lending in KSA is relatively low and according to the official statistics, mortgage housing finance in the Kingdom is a mere two percent of GDP as opposed to 17 percent say in Malaysia, 50 percent in US and 72 percent in the UK.

Dar Al-Arkan Real Estate Development Company of Riyadh, KSA is one of the largest real estate developers in the Kingdom. The company has set up a mortgage finance joint venture in April this year with Kingdom Installment Co,( KIC), Arab National Bank (ANB) and the International Finance Corporation (IFC). According to Sheik Abdullatif Al-Shelash, managing director of Dar Al-Arkan, the mortgage joint venture company is capitalized at SR 2.0 billion is to “to help youth purchase suitable house by providing them with Shariah-compliant financial tools. People will be able to buy houses on an installment basis by paying amounts equal to monthly house rents.”


According to Dr Al-Arkan, “a shortfall of 50,000 residential units is projected over next few years just in the middle-income sector. The residential home development demographics in the Kingdom is also changing. In the past some 98 percent of housing was built by individuals and only 2 percent by developers. Nowadays it is just the reverse.”

A little over 44% of the aggregate stock of housing in Saudi Arabia, estimated at 4.2 M units last year, is occupied on a rented basis. The rental market accommodates 37.5% of the Kingdom’s total population, of which 14.7% are Saudi nationals. It is expected that potential demand from Saudi nationals for home ownership will increase significantly as mortgage finance becomes more readily available after the introduction of the new law.

A recent survey by the Riyadh Chamber of Commerce has revealed that Saudi Arabia’s populations is set to cross the 26 Million mark by 2010. Population growth in some areas of the Kingdom is outstripping the construction of housing units there. New housing development in Baha, Hail, Al-Jouf and Jizan is currently well below the current population growth rate of 2.5% per annum.

For more information on any of the issues reported in this article, please contact either of the authors through The Arab Chamber of Commerce & Industry by electronic email at This email address is being protected from spam bots, you need Javascript enabled to view it
About the Press Release
The authors : Dr A S Johan is a leading and sometimes controversial financial and investment guru. He is an influential member of the Shariah Advisory Council (SAC) of The Arab Chamber of Commerce & Industry. Angus C K Pun is a Financial Markets Analyst with the Arab Chamber of Commerce & Industry in Hong Kong.


 
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