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Saudi Mortgage Law Opens Door to Investment

Saudi Arabia is expected to enforce a highly-anticipated new mortgage law that could offer valuable opportunities for banks and investors seeking the next growth story in the Kingdom.


The social spending package passed earlier this year to stave off the ‘geopolitical contagion’ included provisions of $70 billion for 500,000 low-income housing units. A report by Saudi Banque Fransi estimates that 1.65 million new units will be needed by 2015.

Jim Lynn, head of research and consultancy at Knight Frank, told CNBC that “there has been considerable undersupply of property in this market for many years, with the problem compounding each year as the population growth continues to accelerate”.

Data by the Central Department of Statistics & Information (CDSI) shows that more than half the country is under the age of 24, while the World Bank estimates the population to have grown 2.3 percent in 2009.

A final approval by King Abdullah on the mortgage law proposal by the Shura Council, the advisory body to the monarch, is needed for ratification. Analysts tell CNBC that there is considerable pressure on authorities to put the legislation - which has been debated for years - in place as soon as possible to help boost home ownership in the Kingdom.

The law would make the market more attractive for banks, allowing for more competitive interest rates on mortgages, while at the same time bridging the gap between supply and demand.

An equity research note by Credit Suisse pointed out that some 17 percent of Saudi households would be “potential mortgage seekers”, possibly translating into an estimated 17 percent or $20 billion of accretive value to the overall banking sector.  In 10 years, the bank believes the mortgage sector could amount to as much as $241 billion or 23 percent of GDP.   

As a result, if enforced properly, banks and the real estate sector as a whole have a lot to gain. Credit Suisse notes that those with highest exposure to the retail segment, such as Al-Rajhi Bank, Arab National Bank and Riyadh Bank, stand most to gain.

Fitch Ratings cited Bank Aljazira as “one of the first financial institutions in Saudi Arabia” that could benefit from the new mortgage law.

Loan to deposit ratio in Saudi Arabia are currently around 75 percent. In its latest report, Samba Financial Group, one of the country's largest lenders, cites official data showing that bank lending to the private sector grew by 6.9 percent in the twelve months to April, far from the pre-financial crisis levels in excess of 20 percent.

In a speech in May, Mohamed Al-Jasser, the Governor of the Saudi Monetary Agency (SAMA), the country's central bank, described borrowing by individuals as "relatively conservative", and believed the "eventual passage of a mortgage law, along with increased lending to SMEs, should help to encourage responsible borrowing in these areas and improve banking penetration in the economy".

But any upside will depend on how effectively the new legislation is implemented.

"If there is to be any significant positive impact on the country’s real estate market, then it is critical that lenders feel and are protected by enforceable regulation", Lynn adds.

Although the mortgage law, once passed, will be heralded as a turning point, others risks loom. John Harris, the co-head of JLL in Saudi Arabia warned in a statement that "the wealth is changing the face of Riyadh."

However, he said "We are concerned that a lot of investment capital is pushing up peripheral land prices, which will complicate the process of delivering affordable housing."

The Saudi stock market is the biggest in the region, but remains difficult to access for foreign investors.