Can Saudi banks afford the mortgage law?

But that should change, perhaps as soon as by the end of this year, with the introduction of a mortgage law, which is going through its final stages of approval.

That will see Saudis able to get amortized mortgages and give the housing sector a much needed boost.

People in Saudi Arabia want to own property and can get a loan for a home.

A typical rate is between 3.5% and 5%. But such long term loans are expensive.

Spread over a long period , say 20 years, those taking the loan will still be paying 3.5% or 5% of the total original amount taken, making it an expensive option.

Great potential

'If you look at the potential in Saudi Arabia, it is there for developers to create products and for them to be sold.

'The pending issue is if customers can afford to buy our products,' said Ghassan Rida Khalifa, Vice President, Commercial, Kinan International Real Estate Development.

While developers may understand the income levels of locals, they still need to understand how much of that monthly wage they are prepared to put by for mortgage payments.

But for Saudi Arabia, the mortgage law brings with it difficult cultural issues that first need to be resolved, such as what happens when someone defaults (the government does not want to be seen as having eased the passage for people to be made homeless), or how to finance off-plan sales.

The difficulty for developers will be keeping up with demand, but equally banks must plan for the flood of mortgage applications.

Banks have credit limits for sectors like real estate and have to diversify their exposure across different industries. This means raising additional financing for mortgages.

'The financing demand of the real estate sector in Saudi Arabia will be so large that these limits will be reached. The Saudi banking sector is not large enough to take all these mortgages on-balance in their books,' says Michael Gassner, Division Head, Islamic Banking Group at Bank Aljazira.

'There needs to be more analysis and forecasting, but I think they will run out of real estate fund options pretty fast; in the next two to three years,' he adds.

Sukuk finance for banks

Alternatives to a bank's balance sheet finance are needed, such as the Capital Market, the usage of securitisation.

Using these mortgages as the basis for an asset-backed security or sukuk will mobilise more funds towards the real estate sector and expand opportunities, said Gassner.

Banks, insurance companies, pension funds, investment funds, high-net worth investors and international investors can all buy into these sukuk securities, which will then create the liquidity needed by banks to meet the demand for mortgages.

However, Sukuk are not expected to be offered for two or three years and, once available, it is unknown how popular they will be among local investors.

Banks and developers are already working together to offer mortgage products to future home owners, even though the law is not quite in place yet.

'Everyone is waiting for the mortgage law,' says Hani Baothman, CEO at Aayan Arabia Holding. 'The industry doesn't fear the mortgage law.'

Once the law is in place, it will start a flood of people looking to own their homes rather than renting.

And the big advantage that Saudi Arabia has over places such as Dubai is land mass. Being such a vast country, it should be able to expand at a more reasonable cost, which will also mean there is less impact on inflation, says Gassner.

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Schon's insider view on the Dubai property market
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