Tuesday, 01 September 2015  -  17 Dhul-Qada 1436 H
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Saudi banks seen to exercise prudence in mortgage lending

JEDDAH - Although the Saudi real estate sector has been supported by domestic demand fundamentals in recent years, still the market remains undersupplied, particularly for middle and lower income communities, shielding it from selling pressures that have dragged down other Gulf real estate markets in the past year, Banque Saudi Fransi said in its report this month on the Kingdom’s real estate sector.
It noted that the stabilization and rise of prices in many parts of Saudi Arabia could signal real estate prices will continue to strengthen into 2010, although we expect any pick up in real estate demand will be muted and gradual.
However, the report said that though the imminent approval and enactment of mortgage law will serve as a catalyst, still “credit risk appetite remains weak among Saudi banks and any uptake in new consumer loan risk will happen slowly,” the bank’s chief economist Dr. John Sfakianakis said. Banks, under the guidance of the central bank, “will exhibit prudence in mortgage lending, as they would need to avoid the creation of a Saudi-styled sub-prime crisis,” he added.
Developing a safety ratio should help prevent lenders from giving financing beyond the means of the home buyer, he further said.
The report said though increases in disposable income could compensate for high land prices, “we regard this as implausible over the short term.”
“We expect the mortgage law could act as a key trigger for Saudi Arabia’s home finance industry in the longer term, although the short-term implications of its passage will be minimal unless the government increases the availability of land, pushing down prices to levels that are more affordable for common people,” the report noted.
The report also suggested that the quality of housing should also be addressed in order to comply with energy efficiency requirements and green building codes, rather than continuing the current trend of energy inefficient construction.
It also said the sector should develop new building codes that can be implemented to support energy and cost-efficiency. Quality housing would enable the eventual creation of a secondary market, SHB said in the report.
The sale price of empty commercial land has been falling across the country, reflecting a slowdown in private sector expansion in the past year. The average decline in commercial land plot prices in the six cities surveyed was 8.3 percent in H1 compared with H2/09, and 11 percent from a year ago.
In Riyadh, average commercial land plot prices fell an average of 0.6 percent in H1 compared with H2/09, while other areas of Saudi Arabia posted steeper drops over the same period, of as much as 14 percent in Al-Khobar and Dhahran.
In some neighborhoods of the capital city, commercial land prices are picking up after the asking price of a prime commercial plot fell 12.2 percent, on average, in the year to H2/09, including a slump of as much as 30 percent in some neighburhoods of east Riyadh. Prime commercial land is defined as plots located adjacent to wider roads, spanning 40-60 m in width.
The trend has shifted to a large extent this year, with prime commercial land in 10 of the 50 Riyadh neighborhoods tracked by the survey moving up in value compared with the H2/09. Most of the gains happened in east Riyadh, where the average cost of commercial plots rose 5.6 percent from H2/09. Land plot prices elsewhere in Riyadh continued to fall, including in the less-expensive south and west districts, where average prices fell 11.5 percent and 9.2 percent, respectively. The cost of commercial land in Riyadh ranges from SR1,125 per sq m in south Riyadh to more than SR5,000 per sq m in parts of north and east Riyadh. Land in the pricier northern districts fell an average of 9.2 percent in H1 over the end of last year.
Jeddah commercial plot prices dropped to an average price per sq m of SR6,682 in H1, down 7.5 percent from SR7,221 in H2/09. Commercial land prices in Jeddah are 12 percent lower than they were in the second half of 2008 and 9 percent down on a year ago.
The decline in prices exceeded 15 percent in Corniche South Obhor and 24 percent in the Al Rodah district of north Jeddah, where commercial plots are almost a third cheaper overall slowdown in expansion of the Saudi private sector. – QJM
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