JEDDAH — Saudi total real estate market financing is forecast to reach SR60 billion in 2012 as total real estate lending grew by SR17 billion during the second quarter of 2012 alone, the National Commercial Bank (NCB) said in its October Saudi Economic Review”. The report said, according to SAMA, the total real estate financing by local banks reached SR29.3billion in 2011.
The residential lending market in the Kingdom overwhelmingly consists of loans by commercial banks, however, the mortgage market, upon the implementation of the mortgage law, has the potential to attract non-bank lenders to this market.
The Kingdom’s current banks’ residential finance amounts to a meager 2 percent to GDP. This reflects the potential that residential financing has in comparison to other developed economies like Germany, UK and France where the mortgages to GDP ratio stands at 50 percent, 55 percent and 32 percent, respectively, the report said.
“We do not expect the supply demand imbalance of the housing market to significantly change in the short-term even after the passing of the mortgage law. The impact of the mortgage law will take time. Banks and non-bank players will need some time to test the robustness of the law. In addition to limited availability of financing, another real constraint has been affordability,” the report further said.
As long as there is no incentive for landowners to sell (i.e. land prices sky rocketing, no land tax, no capital gains tax), this will continue to restrict availability of affordable land.
Despite the lack of a mortgage law in the Kingdom, local banks have been offering residential finance to their customers.
However, its growth has been rather modest compared to other types of consumer finance like auto lease. To minimize risks in the absence of robust regulatory framework governing this type of financing, banks with varying degrees opted to enforce strict loan criteria.
Some of these borrowing criteria include: limiting residential loans to payroll-only customers, providing loans in cities where bank branch operates and in some cases in predetermined regions where risk is perceived to be lower, restricting the type of property that can be purchased and in most cases the prohibition of off-plan financing.
Moreover, the report noted that in anticipation of the approval of the mortgage law, the Saudi market witnessed the entrance of new non-bank players, signaling a growing attraction to the Saudi housing market. Although their impact has been minimal, these non-bank residential finance providers expanded their loan offerings to include non-payroll customers, and off-plan financing.
These credit institutions will play a critical role in the development and evolution of the mortgage lending landscape in the future.
Additionally, the recent establishment of the Dhamen program, which provides buyers with added financing above and beyond the SR500,000 in the form of bridge loans provided by local banks, will provide buyers the ability to buy a home without having to acquire land.
The Dhamen program stipulates that the desired housing unit must already be built and does not offer bridge loans to finance the construction of a home.
Moreover, the report said the liquid state of the economy and its buoyant growth should theoretically drive up local consumer prices, but that is not the case of late.
The inflation rate has dropped for the sixth consecutive month to 3.8 percent, the lowest since October 2009. The rate of inflation for renovation, rent, fuel, and water decelerated to 7.7 percent Y/Y during August. It is expected that the anticipation of the mortgage law has kept household seekers on hold for the time being.
The regulatory framework of the new law will unfold the direction of the real estate market, albeit having its full impact on the medium to long term.
Another major contributor to the inflation rate, food and beverage prices recorded an annual growth of 3.3 percent as food prices are majorly influenced by imported inflation. However, during Haj, local livestock prices are pushed higher due to the seasonal rituals, coupled with a recent chicken price hike, the food category is expected to accelerate its pace for September- October.
Addressing the category labeled “other expenses and service”, due to base effects, the category posted a 1.9 percent Y/Y change and it likely to contract for September figures as a significant hike was recorded during September 2011. This will probably pressure the inflation rate lower for last month but we expect price levels to rise by the end of 2012.
The Saudi economy is absorbing large amounts of liquidity as banks remain relatively conservative compared to pre-crisis levels and as the Saudi economy receives huge influx of oil revenues.
A glance at Saudi Arabia’s monetary aggregates in August reveals expanding liquidity which should support elevating local prices, but that is not the case for the latter. The monetary base (M0) increased by 10.3 percent annually during August. The main contributor to the gain was deposits with Saudi Arabian Monetary Agency (SAMA), rising by 18.9 percent Y/Y. The rise is partly due to the raising of three local banks’ capital which requires them to increase their deposit by regulations.
Additionally, the cash in vault category accelerated by 9.7 percent as the banking system prepares to accommodate almost 2 million pilgrim travelers for Hajj season. Furthermore, currency outside banks added SAR4.3 billion, a gain of 3.3 percent against August 2011. The aforementioned contributed to a pickup in money supply (M3) which hit an all-time record at SR1.29 trillion. Money currently in circulation grew by 9.7 percent during August on an annual basis. Demand deposits, weighing 54.3 percent of M3, rose by 15.3 percent Y/Y, the fastest pace in five months.
Meanwhile, the semi-available time and savings deposits have recorded the slowest growth this year at 0.4 percent given the suppressed interest rate environment. The International Monetary Fund have recently downwardly revised global economic growth as the European region struggles to structurally contain its debt burdens and the US attempts to resolve its fiscal cliff while going through a presidential race.
Furthermore, other quasi-monetary deposits rose by 9.6 percent to reach SR171.9 billion by the end of August.
NCB study forecast that M3 will to continue its expanding pace throughout 2012. — SG/QJM