Home loans in Saudi Arabia nearly double after passage of mortgage law
Home lending sees rapid growth as developers prepare to benefit from legislation allowing banks to offer credit to a wider range of borrowers
Saudi Arabian home lending grew at the fastest pace in at least four years in the second quarter, evidence that banks in the largest Arab economy are more willing to take risk as the nation's mortgage law comes into effect.
Mortgage lending jumped 83 per cent to 48 billion riyals (US$12.8 billion) from the year-earlier period, the highest on record according to central bank data. In the United Arab Emirates, home loans by banks grew less than 1 per cent in the year to March, while credit to Qatar's real estate industry rose 34 per cent in the second quarter, central bank data show.
Saudi lenders have been anticipating approval of the nation's first mortgage law, which happened on July 2 after more than a decade of debate. The law may give banks greater confidence to offer home loans to a wider spectrum of the population because it defines the rights of borrowers and banks.
The legislation includes rules that facilitate the creation of mortgage providers, outline the foreclosure process and provide for oversight of lenders. Home purchases in the Gulf Co-operation Council's most-populous member are growing as the economy expands five times faster than the Group of 10 nations, data compiled by Bloomberg show.
"Housing has become a government priority," Jarmo Kotilaine, chief economist at Jeddah-based National Commercial Bank, said. "The fact that it's so central to the government's policy actions means that in general banks feel comfortable going into this space. Home financing is also an under-developed market and banks can build their assets in this area."
The world's largest oil exporter needs to bridge a housing shortage for a population that's quadrupled in size in 40 years to 28.4 million in 2011. The government needs to build 1.25 million new homes by 2014, according to its development plan.
The home-loan jump is tracking a broader advance in lending growth as the kingdom pursues plans to spend US$514 billion to build properties, industrial cities and airports. Credit to private businesses grew 14 per cent in July, the fastest pace in more than three years, to 899 billion riyals, central bank data show.
The mortgage law would "help developers increase their sales by expanding the target population for new properties", said Turki Fadaak, the head of research at Albilad Investment in Riyadh. "Real estate developers and finance companies will also be able to form new ventures."
Regulations for implementing the law would be issued within three months, Saudi Finance Minister Ibrahim al-Assaf said in July.
Loan demand has lifted the three-month Saudi interbank offered rate, known as Saibor and the benchmark used by banks to price loans, 18 basis points, or 0.18 percentage points, this year to 0.95625 per cent on Sunday, the highest since April 2009, data compiled by Bloomberg show. The rate's spread over the equivalent US rate widened to 54 basis points from 20 basis points at the end of 2011.
The yield on one-year Saudi treasury bills is up eight basis points in 2012 to 0.58667 per cent at last week's auction. Saudi Arabia sells bills at weekly auctions on Mondays.
Real estate construction has been on the rise since King Abdullah announced in March 2011 a plan to spend 250 billion riyals to build 500,000 homes to tackle the shortage in supply at a time when other Middle East countries were facing popular unrest.
The monarch also turned the kingdom's housing authority into a ministry with a budget of 15 billion riyals.
Housing loans represent only about 3 per cent of banks' loan portfolios and about 2 per cent of the kingdom's gross domestic product, Moody's Investors Service wrote in a July report.
That compares with between 5 per cent and 10 per cent of GDP in most other GCC countries, it said.
"Mortgage lending by banks has been seeing strong growth, although it remains small compared to the size of the economy," Monica Malik, Dubai-based chief economist at EFG-Hermes Holding, said.
The Saudi economy grew 6.8 per cent last year compared with average growth of 1.3 per cent among G10 nations, according to data compiled by Bloomberg.
Consumption spending is picking up as pay increases enable individuals to take out bigger retail loans, Malik said. Personal loans for cars and equipment increased 20 per cent in the second quarter, central bank data show.
Saudi developers are also tapping bank loans to build real estate projects. Mecca-based Jabal Omar Development Co signed in June a 5 billion-riyal Islamic financing deal to complete the first stage of its projects in Islam's holiest city.
Emaar Economic City, a unit of Dubai's Emaar Properties PJSC, is building a real estate project in King Abdullah Economic City on the Red Sea coast that will house about two million people. Red Sea Housing Services, based in Jubail, said in July it was investing 2 billion riyals in expansion.
"Banks have got a lot of room to increase lending further," said James Reeve, the London-based senior economist at Samba Financial Group. "You will see a lot more mortgage lending in the second half. That has certainly picked up a lot in the first half. Lending across the board will increase."