The latest real estate report on financing and lending for the construction or purchase of property in the Kingdom revealed a significant decline in the ratio of real estate financing to gross domestic product, which stood at 1.5%, placing Saudi Arabia second-to-last internationally—according to World Bank data—while the ratio stood at 87% in Australia, 80% in Sweden, and 58% in the United States..
Low Mortgage Financing
A recent real estate study prepared by the Real Estate Development Fund attributed the low rates of mortgage financing to several reasons, most notably the ineffectiveness and incompleteness of the mortgage financing system in the Kingdom. Other key reasons include: the lack of a secondary market for securitization and Islamic sukuk, coupled with a lack of liquidity for financing institutions, and the absence of guarantee companies for real estate financing, and the absence of real estate registration. Figures revealed that 175,000 residential units were financed by financial institutions in the Kingdom, representing 3.5% of the total existing housing stock in the Kingdom.
In contrast, mortgage loans have declined significantly compared to consumer loans for individuals, accounting for 23% of total individual loans compared to 77% for consumer loans, The lack of savings programs contributed to the rise in consumer loans, as did the inability of individuals to accumulate sufficient capital to cover the down payment required for mortgage financing.
On the supply and demand side, a survey by the Fund found that 25% of the segment of citizens in need of housing are those with incomes of 11,000 riyals or more, for whom products are available from developers, while 75% of the same segment—those with incomes below 11,000 riyals—remain underserved.
Murabaha Rates
Earlier this week, the Real Estate Fund announced its intention to finance citizens through financial institutions, with the Fund bearing the murabaha rate, This requires the Fund to operate in line with private-sector principles based on capital development, and to collaborate with banks and finance companies to support vulnerable groups—who constitute a significant proportion of those in need of housing assistance—while emphasizing the importance of supporting developmental housing, off-plan financing, and reducing financing risks for low-income groups in need, in addition to the anticipated role of the government-owned Real Estate Refinancing Company, which is expected to begin operations by the end of this year.
A Significant Step Forward
Nevertheless, a significant and progressive step forward in the field of real estate financing and lending in the Kingdom took place last week, marked by the announcement by the Saudi Arabian Monetary Authority (SAMA) that it had finalized coordination with the Ministry of Finance and the Ministry of Housing regarding the «Concessional Mortgage» program for residential real estate financing for a specific category of citizens. This is expected to give the real estate market greater activity and vitality, as well as provide a strong boost to financial institutions —banks that are permitted to offer residential financing covering 85% of a home’s value—and the implementation of Mortgages provide a strong boost to real estate development companies, as they will open up significant opportunities to develop vast tracts of land available in the public and private sectors in preparation for the construction of residential and commercial properties on them.
