28/03/2011
Shoura Council approves mortgage law
The Shoura Council approved Sunday a mortgage law on real estate subject to certain modifications on the article related to loans.
Shoura Secretary-General Muhammed Al-Ghamdi said the proposed amendments to the mortgage law were approved with certain reservations. The house felt that certain wordings related to loans should be modified to express the right objectives and process of housing loan disbursements.
Al-Ghamdi said that the Finance Committee would carry out the anticipated modifications and resubmit the draft law at a subsequent session of the council.
"The Shoura Council is keen on expediting the draft law because of the pressing need to build more housing units throughout the Kingdom in accordance with the government's implementation plan as per the directive of Custodian of the Two Holy Mosques King Abdullah." He added that in addition to the special allocation of funds for the Real Estate Development Fund, King Abdullah has established a separate Ministry of Housing to ensure that more citizens own houses.
The draft mortgage law is a package of five laws, including a mortgage registration law, which provides for the use of mortgages in real estate financing, including mortgage registration; execution (enforcement) law, which expands a court's authority to provide injunctive and declaratory relief, and to enforce such orders; financial leasing law, which regulates the incorporation, activities and governance of financial leasing companies; real estate finance law, which regulates the incorporation, activities, and governance of companies engaged in real estate financing and control of finance companies law, which regulates the incorporation, activities, and governance of finance companies.
Al-Ghamdi said the proposed law was approved by the council in 2008 and sent to the Cabinet for approval. However, since there were some differences of opinion on a few important articles of the bill, the Cabinet returned it for review.
He said that the council had set up a special committee comprising six members to conduct a detailed study of the whole draft law. Following approval of the modifications to the article on loans, the secretary-general explained that the council of ministers will have a final look at the draft regulation before it is presented for ratification by the king.
The salient features of the approved draft law include allowing the banks to provide funds on real estates under the mortgage scheme. It incorporates a set of guidelines for the financing companies and clearly spells out procedures for repayment. Al-Ghamdi said that these rules and regulations governing the mortgage law would be carried out according to Islamic law.
He said that the implementation of the law will definitely boost the real estate business in the Kingdom and pave the way for construction of thousands of housing units throughout the country. He said that the new law would generate a lot of interest among citizens since individuals and business houses are keen on developing the real estate sector in the Kingdom.
"This is a most welcome development and very much in line with some of the other policy moves made recently which have clearly identified housing as a central investment priority," said Jarmo T. Kotilaine, chief economist at the National Commercial Bank (NCB). "It is to be hoped that the implementation of the law can proceed without additional delays. If so, it will not only help create an even stronger foundation for growth this year but will also foster a culture of home ownership over the longer term, something that in many countries has served as an important driver of financial literacy and security alike.”
Even though the mortgage law is unlikely to constitute a "magic bullet" that would quickly resolve the Kingdom's endemic housing shortages, it will help establish a basis for sustainable development, both in real estate development and in financial intermediation. In that sense, it constitutes an exceptionally important piece of "enabling regulation," Kotilaine said.
"Mortgages in many mature economies account for 60 to 70 percent or even more of GDP and have historically — that is to say until the excesses that emerged during the past decade — served as a source of stable, sustainable development," Kotilaine added.
Saudi Arabia has only a 2 percent mortgage penetration in its real estate market, industry experts say.
"The role of affordable mortgage lending is especially important in Saudi Arabia and the GCC where the recent property boom has tended to favor disproportionately higher-end residential and commercial real estate. It has largely bypassed key segments of the growing middle class, which should now begin to find it easier to gain access to owner occupied housing," he added.
John Sfakianakis, chief economist at Banque Saudi Fransi, said the progress made recently in the housing sector, including the Shoura Council decisions, are a step closer to the final approval and implementation of the much awaited mortgage law. "Housing is an important challenge that requires addressing and it has recently received renewed attention by King Abdullah," he said.
It is estimated that 275,000 new homes are needed each year to address the housing challenge and affordability is a core issue. The government will be enacting a series of measures relating to the housing sector over the next few months. The creation of the Ministry of Housing is one of many, he added.
The passage of the mortgage law will naturally open the door for further development in the housing sector, particularly affordable housing. The king's recent decree to centralize housing and real estate development initiatives under the new Ministry of Housing is also a very encouraging development, said Naveed Siddiqui, CEO of Capitas Group International.
“It appears that the right questions are being asked and worked out by the Shoura Council. In the end the law must be comprehensive and most importantly enforceable on an individual transaction basis,” said Nasser Nubani, general counsel of Capitas. Once the law is enacted it is critical that the supporting regulations give clear direction on the administrative aspects of the law, he said.
According to a real estate expert, the enactment of the mortgage law is eagerly awaited, as it can help end users tackle their financing problems.
Saudi Arabia is one of the countries not affected by the world financial crisis. The Kingdom's construction and property sector has come through the financial crisis in better shape than most of its neighbors.
According to Banque Saudi Fransi's latest report, private and public developers will need to build about 275,000 units a year until 2015, a total of 1.65 million homes over six years, to cater to the demands of a population that has doubled in size since 1988 and grows more than 2 percent annually.
The government's goal is to raise home ownership among citizens to 80 percent by 2024 by boosting the supply of affordable housing and expanding financing options for citizens.
The BSF report said banks could also play a greater role in supporting construction of much-needed supply. Up to the third quarter of 2010, building and construction loans accounted for only 6.7 percent of total credit extended by Saudi banks, the lowest ratio in the Gulf.
Saudi banks exhibit abundant liquidity, while their net foreign assets have more than doubled in the last two years. Still, real estate finance, while picking up, remains limited. By the third quarter of 2010, home loans accounted for only 2.8 percent of total credit extended by Saudi banks. The SR22 billion worth of home loans in Q3 represented a 42.2 percent surge from the first quarter of 2009.
The Kingdom needs to spend about $180 billion by 2015 to build new homes, according to a report from NCB.
