Saudi_Arabia_Economics_20032011 by qingyunliuliu


									       SAUDI ARABIA

         March 2011

 March 20, 2011

Dr. John Sfakianakis
Chief Economist
                                   Under construction
Tel: +966 1 289 1797
                                   Saudi steps up efforts to meet home, loan demand
Daliah Merzaban
Economic Analyst
                                          Saudi housing market needs 1.65 million new units by 2015 to
Tel: +971 4 428 3608                      meet demand due to youth surge, smaller family size; shortfall
                                          of properties likely to persist
Turki A. Al Hugail
Economic Research Analyst
Tel: +966 1 289 1163                      Mortgage law will catalyse housing market in medium term,
                                          but affordability a challenge as mismatch exists between pre-
                                          vailing home prices and salaries

                                          State home loan fund REDF dominates 81% of mortgage lend-
                                          ing; risk aversion, lack of regulation limits bank growth in
                                          consumer mortgage space

                                          Prohibitive land costs barrier to improving affordability in low-
                                          to mid-income bracket
                                   Saudi Arabia’s housing market continues to wrestle with a shortage of supply and mounting
                                   demand which has placed home ownership affordability out of reach for many young Saudis.
                                   As upward pressure on asking prices for apartments and villas gains rather than loses
                                   momentum, there is an urgent need for new units where they are required most, to provide
                                   middle- and lower-income citizens with single-family homes. The government is working on
                                   several fronts to try to alleviate supply constraints, last month dedicating SR55 billion ($14.7
                                   billion) to programmes assisting lower income citizens obtain funding for home buys. Over the
                                   weekend, the king made a considerable call to allocate SR250 billion to the General Housing
                                   Authority to finance immediate construction of 500,000 new units.

                                   There are also signs the state is striving to expedite the passage of a long-delayed mortgage
                                   law which, by delineating the rights of borrowers and lenders, could over time encourage
                                   banks to expand the risk profile of their clientele, potentially heralding a wave of growth in
                                   consumer finance. Yet the short-term housing scenario is complex and puts young Saudis at a
                                   disadvantage. The law’s passage would have the immediate effect of spurring enthusiasm in
                                   Saudi property. But prevailing house asking prices and salaries place ownership out of reach for
                                   numerous public and private sector employees, especially those in the early years of their careers.

                                   We estimate private and public developers will need to build about 275,000 units a year through
                                   2015, for a total of 1.65 million homes over six years, to cater to demands of a population that
                                   has doubled in size since 1988 and grows more than 2% annually. The Saudi housing market
                                   is unique in the Gulf for an undersupply of units; our half-yearly surveys of Saudi real estate
                                   show the cost of apartments and villas climbed quickly in 2010.

                                   Despite price constraints, the Saudi home ownership ratio is high at 60% according to the
                                   2004 general census, and 2007 demographic data showed the rate remained consistent. The
                                   ownership rate had fallen to 55% from 65% between 2000 and 2004, over which period the
                                   ratio of average home rental costs to total income climbed to 30% from 26%, according to
                                   Ministry of Economy and Planning data. Some independent estimates put home ownership
                                   rates as low as 30%.

 March 2011

                                                                        REDF loans double from 2005-09 versus prior 5 years
                             5.5                                                                                                                                     78

                                                                                                                                                                           (Outstanding loans, SR, bn)
 (Loans dispersed, SR, bn)

                             4.5                                                                                                                                     75
                             4.0                                                                                                                                     74
                             3.5                                                                                                                                     72
                             3.0                                                                                                                                     71
                             2.5                                                                                                                                     69
                             2.0                                                                                                                                     68
                             1.0                                                                                                                                     65
                                       1997         1998         1999          2000    2001      2002      2003     2004      2005      2006   2007   2008    2009

                                   Source: SAMA, Real Estate Development Fund (REDF)          Loans dispersed       Outstanding loans

The government’s goal is to raise home ownership among                                                            building costs. The state’s move to grant some developers
citizens to 80% by 2024 by boosting supply of affordable                                                          the right to sell units off-plan should encourage construction
housing and expanding financing options for citizens.                                                             of large-scale projects and such reforms must continue.
Attaining this could prove problematic, however, as two-                                                          Barring a holistic approach to housing sector reform, many
thirds of the Saudi population are below the age of 30,                                                           young Saudis could be compelled to rent instead of buy
including 47% under the age of 20. The number of young                                                            due to comparatively low rental yields, keeping a strain on
people moving out of their parents’ homes and into                                                                already high rents and reducing ownership rates.
independent dwellings as they reach marriage age in the
coming decade is likely to surge. The size of Saudi families                                                      State steps in with home loan push
has, meanwhile, fallen since the 1980s to an average 5.65
per household in 2008 from 7.4 in 1987, creating a large                                                          In Saudi Arabia, as with many countries in the Middle East,
pool of young-people on the hunt for mid-market detached,                                                         citizens have traditionally bought homes using personal
affordable homes.                                                                                                 capital and family savings. Banks offer home loans on a
                                                                                                                  limited basis and some public and private-sector companies
Considering the housing supply-demand gap and the                                                                 have helped employees buy homes through in-house
impending boom in youth demand for homes, we are bullish                                                          financing schemes. These options are usually reserved for
on the housing sector and confident the mortgage law will                                                         wealthier Saudis, leaving a gap of financing among the mid-
widen the scope of home ownership in the long term. Still,                                                        to low-income population. Banks have recently increased
reforms to address the market’s structural deficiencies                                                           mortgage financing to large firms, which guarantee loan
will need to complement the law. For one, developers                                                              repayments, minimizing default risk while offering much-
must focus on building supply of affordable housing since                                                         needed financing to citizens.
prevailing salaries are largely not high enough to support a
mortgage finance boom. Quality and energy efficiency must                                                         Saudis of lesser financial means are able to apply for home
also be prioritised.                                                                                              loans through publicly held Real Estate Development Fund
                                                                                                                  (REDF), established in the 1970s with a goal of distributing
Land prices also pose a challenge. Plots of residential land                                                      non-interest-bearing home loans to citizens for construction
have risen sharply in price over the past decade and some                                                         and purchase of homes. REDF dominates the Saudi housing
estimates say land accounts for more than half of total                                                           market, accounting for 81% of total home financing.


  March 2011

                                                                                                  jump in oil prices between 2003 and mid-2008, which
                        REDF dominates Saudi home finance                                          considerably augmented government revenues and its
                                                        Bank real estate loans
                                                                                                  store of foreign assets, giving it flexibility to fund social
                                                                19%                               programmes; and a massive rise in house prices such that
                                                                                                  rental inflation soared from 4.5% at the start of 2007 to
                                                                                                  almost 24% by mid-2008.

                                                                                                  Against a backdrop of elevated inflation spurred to a large
                                                                                                  degree by housing costs, REDF’s mandate has become
                                                                                                  more pressing. Part of the king’s SR135 billion support
                                                 REDF                                             package for citizens unveiled last month was a pledge to
                                                                                                  inject SR40 billion of additional capital into REDF so it could
                  Source: SAMA, REDF                                                              grant a greater number of loans. The king also added SR15
                                                                                                  billion to the General Housing Authority’s budget to build
From inception to the third quarter of 2009, REDF disbursed                                       more affordable housing for state employees.
SR145.5 billion loans, which are repayable over 25 years.
REDF’s mandate in recent years has expanded rapidly;                                              Still, the estimated waiting period for Saudis who apply for
the fund doubled home lending between 2005 and 2009                                               REDF loans has been 18 years due to pent up demand. The
compared with the prior five-year period. In 2009, REDF                                           new capital could reduce this waiting period, but not as
dispersed some SR5.28 billion worth of home loans, up                                             sharply as the state’s aim to bring it down to eight years.
from SR4.99 billion in 2008, and more than SR3 billion in                                         One cause of the long waiting period for REDF loans has
each of 2006 and 2007. These years were characterised                                             been the body’s difficulty in collecting outstanding loans,
by historically high inflation rates, raising pressure on the                                     according to the Ministry of Economy and Planning. Saudi
government to enhance financial assistance for citizens. In                                       Arabia’s finance minister said last month REDF would use the
fact, the total loans distributed by REDF in 2009 virtually                                       new funds to provide an additional 133,000 loans – adding
equally the value of loans granted between 2000 and 2004.                                         to the 600,000 loans it has dispersed since 1975. Up to the
                                                                                                  first week of February, REDF approved new loans to build
The huge rise in lending coincided with two trends: a rapid                                       54,000 homes valued at SR13.5 billion under the scheme.

                                                        Saudi rents still high, point to supply constraints

 (YoY % change)




                            2007           May   Sep    2008       May           Sep       2009          May         Sep   2010     May      Sep      2011

                            Source: SAMA                                 Loans dispersed             Inflation rate


  March 2011

                                                                                Huge targets for construction in current plan


 (Units, 000s)




                                        4th plan (85-89)               5th plan (90-94)              6th plan (95-99)              7th plan (00-04)               8th plan (05-09)           9th plan (10-14)*

                                Source: Corresponding development plans, Ministry of Economy and Planning               Units built             Target                               * Estimated target and completion

Even with a smooth-running state state-funded home                                                                             extremely prohibitive. In Riyadh, the median price for a
financing scheme, a serious issue of price affordability                                                                       small villa soared 19% in H2 compared with H1 to SR1.23
remains. REDF loan recipients receive up to SR300,000,                                                                         million, while in Jeddah prices rose 17% to SR1.54 million.
which is not adequate to cover land and construction-                                                                          Median prices for small villas in the Eastern Province were
related costs of home building. In our H2 real estate survey,                                                                  also a high SR768,000. Substantial gains in prices illustrate
the median price of a large apartment in 12 Saudi districts                                                                    a cultural preference toward larger homes which must be
in Riyadh, Jeddah, Khobar, Dammam and Dhahran was                                                                              taken into account by developers, although land prices
SR485,833, while for small villas it was SR1.06 million.                                                                       pose a challenge to affordability. In 2004, some 12% to
Under new rules unveiled over the weekend, the maximum                                                                         15% of homes were unoccupied, up to four times higher
loan will be raised to SR500,000, which will go some way                                                                       than normal, economy ministry data show. The ratio of
toward bridging the cost gap.                                                                                                  unoccupied homes has likely stayed at a similar level due
                                                                                                                               to purchasing power constraints of large segments of the
Saudi families tend to prefer living in villas than in                                                                         population.
apartments, but affording detached homes has become

                                                                           Housing demand in Saudi 2014 development plan
          (Units, 000s)

                                                                                                                          70                                 70
                                         New housing units                     New housing units                   Housing units to                      Housing units                    10% reserve units
                                             (Saudis)                            (non-Saudis)                      meet unsatisfied                        required for                      to ease rent
                                                                                                                demand from eighth plan                  replacement                          inflation
                                Source: Ninth Development Plan, Ministry of Economy and Planning


  March 2011

                                                                        Housing units needed by region up to 2014
                 400                       370
                 350         325

 (Units, 000s)

                 200                                                   166.3
                 100                                     81.2                                83.1
                                                                                      51            50.1
                  50                                                                                                    20.5               21.6     21.6
                                                                                                                                 11.5                         13.5
                           Riyadh        Makkah        Madinah        Eastern       Qassim   Asir   Jazan       Tabuk    Hail   Northern   Najran   Al-Baha   Al-Jouf
                                                                      Region                                                    borders

                       Source: Ninth Development Plan, Ministry of Economy and Planning

Supply on the rise, but not fast enough                                                                    Makkah province, which includes the Red Sea port city of
                                                                                                           Jeddah, at 370,000 units, followed by capital city Riyadh
As prices spiral, urgent steps are needed to address
                                                                                                           at 325,000 units, according to government estimates.
shortages in housing supply. According to our calculations,
                                                                                                           These two regions, along with the Eastern Province and
Saudi Arabia should build 275,000 new housing units per
                                                                                                           the holy city of Madinah, account for three-quarters of new
year in the six years to 2015 to cater to demand –for a total of
                                                                                                           demand during the five-year period, data show. Demand
1.65 million new housing units. The government’s demand
                                                                                                           concentration in Jeddah is not surprising given occupancy
estimate, outlined in its 2010-2014 Ninth Development
                                                                                                           rates in the city surpass 95% and, due to extensive flood
Plan, is lower at 250,000 per year (1.25 million in total).
                                                                                                           damage plaguing many homes, demand for replacement
The Ninth Plan is a wide-reaching economic and social
development programme requiring estimated investments                                                      units is higher in other parts of the country.
of almost $400 billion.
                                                                                                           The government envisions being able to add one million
Anticipating population growth of an average of 2.23%                                                      units to the market by 2014, falling 20%, or 250,000
through 2014, the state foresees Saudi households growing                                                  units, short of its demand estimate. To achieve 200,000
by 750,000, requiring 800,000 new homes be built. Another                                                  new units per year would require a massive 66% increase
200,000 housing units would be required to cater to the                                                    in the pace of construction compared with the prior five
non-Saudi population, according to the plan, which also                                                    years. During the Eighth Plan (2005-2009), 120,000 new
calls for 110,000 units to be built in reserve to ease rental                                              units were added annually, which in itself was double the
inflation. Also, 140,000 new units are needed to replace                                                   number added in each of prior two five-year plans. In all
existing units and “dilapidated housing units”, resulting                                                  three cases, construction targets set were not achieved.
from poor-quality construction. Most Saudi homes do not
survive past 30 years, which has constrained the growth                                                    We believe state momentum exists to come as close to the
of a vibrant secondary market. Banks generally refuse to                                                   one million target as possible. The king’s massive SR250
grant home loans toward the purchase of units older than                                                   billion allocation to the General Housing Authority this
10 or 15 years – a restriction that would ease as quality                                                  weekend calls for 500,000 new homes be built immediately.
                                                                                                           Even if Saudi Arabia manages to achieve the one-million-
By region, the greatest demand would come from the                                                         unit target, we estimate a housing shortfall of 375,000


  March 2011

                                                                By 2014, housing market still likely to face deficit of 375,000 units
 (Shortfall, 000s units)

                                         Riyadh        Makkah        Madinah         Eastern        Qassim          Asir           Jazan          Tabuk         Hail           Northern     Najran     Al-Baha    Al-Jouf
                                                                                     Region                                                                                    borders

                                     Source: Banque Saudi Fransi forecasts

units. A bulge in the young population has the potential to                                                                            replacement demand. While it has halved in the past two
substantially ignite demand in the coming years, particularly                                                                          years, rent inflation is still 10%.
in urban centres. According to our estimates, the biggest
shortfalls will be in Riyadh and Jeddah.                                                                                               The size of families also tends to be smaller in urban areas.
                                                                                                                                       According to 2004 census data, the average size of a Saudi
The Saudi population has gravitated toward urban centres                                                                               household was 6.1 people, with smaller cities and villages
over the past decade. Between 2001 and 2007, Riyadh’s                                                                                  far surpassing the country average. In Al-Jouf and Northern
Saudi population grew 23%, the highest rate in the country,                                                                            Borders, the average household size was 8.4 and eight
while its non-Saudi population expanded 24%. In smaller                                                                                members, respectively, compared with households of 6.2
localities like Al-Baha, the Saudi population declined                                                                                 people in Riyadh, 5.1 people in Makkah province and 5.8
more than 22%, while in Asir and Hail, population growth                                                                               members in Madinah. The Riyadh Development Authority
was less than 5%. This trend, as it continues, will place                                                                              expects the average family size in Riyadh will fall to 5.7
a greater strain on housing supply in urban centres. More                                                                              in the next decade. Details of Saudi Arabia’s 2010 census
expatriates also places pressures on rents, further elevating                                                                          data are yet to be fully unveiled.

                                                                                     Average Saudi household 6.1 people in 2004
 (Individuals per household)

                                        Riyadh       Makkah       Madinah         Qassim       Eastern       Asir          Tabuk           Hail      Northern          Jazan       Najran    Al-Baha    Al-Jouf    Total
                                                                                               Province                                              borders                                                      country

                                     Source: 2004 Population and Housing Census


  March 2011

                                                                   Saudi population growth highest in urban areas
 (People, 000s)

                               Riyadh       Makkah       Madinah   Qassim   Eastern    Asir      Tabuk                    Hail        Northern        Jazan       Najran        Al-Baha      Al-Jouf
                                                                            Province                                                  borders

                           Source: CDSI Demographic Surveys                               2001       2007

Private sector role crucial to new building                                                          The supply of affordable two- and three-bedroom villas
                                                                                                     and duplexes is therefore a vital area of focus. A 2007
Meeting building targets will be a critical component to
controlling the rise in property prices in the coming years,                                         demographic survey showed only one-third of Saudis live
and the private sector is expected to shoulder the burden.                                           in apartments, and just a third of those own their flats,
According to the Ninth Plan, private sector firms would build                                        compared with ownership ratios of 85% for villas and 79%
a majority of new homes, including 61% of new homes in                                               for traditional houses. In Jeddah, where housing costs
capital Riyadh and 62% of fresh units in the Makkah region.                                          are the most-expensive in the country, owning a home is
The state’s objective foresees:                                                                      a luxury reserved for a minority of Saudis. Some 41% of
                                                                                                     residents own their homes in the Red Sea city while 52%
                  The Public Housing Authority building 66,000 housing                               rent, according to data of the Jeddah Urban Observatory.
                                                                                                     To encourage the private sector to dedicate more financing
                  REDF financing construction of 109,000 housing units
                  by providing 90,000 loans                                                          toward building large-scale housing developments

                  Government agencies building 50,000 units for their                                                     Private sector seen building 60% or more of
                  employees                                                                                                                new homes
                                                                                                                         250                                                                              63.0

                  The private sector funding and constructing 775,000                                                    200

                  residential units                                                                                                                                                                       62.0
                                                                                                         (Units, 000s)

                                                                                                                                                                                                             (% of total)

                  Some 266 million sq m of land dedicated for housing
                  projects                                                                                                                                                                                61.0

New homes should be affordable as well as relatively large
in size and more ergonomic. In 2004 some 56% of Saudi                                                                      0
                                                                                                                                   Riyadh        Makkah          Madinah        Qassim Eastern Province

households showed density of occupancy per room above                                                                     Source: Ninth Development Plan, Ministry of Economy and Planning
                                                                                                                                                 Private sector            Ratio of total
the national average, meaning they were overcrowded.


  March 2011

                                                                 One-third of Saudis live in apartments

                                      Traditional house                       Other
                                             28%                               2%

                                                                                                                                                  A floor in a
                                                                                                                    Floor in a villa           traditional house
        Source: 2007 data, 2007 Demographic Survey, CDSI                   Villa 25%                                     11%                           1%

demands a more supportive regulatory framework. Saudi                                        unable to secure funding through banks until projects
Arabia has begun to grant licences to developers enabling                                    were at least half complete, they often could only afford
them to sell off-plan properties – referring to real estate still                            to pursue smaller, higher-risk build and-sell housing
under construction – for the first time. Sales of off-plan real                              projects. Restrictions on off-plan sales had the effect, then,
estate in the past decade largely fuelled speculative building                               of deterring the launch of large-scale residential property
booms in Gulf cities, especially Dubai, which subsequently                                   ventures, which has disadvantaged the property market
suffered from a massive property market crash.                                               as a whole. This scenario must shift to meet upcoming
                                                                                             ambitious construction objectives.
Off-plan sales potential boon for developers                                                 Thabat Real Estate Development Co – jointly owned by
In this context, Saudi Arabia’s wariness about allowing                                      Egypt’s Talaat Moustafa Group and Saudi Arabia’s Al Oula
off-plan sales is understandable; until recently, developers                                 Real Estate Development Co – was the first company to
could start selling units only after the completion of                                       obtain rights to sell off-plan. Thabat’s SR7 billion Nasamat
infrastructure. But this vigilance had negative knock-on                                     al-Riyadh residential project in northeast Riyadh spans 3
consequences for the housing sector. With developers                                         million square metres and is expected to add 4,200 new

                                                                  Apartment ownership levels low
         90                     85.07

         40                                                                                                               32.65
         20                                                                                    15.53
                                          Villas                                 Traditional houses                               Apartments

              Source: 2007 data, 2007 Demographic Survey, CDSI           Ratio owned         Ratio rented


 March 2011

                                                                                                             Currently, prospective homebuyers must first buy a plot of
   More than 60% of Saudi families own their homes                                                           land, arrange for the design of the property and liaise with
                                        Provided                                                             a contractor and other experts. This is a lengthy, expensive
                                       by employer Other
                                           5%       1%                                                       and inefficient process that fails to encourage economies
                                                                                                             of scale. Standardising construction through larger-scale
                                                                                                             building would reduce price and improve quality.

                                                                                                             Banks must step up real estate finance
                                                                                                             Banks could also play a greater role in supporting
                          Rented                                                      Owned                  construction of much-needed supply. Up to the third quarter
                           32%                                                         62%                   of 2010, building and construction loans accounted for only
                                                                                                             6.7% of total credit extended by Saudi banks, the lowest
                   Source: 2007 data, 2007 Demographic Survey, CDSI                                          ratio in the Gulf; real estate and construction loans comprise
                                                                                                             about a third of total credit in the UAE, Kuwait and Bahrain.
residential units when it is completed in about 2014.                                                        There is thus room for upward growth without excessive
Dubai’s Damac Properties also secured a licence this year                                                    risk of over-exposure to property.
to develop and sell properties off plan in the kingdom.
                                                                                                             Saudi banks exhibit abundant liquidity, their net foreign
If properly monitored, allowing off-plan sales will be a                                                     assets have more than doubled in the last two years. Still,
boon for developers, particularly since most of the pent-                                                    real estate finance, while picking up, remains limited. By
up demand is from the indigenous population seeking                                                          the third quarter of 2010, home loans accounted for only
homes to live in, rather than from speculators. Saudi                                                        2.8% of total credit extended by Saudi banks. The SR22
Arabia has also relaxed real estate and investment laws to                                                   billion of home loans in Q3 represented a 42.2% surge from
allow expatriates living and working in the kingdom to buy                                                   the first quarter of 2009.
properties in free zones, as well as in other districts with
special permissions. But large-scale residential projects                                                    Comparatively speaking for the region and globally, Saudi
tend to be skewed toward serving the upper-middle income                                                     mortgage lending is undersized. At 6.8%, Saudi mortgage
segment. Developers regard the underserved mid- and                                                          debt to GDP in 2009 was below 15.5% in the UAE, and more
lower-income segment housing as offering lower margins.                                                      than 30% in Malaysia and many European countries, and

                                                                      Saudi mortgage lending picks up, penetration low
                        22                                                                                                                                            3.0
                        20                                                                                                                                            2.5
 (Loans, SR, bn)



                        12                                                                                                                                            1.0
                        10                                                                                                                                            0.5
                                 Q2           Q3          Q4           Q1       Q2       Q3      Q4         Q1          Q2       Q3        Q4     Q1     Q2     Q3
                                2007         2007        2007         2008     2008     2008    2008       2009        2009     2009      2009   2010   2010   2010
                             Source: SAMA                                Real estate finance    Ratio to total credit      Ratio to GDP of year


  March 2011

                                                                       Saudi mortgage loan penetration exhibits vast potential

                                       Turkey         Saudi           India              China        United Arab        Italy          Malaysia        Greece         France         Germany         United         United
                                                      Arabia                                           Emirates                                                                                       States        Kingdom

                                  Source: European Mortgage Federation Hypostat; SAMA; UAE central bank; Asian Development Bank; Bank Negara Malaysia                           Mortgage debt to GDP, 2009

rates of 87.6% in the United Kingdom and 81.4% in the                                                                                       Building code application key as quality lags
United States. If oil GDP is stripped from the equation, the
mortgage penetration ratio rises to 13% of GDP, bringing it                                                                                 One of the goals of the 2010-2014 plan is to ensure
more in line with regional norms.                                                                                                           that the Saudi building code is applied to all stages of
                                                                                                                                            home building, underlining the state’s awareness of the
Expanding the scope of financing for home purchases                                                                                         need to improve the quality of properties. Enforcing high
would form a critical component of housing market reform                                                                                    building code standards is crucial to promote energy-
measures, especially as the young population mushrooms                                                                                      efficient construction. At present, 70% of homes suffer
in size. Youth below the age of 30 accounted for 66% of                                                                                     from inadequate insulation, for instance. This strains
the Saudi population in 2009 and this pool of new potential                                                                                 the electricity grid as residents turn to air conditioners
homebuyers will most likely seek mortgage loans from                                                                                        which, in turn, exhibit one-third the efficiency of those
banks and mortgage finance companies to purchase their                                                                                      used in advanced economies. Some 52% of power is
first homes in the coming decade.                                                                                                           consumed by Saudi households, and 65% of household
                                                                                                                                            consumption goes toward air conditioners.

                                                                       Youth under 30 account for 2/3rds of Saudi population

 (2009 population, 000s)




                              0 to 4       4 to 9    10 to 14    14 to 19     20 to 24     24 to 29    30 to 34     34 to 39     40 to 44    44 to 49   50 to 54   54 to 59     60 to 64   64 to 69   70 to 74   75 to 79     80+

                                  Source: SAMA


  March 2011

The mortgage law catalyst                                           of the borrower and re-sell it to them at a profit, allowing
                                                                    the buyer to pay them back in instalments. Another “lease
The enactment of Saudi Arabia’s long-awaited mortgage law
                                                                    to purchase” method involves the mortgagee renting the
will act as a catalyst for the domestic real estate sector. The
                                                                    property from the bank, while paying down the principal
law should enhance the market’s sophistication and widen
                                                                    and gaining equity.
funding options for middle and low-middle income groups
if applied and enforced. Earlier this month, chairman of the
                                                                    The absence of a clear mortgage law framework to govern
advisory Shura Council said the law’s approval had been
                                                                    property ownership, property repossession, enforced
prioritised on the council’s agenda at the recommendation
                                                                    eviction and asset liquidation in the case of delinquency has
of King Abdullah. As such, we anticipate it will come into
                                                                    deterred banks from expanding lending in this segment. If
force by next year following a number of delays.
                                                                    protections for banks are adequate, they will in the long run
                                                                    be willing to increase the risk profile for borrowers, which
Until now, someone hoping to buy a home would either dip
                                                                    could create greater loan opportunities for lower-income
into family savings or get a bank loan–options reserved
                                                                    Saudis. With a mortgage law in place, borrowers would also
for those who could afford substantial down payments,
                                                                    eventually be able to secure loans at lower costs because of
repayment schemes of 15 years or less, and high interest
                                                                    the legal backing involved in mortgage financing.
charges. Mortgage recipients thus fell into a relatively low–
risk profile for banks. A mortgage law could change the
entire equation, but it would do so at the expense of some
                                                                    Curbing lending risks
social protections which safeguard tenants against eviction         It will take time before the benefits of the mortgage law will
from their homes. The law could challenge this norm by              be fully felt as banks will need to test the legal system’s
allowing banks to repossess properties and evict owners             ability to enforce evictions. Banks, meanwhile, would
who default on loan repayment.                                      slowly need to restructure mortgage financing schemes
                                                                    to eliminate charging interest on the principal amount
Globally, foreclosure rules enable banks to demand                  recurrently throughout the loan’s duration rather than on
repayment if a homebuyer fails to pay instalments. In the           the reduced amount.
event of a default, a judge appoints an agent to sell the
property in a public auction to pay off the mortgage. This          The law’s passage coincides with a period of continued
practice is often regarded as inconsistent with the values of       risk-aversion among Saudi banks in the aftermath of the
Islamic law, so it will be crucial to monitor how the law handles   global financial crisis. Many banks have nonetheless cited
this issue. Mortgage finance regulations have nonetheless,          retail banking as a key growth segment, and once mortgage
been applied successfully in other predominately Muslim             financing rules are entrenched, banks will lend more. But
countries such as Egypt and Malaysia.                               they will be cautious not to support the creation of a sub-
                                                                    prime market comprising individuals barely able to keep up
The draft Saudi law contains five components, including             with instalments, particularly if interest rates begin rising as
regulations on mortgage registration, enforcement, financial        is likely to happen starting next year. To curb lending risks,
leasing companies, real estate financing companies and              banks should apply reasonable income caps such that any
general finance companies. It is crucial that the law set up        borrower cannot take a mortgage of more than one third
a central body to register title deeds, replacing the current       to 40% of their total income. The law should also maintain
system of having notaries public record deeds in a less-            a “safety ratio” of around 50% of gross income to prevent
standardised way.                                                   lenders from over-extending themselves.

Under Islamic mortgages, banks buy the property on behalf           Mortgage standardisation would further improve efficiency


  March 2011

                                                        Villa prices out of reach for common Saudis
 Property cost
 Median asking price of small Riyadh villa                                                                       SR 1.23 million
 Median asking price of small Jeddah villa                                                                       SR 1.54 million
 Median asking price for small Eastern Province villa                                                             SR 768,333
 Mortgage terms
 Assumed down payment                                                                                                 20%
 Monthly mortgage instalment vs salary ratio                                                                          36%
 Loan profit/interest rate                                                                                             6%
 Tenure of loan                                                                                                     15 years
 Monthly salary requirements
 For Riyadh villa                                                                                                  SR 22,972
 For Jeddah villa                                                                                                  SR 28,879
 For Eastern Province villa                                                                                        SR 14,408
 Typical Saudi monthly salary                                                                                      SR 8,000

 Source: Banque Saudi Fransi research

and reduce transaction costs of home loan providers. Banks                      Mortgage loan schemes typically reduce the initial down
could carry out due diligence on master developments only                       payment homebuyers require to make a purchase, which
once, enabling them to concentrate on assessing the credit                      opens the door to greater home ownership among youth.
quality of individual borrowers.                                                In many countries, borrowers can take 25-30 years to
                                                                                repay a mortgage, but we anticipate among Saudi banks,
While it is hoped the law’s passage will allow much wider                       mortgages repayment periods would likely span 15 to 20
access to property ownership, such a reality could take                         years at the onset.
time. Egypt passed a mortgage finance law in 2001 and, a
decade later, the sector is still in its infancy. A key hurdle                  An evaluation of prices for villas and apartments against
has been the discrepancy between the high cost of financing                     average public and private sector wages illustrates the
and the low incomes of the largest pool of possible home                        affordability challenge facing the kingdom. Assume a Saudi
buyers. Saudi Arabia’s challenge will be to expand the base                     buyer, a man who relies on his income alone to support a
of beneficiaries from the system. Apart from banks, the                         wife and three children, purchases an apartment of 190 sq
mortgage law is poised to pave the way for independent                          m in size for SR574,167 in Riyadh (the median price in our
home financers, such as Real Estate Finance Co (REFCO),                         H2 housing survey). Prices in Jeddah are higher than this
partly owned by the Saudi Public Investment Fund, which                         while those in the Eastern province are lower.
plans to offer mortgages once the law is in place.
                                                                                Assume he places a down payment of 10%, or SR57,417,
The affordability challenge                                                     with a bank and receives a flat-rate mortgage of SR516,750
For the mortgage law to have a meaningful impact on the                         to cover the remainder of the loan. Rules specify this loan
market, financing terms would need to become attainable                         must be repaid over 15 years at an interest or profit rate
for common Saudis. An obstacle to this is prevailing wages                      of 6%. The family’s home loan payment would amount to
in the public and private sectors, which in many cases are                      SR4,361 per month, requiring a monthly wage of at least
not conducive to home ownership. Interest rates, too, are                       SR12,113 (SR145,354 per year), supposing the instalment
sometimes prohibitive, currently ranging between 3% and                         represents 36% of the buyer’s income.
7% for personal loans in Saudi Arabia, depending on the
tenure and type of loan.                                                        The same family’s monthly income would need to be almost


 March 2011

                                                                        Home ownership out of reach for many govt employees
                 23,000             * Shows monthly salary of public sector employees with five-years in position. Numbers 1-15 refer to salaries by grade of general personnel
                 21,000             * Minimum salary assumes 15-year mortgage with fixed 6% interest rate                                                                                                        20,250
                 19,000                                                                                                                                                                                18,555
                 17,000                                                                                                                                                                       16,330
                                                                                                                                                                                 15,550 16040
 (SR, monthly)

                 15,000                                                                                                                                                 14,415
                                                                                                                                                        12,780 12,805
                 13,000                                                                                                                        12,113
                                                                                                                                 11,230 11,870
                 11,000                                                                                                 9,810
                                                                                                     8,800 8,855
                  9,000                                                                     7,520
                  7,000                                                           6,470
                  5,000                                         4,590
                  3,000     2,185 2,770
                            Grade     Grade   Grade    Grade    Grade    Grade    Grade     Grade    Grade Investigation Grade    Grade    First Minimum Grade Pharmacist Grade Resident Judge Grade Professor Grade Minimum Court
                              1         2       3        4        5        6        7         8        9     assistant 10          11 investigator salary  12              13    doctor (Degree 5) 14 (Degree 5) 15    salary president
                                                                                                            (Degree 5)                  (Degree 5) for                                                                  for (Degree 5)
                                                                                                                                                   large                                                             basic villa
                          Source: Ministry of Civil Services, Banque Saudi Fransi research                                                       apartment

double that to finance a villa purchase. The median cost                                                                                   General public service personnel with five years on the
of a villa 300-400 sq m in size was SR1.23 million in H2.                                                                                  job are paid according to 15 grades ranging from monthly
Assuming the same interest/profit rate and a down payment                                                                                  wages of SR2,185 to SR20,250, all of which are too low to
of 20%, the family’s monthly instalment would be SR8,270,                                                                                  afford the Riyadh villa in question. In changes this month, the
requiring a salary of SR22,972 (SR275,660 per year).                                                                                       king ordered the minimum public sector wage to be raised
                                                                                                                                           to SR3,000. The average public service wage is SR8,644,
According to this rough guideline, the minimum salary                                                                                      although most employees earn an average wage of SR5,699.
required to mortgage villas and apartments is out of reach                                                                                 A substantial proportion of wage earners would thus also be
of a vast number of state and private sector employees,                                                                                    unable to finance a large apartment. Many higher-skilled
most of whom earn less than SR8,000 per month, for an                                                                                      public sector professions such as pharmacists, doctors,
annual salary of SR96,000 ($25,000). Even if loans were                                                                                    professors and court presidents are able to afford properties,
payable over 20 years, the minimum salary required for the                                                                                 although they may also demand higher down payments.
above apartment would be SR10,284 and SR19,503 for the                                                                                     The mismatch is even more evident in the case of private
villa.                                                                                                                                     sector wages, generally lower than public sector pay.

                                                               Average private sector wages fail to match home loan demands
                 24,000                                                                                                                                                                                                    22,972

                 14,000                                                                                                                                                                                  12,113
                  6,000                                                                                                                                                 4,850
                                                                                             3,016              3,156                3,321            3,640
                  4,000                               2,066             2,679
                               Services               Sales         Engineering           Clerical work      Farming and         Technicians in      Industrial     Specialists in    Managers &        Minimum            Minimum
                                                                      support                                 agriculture          scientifc,       processes,        scientific,       business         salary for         salary for
                                                                                                                                  technical &       chemical &       technical &       managers           large            basic villa
                          Source: Ministry of Labour, Banque Saudi Fransi estimates                                               humanities      food industries     humanties                         apartment
                                                                                                                                     fields                              fields


 March 2011

Incomes typically rise as productivity per capita increases,                                                      the monthly instalment burden. Most banks currently
but this will happen only as a greater number of Saudis                                                           require repayment in 15 years, although there are limited
participate in the private sector and salaries offered by                                                         loans carrying maturities of as high as 30 years.
private sector firms climb. At present, there is only one
Saudi employee for every nine expatriates employed in the                                                         Furthermore, interest or profit rates on mortgages would
private sector. This needs to change to enable improvement                                                        need to become less prohibitive. A rate of 3.5% would
in per-capita multipliers. We discussed the dynamics of the                                                       bring the Riyadh villa mortgage instalment down by
labour market and the demands for reform in a report issued                                                       almost SR1,300 per month and the apartment instalment
last month. Consumer appetite is also shifting and demand                                                         down by almost SR700, broadening the affordability band.
for apartments is bound to rise in the next two decades due                                                       Mechanisms to help buyers place larger down payments
to their relative affordability.                                                                                  would also be beneficial, but current wages pose an
                                                                                                                  impediment to this. One Saudi bank already offers home
Mortgage rates, meanwhile, will need to be gauged versus                                                          loans with no down payment, which could capture low-
rental yields; lower rental yields could entice prospective                                                       income clients but must be closely examined.
buyers to rent rather than borrow to build a home. Yet, if
given the right financing opportunities, most Saudis are                                                          Other schemes geared toward specific segments of
most likely to opt to own a home, even in a low-rental-yield                                                      the population could help pave the way to greater home
environment.                                                                                                      ownership. The Public Pension Agency and Dar Al Tamleek
                                                                                                                  have set up a real estate finance venture known as Masakin
Analysis: state cash alone won’t rectify                                                                          to offer public sector employees earning at least SR4,000
                                                                                                                  per month with competitive home finance schemes. The
sector struggles                                                                                                  sharia-compliant company has more than SR1 billion
Taking these factors into consideration, widening the pool                                                        of committed capital, and says it could offer a loan of
of eligible homebuyers through the introduction of the                                                            SR500,000 repayable over 25 years at an instalment of
mortgage law would require a number of supplementary                                                              SR3,346 per month – which would be exceptionally
factors take place. For one, banks should offer longer                                                            affordable for Saudi employees.
tenures for loan repayments – perhaps 25 years – to reduce

                                                               Mortgage loan repayment tenure, interest rate key to affordability*
                             4,500              4,360.63                                                                                                                                          13,000

 (Monthly installment, SR)

                                                            3,694.16                 3,702.16
                                                                                                                                                                                                           (Salary, SR)

                             3,500                                                                                  3,329.43
                                                                                                                                                          3,098.18                                10,000
                             2,500                                                                                                                                      2,320.44                  8,000

                             2,000                                                                                                                                                                7,000
                                                       15 years                            20 years                       25 years                                30 years
                                                                                                                                          * Data reflect median price for large Riyadh apartment
                                     Source: Banque Saudi Fransi research   Instalment (6% interest/profit rate)   Instalment (3.5% interest/profit rate)          Minimum salary required


  March 2011

                                                                       Residential plot prices gain, Jeddah and Khobar in focus
 (Median price per sq m)

                                               Riyadh                         Jeddah           Makkah             Dammam           Dharan             Khobar

                                   Source: Banque Saudi Fransi H2 2010 Real Estate Survey   H2 2008     H1 2009      H2 2009   H1 2010      H2 2010

Institutions have also helped employees buy homes through                                                   to estimates of the Riyadh Development Authority, some
in-house schemes. Saudi Aramco, for one, introduced                                                         77% of land plots in Riyadh are undeveloped.
a home ownership programme for employees in 1953
whereby it encouraged employees to build and buy homes                                                      The government could allocate large parcels of land for
in the Eastern Province by providing them free building plots                                               development with basic infrastructure. If land becomes
or grants for land purchases, as well as subsidising home                                                   more affordable, more people will be able to build and
loans. Such programmes should be made more widely                                                           own a home, putting to use REDF loans. This would reduce
available.                                                                                                  the burden on prospective homebuyers and give the
                                                                                                            government more time to address shortfalls in the labour
The mortgage law should trigger growth in Saudi Arabia’s                                                    market and the need to raise the wage equilibrium. Public
home finance industry in the medium term, although short-                                                   funds such as the Public Pension Agency, GOSI and the
term implications will be minimal unless the government                                                     Public Investment Fund could also be granted plots of land
increases the availability of land, pushing down prices to                                                  and become developers of affordable housing, shouldering
levels more affordable for common people. Land prices                                                       the risk of mortgage financing along with banks.
rose exponentially in the past 10 years and, while there
was a reprieve in 2009 during the economic downturn, the                                                    The mortgage law will over time push out the limits of
cost of a plot of residential land began accelerating again                                                 major cities; 40 years ago, Riyadh spanned just 64 sq km
in 2010. The median price per sq m of land in Jeddah was                                                    and now the city occupies more than 1,000 sq km. Even
up 9.8% in H2/2010 compared with the year earlier, while                                                    if land is made more affordable rates on the periphery of
prices rose almost 6% in the Eastern Province, our housing                                                  cities, there are currently few public transport alternatives
survey showed. Riyadh land prices climbed almost 3% in                                                      to accommodate for this suburban expansion, which will
H2 from H1.                                                                                                 need to be rectified as horizontal sprawl continues. It
                                                                                                            is crucial, therefore, to recognise that while the state’s
It is therefore imperative in any housing market reform to                                                  big cash injection in state-run REDF this year signals its
consider providing residential land, supplemented with basic                                                commitment to facilitating greater home ownership among
services and facilities, at reasonable rates in major urban                                                 citizens, structural issues facing the housing sector cannot
centres to cater to these potential homebuyers. According                                                   be resolved by state spending on its own.


 March 2011

                                                                      Key Saudi Arabia Economic Indicators
                                                              2002       2003        2004        2005       2006      2007       2008      2009     2010e       2011f     2012f
 Nominal GDP (USD bn)                                        188.6       214.6       250.3      315.3       356.2     384.7      476.3     372.7     434.7      478.6     519.3
 Nominal GDP (SR bn)                                         707.1       804.6       938.8     1,182.5     1,335.6   1,442.6    1,786.1   1,397.5   1,630.0    1,794.9   1,947.5
 YoY % change                                                  3.0        13.8       16.7       26.0        12.9        8.0      23.8      -21.8     16.6       10.1       8.5
 Real GDP growth rate, %                                       0.1         7.7        5.3        5.6          3.2       2.0       4.2        0.2      3.8        4.2       4.4
 Non-oil private sector real GDP growth rate, %                4.1         3.9        5.3        5.8          6.1       5.5       4.6        2.7      3.7        4.2       4.5
 Government real GDP growth rate, %                            2.9         3.1        3.1        4.0          3.1       3.0       3.7        5.2      5.9        5.3       4.7
 Oil sector real GDP growth rate, %                           -7.5        17.2        6.7        6.2         -0.8      -3.6       4.2       -7.6      2.1        3.5       4.0
 Inflation, YoY % change                                      0.2         0.6         0.3        0.7         2.2       4.1        9.9       5.1       5.3        5.1       4.8
 GDP per capita (USD)                                        8,774       9,744      11,111     13,640      15,041    15,868     19,200    14,687    16,039     17,279    18,286

 Total government revenue (SR bn)                            213.0       293.0       392.3      564.3       673.7     642.8     1,101.0   509.8      735.0     769.0      798.3
 Total government expenditure (SR bn)                        233.5       257.0       285.2      346.5       393.3     466.2      520.1    596.4      626.5     676.0      718.0
 Deficit/surplus (SR bn)                                     -20.5        36.0       107.1      217.9       280.4     176.6      580.9    -86.6     108.50      93.0      80.3
 Budget balance, % of GDP                                     -2.9        4.5         11.4       18.4        21.0      12.2       32.5     -6.2       6.7       5.2        4.1
 Domestic debt (SR bn)                                       558.0       660.0       610.6      459.6       364.6     266.8      235.0    225.1     167.0      145.0       137
 Domestic debt as % GDP                                      78.9        82.0        65.0       38.9        27.3      18.5       13.4     16.1       10.2       8.1        7.0

 Total export revenues (USD bn)                               72.3       93.0       125.7       180.4       210.9     233.1     313.4     192.2     236.3      249.9      268.5
 Oil export revenues (USD bn)                                 63.6       82.0       110.4       161.6       188.2     205.3     281.0     163.1     203.2      212.4      227.3
 Total imports (USD bn)                                       29.6       38.3       43.5        53.8        63.0      81.5      100.6     86.4      87.0       97.4       112.0
 Current account balance (USD bn)                             11.9       23.3       49.3        90.0        98.9      93.3      132.3     22.8      69.6       63.1       58.8
 Current account as % of GDP                                  6.3        10.8       19.7        28.5        27.8      24.3      27.8       6.1      16.0       13.2       11.3

 Saudi riyal                                                  3.75       3.75        3.75        3.75       3.75      3.75       3.75      3.75      3.75       3.75      3.75

 Bank claims on private sector, year-end % change             10.0       11.0        37.4        38.9         9.2      21.4      27.1     -0.04       6.6       9.1       11.1
 Total private credit, year-end % change                      12.4       11.3        37.0        38.9         9.8      20.6      27.9      -0.6       7.3       8.8       10.2
 Total bank credit, year-end % change                         12.3       17.2        34.5        36.2         9.8      19.7      25.2      -1.1       8.4       8.6        9.5
 Broad money M3, YoY % change                                 14.7        6.9        18.8        11.6        19.3      19.6      17.6      10.7       5.0       9.7       10.4
 SAMA net foreign assets (USD bn)                             41.9       59.5        86.4       150.3       221.1     300.9     437.9     405.3     440.41     470.8     499.1
 Repurchase Rate (year-end)                                   2.00       1.75        2.50       4.75        5.20      5.50      2.50      2.00       2.00      2.00      2.50

 Gross fixed capital formation, % of GDP                      18.1       18.4        16.7        16.5       17.5      20.5       19.5      24.7      23.9       24.8      26.5
 Non-oil government investments, % of GDP                      2.6        2.9         3.2         4.6        4.4       5.8        6.2       8.6       8.7        8.6       8.4
 Non-oil private investments, % of GDP                        13.8       12.9        11.6        10.0        9.7      10.1        9.6      12.0      11.0       10.9      10.7
 Gross domestic savings, % of GDP                             37.1       41.8        45.9        51.3       50.1      48.5       52.8      37.1      41.8       42.3      40.9
 Government savings, % of GDP                                 -0.9       6.0         14.0        23.6       26.2      20.5       40.7      6.6       12.1       16.5      17.8
 Private savings, % of GDP                                    38.0       35.8        31.9        27.7       23.9      28.0       12.1      30.5      27.6       23.5      24.3

 Population (in millions)                                     21.5        22.0       22.5        23.1       23.7       24.2      24.8      25.4      27.1       27.7      28.4
 Non-Saudi                                                    5.8          6.0        6.1         6.3       23.7        6.6      6.7        6.8       8.4        8.6       8.9
 Unemployment rate (%) Saudi                                  9.7         10.4       11.0        11.5       12.0       11.0      9.8       10.5      10.0       10.7      10.9
 Non-Saudi                                                    0.8         0.8        0.8         0.8        0.8        0.4       0.4       0.3       0.4        0.4       0.3

 Argus Sour Crude Index (ASCI)                                                                              59.4       66.4      93.8      60.4      76.0       79.4      82.1
 Average oil price (WTI) (USD/barrel)                         26.3        31.3       41.3        56.6       66.1       72.3     100.2      62.1      79.5       82.5       85
 Average Saudi oil price (USD/barrel)                         23.4        26.8       34.5        49.5       60.5       68.1     93.4       61.4      77.0       79.0       81
 Crude oil production (million bpd)                           7.09        8.41       8.90        9.35       9.21       8.82     9.20       8.18      8.19       8.48      8.75

 STOCK MARKET INDICATORS                                                                                                                                      Jan. 2011 Feb. 2011
 Tadawul Stock Index (TASI) (period-end)                    2,518.1     4,437.6     8,206.6    16,712.6    7,933.3   11,038.7   4,803.0   6,121.8   6,620.8    6,358.03 5,941.63

 Source: Saudi Arabian Monetary Agency, other Saudi Arabian government authorities, Banque Saudi Fransi forecasts


  March 2011

Disclosure appendix
Analyst certification
The analyst(s), who is primarily responsible for this report, certifies that the opinion(s) on the subject security(ies) or issuer(s)
and any other views or forecasts expressed herein accurately reflect their personal views and that no part of their compensation,
was, is or will be directly related to the specific recommendations or views contained in this research report.

This report is designed for, and should only be utilised by, institutional investors. Furthermore, Banque Saudi Fransi believes an
        ,                                                                                                     ,
investor s decision to make an investment should depend on individual circumstances such as the investor s existing holdings
and other considerations.

Additional disclosures
1 - This report is dated as at 20 March 2011.
2 - All market data included in this report are dated as at close 19 March 2011, unless otherwise indicated in this report.
3 - Banque Saudi Fransi has procedures to identify and manage any potential conflicts of interest that arise in connection with
its Research business. A Chinese Wall is in place between the Investment Banking and Research businesses to ensure that
any confidential and/or price-sensitive information is handled in an appropriate manner.

This report is prepared for information only. Where the information contained in this report is obtained from outside sources,
Banque Saudi Fransi believes that information to be reliable. However, Banque Saudi Fransi does not guarantee its completeness
or accuracy. The opinions expressed are subject to change without notice and Banque Saudi Fransi expressly disclaims any
and all liability for the information contained in this report.

The report only contains general information. It should not be construed as an offer to sell or the solicitation of an offer to
purchase or subscribe to any investment. The specific investment objectives, personal situation and particular needs of any
person have not been taken into consideration. Accordingly, you should not rely on the report as investment advice. Neither
Banque Saudi Fransi nor any of its affiliates, their directors, officers and employees will be liable or have any responsibility of
any kind for any loss or damage that may be incurred as a result of the information contained in this report.

                                                                                      Designed by Corporate Communications Dept. / Banque Saudi Fransi

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