The Council of Ministers, chaired by Custodian of the Two Holy Mosques King Abdullah, approved on Monday the much-awaited mortgage law, which would regulate the Kingdom's real estate financing and investment, and boost its mortgage market.

Finance Minister Ibrahim Al-Assaf said the mortgage law, which was passed by the Cabinet, would develop a new real estate finance market in the Kingdom. It will also help Saudis get Shariah-compliant finance to build their homes.

Al-Assaf said the Saudi Arabian Monetary Agency (SAMA) would allow banks and licensed companies to finance real estate projects. The state-owned Public Investment Fund can participate in the new real estate holding companies to be licensed by SAMA.
"The law gives necessary flexibility to make optimum use of real estate and movable assets in the country," Culture and Information Minister Abdul Aziz Khoja said while explaining the Cabinet decisions.

SAMA Gov. Fahd Al-Mubarak said his organization is honored for being given the privilege to supervise the real estate financing sector and non-banking financial firms. He said the executive bylaw drafted by SAMA for real estate financing sets its operation mechanism and protects the rights of consumers.

"This has been a great day for the housing sector. These long awaited laws will contribute tremendously to the development of real estate sector. It will also allow the financial sector to play a bigger role in mobilizing adequate resources to meet the domestic demand for housing. The developers in Saudi Arabia should take advantage of the issuance of the laws by expediting their projects. The creation of a well regulated market will also help many other sectors which are connected to the real estate sector," said Khaled Al-Aboodi, CEO and general manager of Islamic Corporation for the Development of Private Sector (ICD), a private sector arm of the Islamic Development Bank Group.

The newly approved mortgage law is envisioned to primarily minimize the risk on the lenders' side (banks and financiers), which in turn should translate into more affordable rates for a wider base of customers. However, if the supply of houses does not quickly catch up with existing and expected demand, the continued appreciation of property values will diminish any advantages from the lower rates. "This is what companies like KEC (master-developer of Knowledge Economic City in Madinah which is envisioned to have nearly 30,000 residential units) are doing and we need more community developers with sizable developments," Khaled A. Tash, vice president, Marketing & Sales - Knowledge Economic City (KEC), told Arab News.

Basil Al-Ghalayini, CEO of BMG Financial Group, said: "This long awaited approval is a historic development and a milestone in the real estate sector of the Saudi financial market. We have been anticipating the approval of this law for years now. With over 60 percent of the Saudi adult population who still do not own their residences, this new law will serve them in getting cheaper financing for their future homes."

Al-Ghalayini added: "It will serve all other parties involved including mortgage providers, sukuk issuers, property developers, appraisal firms, etc. It will definitely regulate this virgin but potentially huge market of SR170 billion and will make it more attractive to local and regional property developers and financiers."

Commenting on the Cabinet decision, Paul Gamble, chief economist and head of research at Jadwa Investment, said: "Passing the mortgage law is a very important step. It will make housing more affordable for many of the population. In addition, to widening home ownership, it will also improve building standards and transparency, as developers have to be licensed and properties approved to be eligible for a mortgage. This will encourage developers to enter the market and as they can exploit economies of scale, should reduce prices."

However, Gamble cautioned lenders will be cautious about providing mortgages until they have comfort in the law, particularly with regard to foreclosure. In addition, he said: "With mortgage financing likely to be more expensive than that offered by the Real Estate Development Fund, demand might not be high initially. Furthermore, while a mortgage law helps to address affordability, it does not increase supply of housing, in fact higher demand stemming from the availability of mortgages could cause prices to rise."

Jarmo T. Kotilaine, chief economist at the National Commercial Bank, said: "This is naturally eagerly awaited and very welcome news. It has the potential to lend a major impetus to the development of the Saudi housing market at a time when the need for new supply is acute. Although we have seen a lot of banks redouble their efforts in this space, the new law should substantially boost access and affordability."

However, Kotilaine warned: "It is important to realize that this law is not a 'magic bullet.' It will not instantaneously transform the market. But it will give all participants greater comfort and hopefully ensure the sustainable development of the market. Overall, one of the most important pieces of 'enabling legislation' to have come in the area of Saudi financial markets."

CBRE said in its Saudi real estate market review recently that as the supply and demand gap continues to widen in the Saudi housing sector, affordability, access to mortgage finance and the lack of suitable products remain the key barriers to home ownership among Saudi nationals.

Saudi Arabia has the largest real estate market in the GCC but the least developed mortgage market, and this has resulted in a shortage of owner-occupied residential housing, particularly at the lower end of the income scale.

The CBRE report said Saudi Arabia's mortgage penetration rate is estimated at around 2 percent, while markets such as the UAE have rates at around 14 percent. Even this figure is well below mature Western markets, for example, the United Kingdom where the penetration rate is currently around 70 percent.

"It is a very welcome development," said Asad Shareef, an Alkhobar-based real estate consultant. "Most of us in our industry were looking forward to it. This will provide the much-needed injection to the Kingdom's real estate sector."

According to him, the new development will lead to a phenomenal resurgence in the housing sector. "This will be the game-changer as far the housing sector is concerned," Shareef said.