The Council of Ministers, chaired by Custodian of the Two Holy Mosques King Abdullah, enacted on Monday a law that will enable mortgages to be sold in the Kingdom.

The much-awaited Mortgage Law would regulate the Kingdom's real estate financing and investment, and boost its mortgage market.


Finance Minister Ibrahim Al-Assaf said the mortgage law 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 has been allowed to participate in the new real estate holding companies that are 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 is a great day for the housing sector. These long awaited laws will contribute tremendously to the development of 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.

“It will also allow the financial sector to play a bigger role in mobilizing adequate resources to meet domestic demand for housing,” he said, adding 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," he said.

The 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 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."

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 would 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.”

Shariah-compliant

Al-Assaf thanked King Abdullah for giving his full support for the measure and said it would develop a new real estate finance market in the Kingdom. “The law will also help Saudis get Shariah-compliant financing to build their homes.”

He said the law would play a big role in solving the Kingdom’s housing problem, allowing banks and companies to finance more real estate projects across the country.

He said the private sector was waiting for the law to establish real estate financing companies.

Al-Assaf said the Saudi Arabian Monetary Agency (SAMA) would allow banks and license 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.

“SAMA will also issue licenses to establish insurance companies that would cover real estate finance risk.”

SAMA will also issue the criteria and measures to be followed for real estate financing.

The Real Estate Development Fund (REDF) will allocate part of its budget to support and guarantee real estate finance.

A special court will handle disputes related to real estate finance, the minister said.

“We will also create new real estate financing products that would be traded on the Saudi bourse like Sukuk.”

Al-Assaf valued existing real estate assets at hundreds of billions of riyals. “All these assets would be utilized to boost the national economy.”

He said the government is mainly concerned with protecting the rights of all parties involved in the business.

He said REDF would provide new products to finance Saudis’ real estate projects in cooperation with banks and financing firms.

He also emphasized the importance of the finance leasing law passed by the Cabinet, saying it would cover real estate properties.

The maximum amount for real estate finance would be determined by the executive bylaw, the minister said. “The financing will be within the limit of solvency in order to avoid financial crises that occurred in the US and other countries.”

He added SAMA would monitor the market to avoid foul play.

Culture and Information Minister Abdul Aziz Khoja, elaborating on the Cabinet decision, said: “The law gives necessary flexibility to make optimum use of real estate and movable assets in the country.”

The Finance Ministry will set out general policies for real estate financing in association with the Housing Ministry and other relevant agencies and present them to higher authorities for approval.

Khoja said the new mortgage law would lead to the establishment of a strong real estate market in the Kingdom with the formation of holding companies in association with real estate developers.

“It will also help beneficiaries to own real estate properties easily making use of services of real estate firms under SAMA’s strict supervision.”