Falling Mortgage Loan Rates Could Boost Housing and Allied Sectors in the Kingdom of Saudi Arabia

Published on 23 Mar, 2017

Saudi Arabia Real Estate Sector Analysis

Mortgage loan rates in the KSA are coming down after state-owned Saudi Real Estate Development Fund’s (REDF) launched aggressive programmes like “facilitated mortgage” to develop a subsidized housing finance ecosystem in partnership with various commercial banks. 

In the most recent development, the interest rates for some mortgage loans in KSA have fallen from 15.0% to 10.0% under its flagship “facilitated mortgage programme”. The Real Estate Development Fund (REDF) recently signed various cooperation modules and agreements with Banque Saudi Fransi (BSF) as well with regards to providing housing finance to over 1.2 million eligible Saudi Citizens.

Under the partnership agreement, REDF will be responsible for 100% of finance charges for low and middle-income individuals, while citizens will only pay for a goodwill loan.

For the high-income individual group, the REDF will bear 35.0% of finance charges, while the rest would be paid for by the individuals.

The agreements allow Banque Saudi Fransi to participate in REDF’s subsidized housing loan programs, allowing it to diversify its loan book and reduce overall risk, with the Ministry of Housing standing as a conditional guarantor for such loans.

The housing and real estate sectors are important for the kingdom’s transformative vision 2030 and National Transformation Program (NTP). The NTP laid down several measures to improve the sector’s efficiency and economic sustainability, and the Saudi government is keen to attract more investments in these sectors in order to increase the availability of capital and achieve its long-term targets.

The Ministry of Housing and REDF are collaborating with commercial banks and housing finance companies to develop various funding schemes. The NTP Vision 2020 has set the following objectives for the Ministry of Housing:

Strategic Objective 1: To improve performance of the real estate sector and increase its contribution to the GDP


           Units          
 Current Statistics                 
 2020 Target              
International Benchmark                             

Increase Real estate sector contribution to GDP from 5.0% currently to 10.0% by 2020.  

  %

       5

    10

       20

Annual growth rate of real estate sector   

  %

       4

     7

       11

Average time required to license new residential real estate development projects

  Days


       730


     60


       26


Source: National Transformation Program 2020

Under various REDF programs, the Ministry of Housing plans to allot 120,000 housing units this year to the most deserving citizens such as widows, people with special needs, and financially backward citizens.Source: National Transformation Program 2020

The Ministry in collaboration with local banks and finance institution is ready with the first batch of 15,653 housing units and financial assistance, which includes 5,016 housing plots, 2,937 housing units, and financial support for 7,700 through its Real Estate Development Fund.

To tackle the housing shortage problem and counter speculation on rising land prices, the government introduced a white land tax on empty land parcels in urban areas, thereby increasing the supply of land available for affordable housing. Such programs, along with their social benefits, have positive ripple effects on the country’s economy and infrastructure.

According to recent figures from the Ministries of Justice, Labor and Social Development, the price of a square meter of land is around SAR5,000, whereas the average monthly salary of Saudi citizen (private sector) is SAR4,967. Around 60.0% of Saudis receive a monthly salary less that SAR10,000. The lack of affordable homes has been a constant complaint among many Saudis, especially the younger demographic.

Addressing the situation, Saudi Arabia’s central bank SAMA allowed commercial banks to lend as much as 85.0% of the value of home last year, as compared to the earlier maximum lending limit of 70.0%, which slowed the growth in the country’s home-finance market.

Strategic Objective 2: Enabling citizens to obtain sustainable housing finance

 

Units
Current Statistics
2020 Target 
International Benchmark 

Percentage of Saudi family owning homes

   %

      47

   52

      64

Percentage of real estate financing to non-oil GDP

   %

       8

   15

      75

Percentage of families who obtained housing subsidy out of the total enrolled families in

   %

       0

   40

      NA

Average waiting period to obtain housing financing.

 Years

      15

    5

      NA

Source: National Transformation Program 2020

The government’s emphasis on affordable housing and cheaper finance is a step in the right direction for the Kingdom, as positive developments in the real estate sector eventually trickle down to other major industries such as cement, power, and steel. The housing sector also has significant potential to create employment in the region, and could help the kingdom diversify its oil-dependent economy toward other sustainable sectors.  



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