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The Shifting Sands of Saudi Real Estate


New rules may loosen the country's mortgage market and bring homeownership to the masses

After five fruitless years of seeking a mortgage in Riyadh, 28-year-old Abdulaziz Al-Salem has some advice for his peers: forget it. "Homeownership in this country is nothing short of a nightmare," says the father of one. "If you're not descended from a wealthy family nor have an extremely successful business, you probably should give the whole thing a pass."

Saudi Arabia's housing stock has failed to keep up with a population that has quadrupled, to about 25 million, over the last 40 years. The country's underdeveloped home finance system and property law are a big part of the problem, analysts say. Now prospective Saudi homeowners are waiting to see whether the kingdom adopts new regulations designed to make mortgages more accessible. The oil-rich nation could support a home lending market of about $32 billion annually, given the pent-up demand for homes, according to Capitas Group International, an investment management firm.

A proposed law, which is part of an overhaul of the kingdom's home finance market, would change or create rules for everything from registering mortgages to letting judges prosecute policemen who won't carry out eviction orders. The changes are aimed at easing lenders' concerns that unclear regulation makes mortgage lending risky because of potentially lengthy court disputes. "You can't function as a mortgage finance business without having a law that regulates all activities," says Henry Azzam, Deutsche Bank's (DB) regional chief executive for the Middle East and North Africa. The new law would encourage lending by giving banks legal recourse to respond when a borrower doesn't pay, he says.

Plenty of details still need to be ironed out, particularly rules involving evictions and foreclosures, as well as bureaucratic tussles over which agency should regulate financial products covered under the legislation. A vote by the Shura Council, an advisory body to the king, on still-disputed sections of the law is expected in the coming weeks, after being postponed earlier this year. Should the government and the council fail to reach a consensus, King Abdullah has the power to decree the measure law without legislative approval, says Abdulaziz Al Gasim, a partner at the Al Gasim law firm who was involved with drafting the mortgage law alongside Allen & Overy, an international law firm founded in London.

If the legislation passes, many see a residential construction boom in the making. Credit Suisse (CS) estimates that 2 million homes could be built by 2014 as developers increase investment. Saleh Al-Shoaibi, head of the Shura Council's Economic Affairs and Energy Committee, thinks the country needs 18 million to 20 million homes over 10 years. "The demand is huge and can't be easily met," Al-Shoaibi says. "It will require a system that facilitates homeownership."

As things stand, fewer than 1 percent of Saudi home purchases are financed by mortgages. That compares with 7 percent in neighboring United Arab Emirates and 66 percent in the U.S., according to Deutsche Bank estimates.

One reason home loans are scarce in Saudi Arabia is that Saudi mortgages have strings attached. Lenders often demand the title to a property, stress their right to evict defaulters, and seek complete control over borrowers' bank accounts to prevent them from getting loans elsewhere. "I've been renting for the past 10 years, and that's money down the drain," says Badr Abdulla, a 29-year-old resident of Riyadh. "But that's still better than putting my life and bank account under the direct control of banks."

Some international banks are now trying to fill the void. Deutsche Bank and local Saudi Arabian investors led by Fahad Abdullah Abdulaziz Al Rajhi formed a $110 million joint venture for mortgages compliant with sharia, or Islamic law, in April that is already giving out 5- to 20-year mortgages to Saudis and foreigners. "The segment that we're targeting is the 500,000 riyal [$133,000] home mortgage," says Paul Loiacono, chief operating officer at Deutsche Gulf Finance. "The person looking for that is part of a young up-and-coming couple looking to buy a first home." Most of Saudi Arabia's demand comes from low- and middle-income consumers.

For frustrated homeowners like Al-Salem, the new mortgage law can't be passed soon enough. It's "the only way to free up the real estate market and bring it to the masses," he says. "It has to happen."

The bottom line: Unless Saudi Arabia passes a new home finance law, getting a mortgage will remain tough for young families.

Fattah is a reporter for Bloomberg News.

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