(MENAFN - Arab News) Although real estate loans in Q1, 2012 increased by SR 29.3 billion, experts still consider real estate debts as risky even after the enforcement of three mortgage regulations.
Banks and real estate development companies are still waiting for the formal approval of two of mortgage regulations. Experts say the issuance of three of five final regulations on real estate mortgage law is expected to encourage competition, but the market will start benefiting only after five years of implementation.
Saudi Arabian Monetary Agency (SAMA) recently issued its 48th annual report, which reviews the latest developments witnessed by the Saudi economy during fiscal year 2011 and the first quarter of fiscal year 2012. The report confirmed that loans granted for financing real estates grew by 26.9 percent (SR 6.2 billion) to SR 29.3 billion, constituting 12.1 percent of total consumer loans compared to a rise of 29.3 percent (SR 5.2 billion) in the preceding year.
The package goes into effect when regulations for the two remaining laws are implemented, which should be in the coming month, said Fahad Al-Turki, head of research department in Jadwa Investment.
"The mortgage law, which has been debated for a long time, will not have a big impact in the short term, rather it will increase the real estate debts once the banks become comfortable with it. The two elements that would make the banks comfortable with the mortgage laws include the speed of implementation, and enforcement," he stated.
"Although the long term benefits are clear, we do not think there will be a large immediate response, as lenders will test the mortgage framework before they become comfortable with it. It will take some time before this can happen, as it requires a new borrower to fail to honor their repayments consistently. Lenders may not be completely comfortable with the legislation until they can see the revenue they will obtain from the sale of a foreclosed property; the law states that foreclosed real estate will be sold through an auction system.
According to Al-Turki, banks will start benefiting from this law after five years. "We think it will take some time before the full benefits of the mortgage law are realized and that the initial impact will probably not be substantial. Rather than one law, what was approved is a package of five laws that not only provides the framework for enforcement of mortgage contracts, but also cover mortgage registration and real estate financing companies. Detailed policies, implementing regulations and licensing arrangements are in the process of being drawn up and should be issued in March," he added.
According to report issued by Jadwa, less than half of the Kingdom's population owns their own homes. This is primarily because those in low and middle incomes have been unable to afford a property. In turn, this has contributed to shortage of housing for this market segment. As a result, rents have risen rapidly (by an annual average of 11.4 percent between 2007 and 2011) and the absence of affordable housing has become a central issue for many.
"Housing finance from banks and some property developers have been available for some time, but generally lenders have adopted conservative standards, so mortgage penetration is low. Mortgage debt accounts for around 2 percent of GDP in the Kingdom, compared with more than 70 percent of GDP in the US and the UK. The main concern of lenders has been legal uncertainty over foreclosure. The mortgage law codifies the foreclosure process and will therefore give housing finance providers better confidence to lend. In the event of a bankruptcy, the mortgage is senior to all other loans," he said.
Hossam Al-Rashoud, CEO of Maskan Arabia, stated that the absence of clear regulations is still delaying the implementation of mortgage law.
He added: "Lenders have to trust the mortgage law in order to start implementing it. There are many laws in the Saudi market that are not implemented yet, because of missing regulations and details."
Abdullah Al-Rashoud, CEO of BlomInvest Bank in Saudi Arabia, doesn't expect the new regulations to boost real-estate loans positively.
"I don't think the new regulations would have an effect on the attractiveness on the real estate loans as it will not decrease the interest rate of such loans. However, it would facilitate lending to real estate development companies. Besides, it would increase the number of people who are eligible to take loans.
Yet, the regulations are still missing coverage, especially those related to enforcement mechanism in case of foreclosures. I believe it needs 1-2 years to test its effect. Everybody remembers that the stock market did not respond to many decisions to boost its trading," he said.