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Sun 27 Mar 2011 10:29 AM

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Saudi's $67bn cash boost no quick fix for property woes

Kingdom to spend $67bn on 500,000 new units as population outpaces housing

Saudi's $67bn cash boost no quick fix for property woes
Banque Saudi Fransi said Saudi Arabia needs to build about 275,000 units a year through 2015 to meet demand for about 1.65 million new homes

Saudi King Abdullah's bumper cash pledge to build more homes
shows the kingdom's intent to address vast undersupply in the world's biggest
oil exporter, but there is no quick fix for its property woes.

In a rare televised speech last week the elderly king
announced $93bn in social handouts, the second benefits package to be unveiled
within a month, and included SR250bn ($67bn) to be spent on 500,000 new homes.

The move was part of the ruler's efforts to stave off a wave
of Arab unrest that has gripped neighbouring Bahrain, Yemen and Oman, and to
strengthen the pillars of Saudi family rule. It was also a direct call of
support for affordable housing across the country.

"We see that it's a commitment and recognition of a
challenge facing Saudis but we don't expect it to have immediate impact, with
substantial time needed to deliver the number of housing units," said
Monica Malik, chief economist at EFG-Hermes in Dubai, adding it could take some
five years before the homes would be built.

A report by Banque Saudi Fransi said private and public
developers need to build about 275,000 units a year through 2015 to meet demand
for about 1.65 million new homes in the country.

In another to move to address the problem, the kingdom on
Friday set up a ministry for housing.

However, the absence of a clear mortgage law, which has been
in planning stages for almost a decade, has left Saudi with no framework to
govern property ownership, deterring foreign banks from lending and private
developers from entering the market.

Saudi Arabia has only has a two percent mortgage penetration
in its real estate market, industry experts said.

"Only 30 percent of Saudis actually own homes and less
than one percent of all homes purchased are financed by mortgages," Waseem
Saifi, the global Islamic Banking head at Standard Chartered Bank said earlier
this month.

"Most development so far has happened at the upper end
.... we need to see a lot of additional units coming at the middle level where
demand is really there from the Saudi community."

Saifi said there isn't a robust real estate market in Saudi
Arabia to attract investors and one of main reasons is that the mortgage law is
yet to be passed.

"So, most of the financing would be state-assisted
financing with some element of personal loans as well as family loans trying to
provide bridging of the gap."

Banks do extend loans to wealthy Saudis but there is
currently no legislation on what should happen if a borrower defaults.

That makes banks reluctant to lend more widely and forces
average Saudis to rely on the state-run Real Estate Development Fund (REDF),
which offers sharia-compliant, interest free loans.

While the draft law is still waiting for approval, industry
players continue to worry about when it will actually be passed and remain
sceptical over its effective implementation.

"Banks are going to see how the law is implemented
first. It's not as if they will open the flood gates and release capital to
everyone," said John Sfakianakis, chief economist at Banque Saudi Fransi.

Even if and when passed, the law is unlikely to solve the
housing deficit completely.

"What the law does is provide access to financing but
does not necessarily solve the affordability issue, unless you have downward
pressure on prices," Sfakianakis said, adding this would require the
supply of more land.

The average price of a small villa in the kingdom's capital
Riyadh rose 19 percent in the second half of 2010 while prices in Jeddah rose
17 percent, Banque Saudi Fransi said in its report.

The minimum salary required to mortgage villas and
apartments is out of reach for a vast number of state and private sector
employees, most of whom earn less than 8,000 Saudi riyals ($2,133) per month,
the bank said.

"The other way to fix it is to raise incomes, which is
not a short-to-medium term solution," Sfakianakis said.