Reviewing the partial regulations for the Saudi Mortgage Law published by SAMA, NCB Capital, the GCC’s leading wealth manager and the Kingdom’s largest asset manager, believes that the regulations are positive and will impact the banking sector in the medium to long term.
The final approved draft of three of the five laws forming the Real Estate and Financing Law published by SAMA relate to (1) Real Estate Financing (2) Financial Leasing (3) Supervision of Finance Companies. The law related to foreclosures in case of non-payments “The Execution Law”, and the “Registered Real Estate Mortgage Law” are yet to be published.
“The aim of the regulation is to separate the mortgage lending function from commercial banks, similar to separating the commercial banks from the securities business,” said Mahmood Akbar, Equity Research Analyst at NCB Capital. “If the banks need to create separate entities to deal with mortgage lending, the benefit from the proposed law will materialise in the long-term.”
Financing and re-financing companies will be heavily regulated since SAMA has introduced a set of strict regulations to ensure the stability of the new sector and to protect borrowers. This includes, among others, promoting transparency of activities (Article six and 26, Real Estate Finance Law), preventing speculative real estate investments (Article 23 and 24 of the Real Estate Finance Law) and fair pricing (Article 20 of the Real Estate Finance Law).
“We believe this is positive for the Kingdom as it fully tackles many of the issues facing the real estate market,” commented Mr. Akbar.
A real estate refinancing company called “The Saudi Real Estate Refinancing Company” is expected to be formed by the Public Investment Fund and will have a paid up capital of SR5bn. This new entity will purchase the mortgages from the real estate companies, securitise them and issue mortgage-backed securities. This will offer investors alternative channels for real estate exposure which may ‘free up’ some of the undeveloped land owned by wealthy families.
“In our view, the law is part of a long-term vision and not to the short-term benefits of the corporate sector,” said Mr. Akbar. “While we believe the proposed law will have medium and long term benefits to the economy, it is unlikely to have an immediate positive impact either on real estate companies or banks. Indeed, we see the regulations as attempting to establish a stable, efficient and sustainable market for mortgages which should support Saudi’s long-term social reforms.”
Concluding his comments, Mr. Akbar said: “In our review we do not factor in additional growth in our banks’ models to incorporate the proposed Mortgage Law. Indeed we believe the recent increase in consumer real estate financing is related to banks’ “chase for yields” rather than in anticipation of the regulatory changes. Given the recent decline in NIM’s in the corporate segment, we see banks gradually changing the asset mix more towards the consumer finance segment and in particular real estate financing which would limit the decline in margins. The management of most banks we met recently have indicated that they expect to see higher consumer lending growth in 2013E driven by real estate financing.”