NCB Capital: Sama’s announcement a step closer to long awaited and much needed Mortgage Law

NCB Capital, the GCC’s leading wealth manager and the Kingdom’s largest asset manager, believes that SAMA’s recently published draft regulations moves the country closer to the enactment of the long awaited and much needed Mortgage Law. 

In a new report issued today commenting on the guidelines, NCB Capital highlighted that this illustrates the willingness of the Saudi government to reform and address the economic and social challenges it faces. However, NCB Capital noted that alongside financing issues, the other key obstacle in the housing market, that of lack of supply of affordable housing, also needs to be addressed in order for the Mortgage Law to have its full desired effect. 

The published draft regulations related to mortgage lending include: (1) Implementing regulation of real estate finance (2) Implementing regulations of financial lease law and (3) Implementing regulation of the law on supervision of finance companies. However, although these regulations are set to become official after a period of 30 days, it is expected to take at least 18 months preparation before Saudi banks can start lending based on the new guidelines. 

“We believe that the regulations introduced fully tackles many of the issues facing the real estate market including: speculation and real estate “bubbles”, the need for a real estate price index, transparency, and the creation of a secondary market for the trading of these mortgages including securitization,” said Mahmood Akbar, Banking research analyst at NCB Capital, commenting on the report. “However, we believe the proposed law in its current form does not tackle a key underlying problem; lack of suitable and affordable housing. Therefore, even if the process of mortgage lending was made easier through private property institutions, middle class borrowers will find a limited supply of suitable housing.” 

NCB Capital expects the impact of the Mortgage Law to have its full effect on home ownership only after the supply of housing becomes more affordable. A key trigger for mortgage lending, even in the absence of enforced formal institutions, is the introduction of incentives to develop private land and/or deterrents in holding such undeveloped land. An example of this which has been discussed in the past few months is the introduction of tax on underdeveloped lands. “We believe this will ease pressure on property supply by freeing up land for development. This will be a key trigger for mortgage lending going forward; while a mortgage law will facilitate bank lending, a land tax will ensure greater supply to meet the demand of home buyers,” explained Mr. Akbar. 

According to various sources, the vast majority of credit companies do not meet the criteria mentioned in the draft regulation in terms of supervision of finance companies. This will lead to the licenses of these companies to be revoked unless they meet the requirements. NCB Capital believes this is a positive move as it will unify and increase confidence in terms of the quality of the firms which do meet the criteria. 

The report highlighted that unless property supply improves, mortgage lending from banks is unlikely to significantly pick up in the short and medium term. Therefore, NCB Capital does not expect this new legislation to have a material impact in the next two years for Saudi banks. 

NCB Capital expects the share prices of banks (Al Bilad and Alinma in particular) as well as real estate companies (e.g. Dar Al Arkan and Emaar EconomicCity) to see share price increases in the short-term. However, like the announcement made in July, this is likely to be short-lived until more clarity is shown on the issue.