Paul McViety believes the mortgage law will boost the construction industry.
The long-awaited Saudi real estate mortgage law, published in August, is set to come into force next month, a move that is likely to be a key development in the Kingdom’s real estate sector.
Banks and other financial institutions as well as real estate and construction companies across Saudi and other parts of the Gulf Region will be watching closely as new opportunities start to open up off the back of this law and the other new finance laws which will come into effect around the same time.
Officially titled as the Law on Registered Real Estate Mortgage (Royal Decree No. M / 49 dated 13/08/1433 AH), the mortgage law is a clear step forward for the Kingdom.
It is a significant legal development that is expected to bring more certainty for banks in terms of the security that they are able to take over real estate property in Saudi Arabia. In addition, it is hoped that the new law will help the growth of non oil-related ventures in the region.
The new law will enable individuals and corporates to buy (or leverage) their own properties with mortgage-backed finance, and will also help developers by making project financing easier to obtain or more ‘bankable’.
The anticipation of this new law has been such that a large number of existing financing deals (some dating back a number of years) in Saudi Arabia already include provisions which require borrowers to grant real estate mortgages once the mortgage law comes into force. It is likely that a number of Saudi banks will be contacting their borrowers to put those provisions into effect, potentially resulting in a flood of initial applications during the first few months.
Saudi Arabia’s population has quadrupled over the last 40 years to 28.7 million, creating a shortage of housing. As a result, the Arab world’s largest economy needs to build in the region of 1.25 million new homes by 2014, according to the country’s development plan.
In March 2011, King Abdullah announced a plan to spend US$67 billion to build 500,000 homes to tackle the shortage at a time when political unrest prevailed across many parts of the region. The country’s housing authority was also turned into a ministry with a budget in the region of 15 billion riyals.
Such high levels of demand combined with the new law will undoubtedly energise the property sector as well as the financial sector that supports it. When it comes into force in November, DLA Piper will be closely monitoring all eyes will be focused on how exactly the law is implemented in practice.
There is likely to be a ‘teething in’ period where clear processes need to be established for registration and certain ambiguities in the text of the new law need to be overcome.
Such is the expectation within the Kingdom that, within days of the announcement back in August of the introduction of the new law in August, Saudi Arabia’s Tadawul All-Share Real Estate Development Industries Index, which includes eight developers, climbed almost 8%.
The implications of the new mortgage law will certainly be far reaching for a number of different industry sectors. However, when the law does come into force this November, it is unlikely that it will flick a magic switch. What we are more likely to see is a boost to the real estate sector (as a whole) over the medium-to-long-term.
But for this to happen, the new law must be supported by effective regulation and implementation, and developers must be able to rely upon continued liquidity and appetite amongst the banks who are looking to support the Kingdom’s real estate and development demands.