Saudi Arabia woos US investors to bolster housing sector

Arab World Press via Reuters

• Saudi mortgages ‘safe’ investment
• Deals signed with US majors
• Home ownership vital to Vision 2030

As growth in mortgage lending in Saudi Arabia runs up against local liquidity constraints, several US investment giants are looking to step in.

After a visit by Saudi officials to the US at the end of August, household names such as BlackRock and King Street Capital signed preliminary agreements with the Saudi Real Estate Refinance Company (SRC) and Saudi Mortgage Guarantee Services Company (Dhamanat) to enhance the kingdom’s secondary market for home loans.

“Globally, clients have increasingly expressed interest in having exposure to Middle East assets,” BlackRock says. “As Vision 2030 comes to life, Saudi Arabia has become an increasingly attractive destination for international investment.” 

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Saudi authorities have made home ownership a key goal of Vision 2030, aiming to have 70 percent of Saudis owning their own homes by the end of the decade.

An estimate shared with AGBI by the Sico Bank research team says, the kingdom has already hit a “fairly strong” 62 to 65 percent of Saudis being home owners. 

Home loans have grown in tandem with that, going from a stock of about $52.8 billion in 2019 to $171 billion at the end of June, according to figures from the Saudi central bank.

Mortgages in the kingdom are viewed as relatively safe, because they tend to go to employees of the government or government-backed companies, are linked to automatic salary transfers into the same account, and generally enjoy fixed interest rates, according to Mohamed Damak, a managing director at S&P Global.

Therefore, banks jumped at the opportunity to issue mortgages under Vision 2030, “printing them left, right and centre”, Damak says. Now, he say, they are not “that aggressive” in divesting from the home loans, with their low default risks and the profitability they yield, “assuming that they can be refinanced”.

Meanwhile, the market for residential mortgages-backed securities remains undeveloped, as the kingdom works on a regime that would ensure banks can seize houses when a borrower stops making payments.

As such, the challenge for Saudi authorities today is how to boost liquidity, and the ability of local banks to find alternative sources to finance the rise in home ownership, while also supporting corporate growth and other priorities for the Vision 2030 project.

Junaid Ansari​​​​, director of investment strategy and research for Kamco Invest, says an influx of expats as part of the country's larger economic development push has put upward pressure on prices and rents, especially in the capital, Riyadh, undermining government efforts to provide Saudi citizens with access to affordable housing.

“This is the imbalance that the government is to address with its new initiatives,” he says.

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Since 2009, retail real estate financing has been among the fastest growing segments for banks in the kingdom, with a compounded annual growth rate of 24 percent, against 14.2 percent for its corporate equivalent, Ansari says.

The number of residential real estate transactions in Saudi Arabia rose 41 percent during the first half of the year, data from Knight Frank shows. The National Housing Co alone said it had sold more than 13,000 units from January to June, a five-fold increase.

Blackrock says it is too early to comment on the specifics of the deals the company has signed, but “there is significant demand” for mortgage-related investment.

“SRC is pioneering the development of mortgage refinancing solutions for Saudi banks and housing finance companies to allow global institutional investors to participate in this growing, high quality fixed income asset class.”