JEDDAH – The regulations for the Saudi Mortgage Law published by SAMA, while overall positive, will impact the banking sector only in the medium to long term, if at all, NCB Capital, the GCC's leading wealth manager and the Kingdom's largest asset manager, said Monday. “The regulation in its current form does not fully tackle issues related to foreclosures of properties and how Saudi banks are expected to participate in the suggested format stipulated in the laws published so far,” said Mahmood Akbar, Equity Research Analyst at NCB Capital. “Indeed, we believe that some banks actually prefer the current framework (salary-assignments) where they have ownership of the property. Nonetheless, we expect short-term price gains in small-cap banking sector and real estate stocks.” 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”, however, are yet to be published. “The focus is mostly on finance companies and there is limited reference to banks,” Akbar further said. “Given the limited reference to commercial banks, coupled with the fact that the laws stipulate that the finance company can only engage in real estate financing, there is limited clarity on whether the laws will apply to commercial banks. This makes it possible, although still uncertain, that the aim of the regulation is to separate mortgage lending function from commercial banks, similar to separating the commercial banks from the securities business. The regulations did not tackle issues related specifically to the banking sector particularly with regards to risk weightings. If the banks need to create separate entities to deal with mortgage lending, the benefit from the proposed law will materialize only 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,” Akbar noted. 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 SR5 billion. This new entity will purchase the mortgages from the real estate companies, securitize 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. – SG
