Many real estate experts consider real estate financing to be one of the most important challenges facing the real estate sector and investors in the Kingdom. The accommodation problem contributes to the increase of demand for housing units and the rise of their prices to levels far beyond the financial abilities of some people in society who are not capable of owning their own houses. This financial inability starts with the failure to secure the piece of land and culminates in the lack of funds necessary to meet construction costs. The problem appears more prominently in big cities that are densely populated such as Riyadh, Jeddah and Dammam. Creation of a real estate sector The housing sector in Saudi Arabia has been characterized by extreme caution since the beginning of 2012 until today. This caution was, however, not totally void of some optimism. The sector obtained quantitative attention when the government injected more than SR250 billion in the market and is working on the construction of 500,000 housing units for citizens in various parts of the country. It is obvious that the current moves in their entirety are aimed at establishing an effective real estate sector in the Kingdom and also to create opportunities for the investors, especially after the approval of real estate financing modes which, on their part, will consolidate the real estate financing industry. A report recently released by Tamlik Real Estate Company expected the real estate financing market to grow parallel to the rise of the new housing units that are currently under execution. The report criticized the banks for expanding consumer loans at the expense of saving products, including housing products. The report said real estate financing is the base for the nationalization of jobs in the housing sector. It said many realtors believe that the real estate financing modes that have been approved by the Council of Ministers will help solve the housing problem and increase competition among financing institutions. Real estate financing regulations CEO of Tamlik, Yasser Abu Atiq, stressed that the approval of rules and regulations for real estate financing is the correct way to start the creation of a real estate financing industry. He said these regulations will not only enable citizens to obtain their own homes but will also have an added economic value. He said competition among the financing institutions will be fair. He said the market is now witnessing some unhealthy practices that are not in favor of the citizens. “All these incorrect practices will be removed when the Saudi Arabian Monetary Agency (SAMA) starts supervising the market during the coming phase,” he said. Abu Atiq believes that the approval of the real estate financing modes, including the establishment of a re-financing company, is a decisive factor in the provision of long-term financing needed by the industry. “This will greatly contribute to the price stability and ensure the availability of the legal environment that will preserve the rights of all the concerned parties,” he said. Recent studies Some recent studies have suggested converting the government Real Estate Development Fund (REDF) into a private real estate financing company that will offer housing loans to the citizens under the Murabaha Islamic mode of financing. The studies proposed the establishment of a saving program under which monthly installments will be deducted from the income of the citizens. This step will enable the citizens to join the REDF's Tamlik (owning of a property) program. The government is endeavoring to provide houses to the citizens against a backdrop of an increasing demand and in the light of a steady population growth. The REDF is attempting through new applications and loans, such as Damin (guarantor) and the Idafi (additional) loans, to complete the real estate financing process. Land & loan initiative The real estate financing regulations have been on the waiting list for more than three years. These rules started to swing between optimism and pessimism when the Council of Ministers approved the real estate financing modes within five main real estate patterns. The GGC banks have delayed their entry into the real estate financing market in the Kingdom, whether to individuals or corporates, until the Saudi Ministry of Housing finalized its programs aimed at resolving the housing problem in the country and until it has launched its initiative of “land & loan”. The GCC banks believed that the Saudi banks were capable at this phase of meeting the need for real estate financing through the extension of competitive financing products at minute interest rates that cannot be obtained in the neighboring countries. However, the real estate boom expected to be witnessed by the Saudi market in the near future entails the entry of foreign investors and financiers to compete in the offering of distinguished financing products to individuals and companies. Professionalism of investment companies On his part, Walid bin Abdullah bin Saeedan, CEO of Abdullah bin Mohammed bin Saeedan & Sons Real Estate Company, said the Saudi real estate funds have become the practical solution for the shortage of real estate financing in the Kingdom. He said these funds represent a safe investment with good returns. “The funds are successful and have gained the confidence of the citizens,” he said. Saeedan said the supervisory bodies, such as the Saudi Capital Market, will only give licenses to financing funds whose capital is not less than SR50 million. He said the current housing problem in the Kingdom could be made into a gigantic investment that would serve all the beneficiaries through a real partnership between the government and the private sectors. The Idafi (additional) financing mode The REDF has recently introduced a mechanism for cooperation with the financing institutions to extend Idafi (additional) loans to the citizens whose loans have already been approved. The minister of housing, who is the chairman of the fund, said the Idafi program was in response to the directives issued by the Cabinet aimed at enabling citizens to own their private homes. He said the Idafi loans would benefit the citizens who were not able to use their ordinary loans approved by the REDF long time back. The minister said the Idafi loan would enable the citizens to purchase the land and to finance the construction of their own homes. The houses will be mortgaged to the REDF and the monthly installments will be deducted from the citizen's salary by the bank. The payment of the loan installments will start 24 months after the loan agreement has been signed. Realtors expect the actual results of the mortgage system, which has been recently approved, to appear five years after the application of the system. They said the banks and the financing companies are now modifying their systems to comply with the new legislations. The also said the Saudi real estate development companies are still facing difficulties in obtaining licenses from the municipalities and warned that this might adversely affect the performance of these companies and lead to scarcity of supply and hence price increases. Four companies to finance construction of housing units SAMA has said the mortgage system is the concern of the Justice Ministry while the real estate financing modes are under its own responsibility. The ministry asked all the courts and the notary publics to adopt and implement the rules of the new real estate mortgage system. Four companies have been established to finance accommodation in Saudi Arabia. The companies will present real estate solutions that are Shariah compatible. The companies will focus on providing flexible real estate financing for the first time in the Kingdom.
