JEDDAH: The mortgage markets in the six-nation Gulf Cooperation Council (GCC) remain extremely underdeveloped by global standards, said NCB Capital Wednesday. Against this backdrop, the region needs to develop an active mortgage market to regulate real estate activities as the sector begins to recover from the repercussions of the 2008 global fiscal crisis, the report said. Total mortgage industry in the GCC nations is estimated at around $60-70 billion, slightly more than five percent of their combined GDP, the report noted. Mortgage penetration - mortgages as a percentage of GDP - in Saudi Arabia is only around 1-3 percent while it is estimated at nearly 4.5 percent in Bahrain. In the UAE, it was only four percent in 2005, but is estimated to have surged to around 14 percent in 2009 while Kuwait and Qatar it stood at around 14 and nine percent. However, although mortgages in the GCC are lagging, lending to real estate emerged was an increasingly important element of bank credit in the pre-crisis years, the report further said. The report showed mortgage market penetration in the developed economies such as the US and Britain is estimated at nearly 50 and 70 percent, respectively. “An active mortgage market in the GCC is now the need of the hour…while sharp corrections in some GCC real estate markets highlight the need for greater regulation, the demographic imperatives, especially in Saudi Arabia militate for speedy reforms,” the report said. Some SR1.2 trillion in house financing demand is expected over the next 10 years in Saudi Arabia. With well over half of the population still relying on rental housing and over 60 percent below 30 years of age, the pressures are likely to remain intense, it said. At present, developers tend to favor high-end real estate, which relies minimally on debt-based sales, and commercial property, which in some markets is supported by a looser regulatory framework, the study noted. “Both factors leave the markets vulnerable to short-term speculation without further regulatory intervention. Addressing these anomalies will in part necessitate the establishment of widespread mortgage markets that ensure greater access and affordability,” it said. “The international experience suggests that such steps can be highly effective in improving access to housing by large segments of the population. The state can play an important role in the process, as demonstrated by the US experience. Even with penetration levels extremely low, however, strict regulation is needed to prevent excesses and the emergence of the kind of credit spiral that ultimately undermined the stability of the housing sector in the US.” NCBC noted that “Continental European” model, less inspired by universal home ownership, serves as an example of greater market stability. “Even with mortgages, the development of the GCC housing infrastructure will inevitably have to involve an element of government-sponsored affordable housing. Nevertheless, options should be considered by gradual privatization and even partial ownership where circumstances warrant this.” The report showed that during 2003-2008, GCC bank credit to the real estate sector increased from around $2.1 billion to $8.4 billion while real estate firms raised as much as $4.7 billion from the equity markets. In Saudi Arabia, the share of real estate loans in the total credit fell consistently from three percent in 2005 to two percent in 2008 and subsequently increased to 2.4 percent in 2009. The value of the real estate loans has steadily increased by 19.8 percent to SR17,860 million in 2009 from SR14,906 million from the previous year. “While most lending is undertaken by commercial banks, the regional is also home to a growing number of specialized mortgage lenders whose role is particularly important in the UAE,” the report said. “The global economic crisis in 2008 however put the brakes on the growth of the nascent mortgage sector. Since the beginning of the turmoil, liquidity flowed out of the regional economy as the capital markets collapsed. While the fall in demand for real estate was broad based, losses were more severe in economies such as the UAE and Kuwait due to a heavy reliance on foreign capital and regulatory shortcomings. Real estate transactions stalled across the region.”
