Saudi Arabia Enters Homebuilding Business to Tackle Shortage

  • Kingdom to create developer to share profit with builders
  • Saudi Arabia's Fannie Mae to start operating end of this year

Saudi Arabia is taking an unprecedented hands-on role in housing finance and development as it seeks to re-energize a plan to build more than a million homes and make ownership more affordable.

The Housing Ministry plans to create its a development company and start a mortgage-guarantee fund to encourage banks to increase lending, Minister Majed Al Hogail said in an interview in Riyadh on Thursday. While the ministry will regulate the developer, its final ownership may rest with another state entity, he said.

“We are looking to improve the productivity of the local developers” but also trying to attract international developers and teaming consultants and builders for some projects, Al Hogail said. The ministry’s longer-term goal is to act as a regulator and a catalyst to balance supply and demand without directly developing, he said.

Despite its vast oil wealth, the country faces a shortage of more than 1.5 million homes over the next five years and most young families are unable to own their homes due to a lack of lending and construction that falls far short of the growing population’s needs. Since taking power in 2015, the regime of King Salman has been working to clear roadblocks that prevented Saudi Arabia from realizing the homebuilding vision set out by former King Abdullah in 2011.

One of the first acts of the new government was to impose a tax on urban land that’s not being developed by its owners. With that hurdle out of the way, the ministry is turning to a profit-sharing plan that helped Dubai turn desert land into a thriving metropolis.

The Tadawul All Share Real Estate Development Industries Index climbed 1.6 percent as of 12:05 p.m. in Riyadh today. Construction stocks rose 1.2 percent.

Financing Help

The new development company will give businesses plots of land to build homes and help them secure financing by providing some loan guarantees. The funding assistance will also be extended to some home buyers.

The country must attract large foreign builders because the capacity of local contractors is too small to manage the scale of projects that the country envisages, Al Hogail said.

The ministry is in talks with Turkish, Egyptian, Chinese and Persian Gulf builders, he said. Saudi Arabia signed a preliminary agreement with a Korean-Saudi group to erect 100,000 homes in the capital, Riyadh, valued at $20 billion and the minister said he expects a final deal soon. The companies are Hanwha Engineering & Construction, Daewoo Engineering & Construction and Saudi Pan Kingdom for Trading, Ind. & Contracting known as SAPAC.

Housing Density

The development and financing measures are part of a raft of actions the new government, driven by Deputy Crown Prince Mohammed bin Salman, is taking as the country tries to diversify its economy to prepare for a post-petroleum future. The housing ministry is looking to double housing-density limits, create an office where all development approvals can be granted in the same place and allow the sale of homes before they’re built.

The ministry is lobbying the central bank to allow lenders to differentiate between first home buyers and others seeking mortgages. The central bank earlier this year halved the down payment required by mortgage seekers to 15 percent.

The creation of a state-owned mortgage firm similar to the U.S.’s Fannie Mae and Freddie Mac is almost complete and the refinance company, which is critical to developing a secondary market for home loans, will start operating by the end of this year, the minister said.

Mortgage Market

The country’s mortgage market, estimated at around 94 billion riyals now, “is very small,” Al Hogail said. But that will grow by 20 to 30 billion riyals a year, boosting the mortgage loan book to about 250 billion riyals through 2020.

International investment banks are seeking opportunities in mortgage securitization, Al Hogail said. Several investment banks have approached the ministry to express interest in issuing Islamic bonds and securitizing the portfolio of the real estate development fund. The REDF has 190 billion riyals and more than 150 billion riyals of receivables, he said.

And as the mega projects start, bank loans won’t be enough to finance the construction and “bonds will play a larger role especially with the limited options,” he said.

Al Hogail concedes that building 1.5 million homes in five years isn’t feasible. The ministry’s aim is to “initiate a path to home ownership” where developers know where the majority of demand is and where the state can help match homes being built with government grants to low-income citizens, he said.

“We think within seven to eight years we should meet a good amount of this demand,” the minister said. “Our objective is to reduce the risk for the developer and reduce the cost of homes for the buyers.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE