Alan Hall discusses the long anticipated mortgage law and its
impact on the housing market and banks in the Kingdom of Saudi
Arabia.
Will the release of the mortgage law be a precursor to
other real estate legislation designed to open up the
Kingdom?
It is important to note at the outset that the mortgage law as it
is known is a package of related legislation comprising 5 laws
dealing with the registration of mortgages, the regulation of
finance companies, real estate funding, financial leasing and,
importantly, enforcement and execution. To its credit, the approach
of the Government has been to adopt a comprehensive reform of the
real estate finance regulatory regime in one consolidated
package.
I understand that the laws are currently before the Shoura Council
and may soon be sent to the Council of Ministers for approval. Once
approved, the laws will be the subject of a Royal Decree at which
time they will become effective. Within 90 days, the Saudi Arabian
Monetary Agency (SAMA) will issue regulations for each law. As is
the Saudi practice, the regulations will contain the detail of the
application of the laws.
By way of background, Saudi Arabia currently has a comparatively
low private home ownership rate. A combination of an unregulated
non bank lending sector, higher building construction costs, an
ineffective enforcement regime in respect of evictions, some
speculative investment (albeit minimal) and limited access to
credit financing has aggravated the housing deficit, increased the
cost of finance products, driven rents higher and required
developers to fund buyers rather than new developments.
With no mortgage law, developers are concerned as to the market for
projects and are therefore reluctant to start new projects or be
ambitious or creative in planning developments. They and financiers
are also concerned by the difficulties of enforcing security and in
obtaining vacant possession. The imminent package of laws is
designed to address these issues.
Will this create a more transparent market and potentially
boost investment?
As a general rule, in my view an increase in the scope and detail
prescribed in the published regulatory regime usually leads to
greater transparency in the relevant process. I fully expect this
to occur in the Kingdom's real estate lending industry as a
result of the package of mortgage laws.
I also have no doubt that the introduction of the package of
mortgage laws will boost real estate sector investment in the
Kingdom. As I mentioned a moment ago, the mortgage laws should
provide some comfort to lenders in relation to the registration of
securities and the removal of current difficulties associated with
enforcing security and obtaining vacant possession.
Addressing these concerns should encourage financial institutions
to lend on a more frequent, and hopefully less expensive, basis.
There is already a high level of interest from local and offshore
institutions which are waiting on the laws and regulations with
great anticipation.
Evidence of the importance placed on these new laws can be found in
the recent announcement by the Public Investment Fund (the Ministry
of Finance's investment arm) that it plans to take stakes of up
to 40% in new mortgage lenders.
The mortgage laws will also assist banks with off balance sheet
financing through the capital markets. It may be possible for
registered mortgages to be securitized through sukuk issuance which
will create the liquidity required for financing further
investment.
What other real estate legislation is needed/could follow
or is this the only law on the table right now? Will there need to
be some form of lender regulation?
As I mentioned, the mortgage laws are a consolidated package of
reforms in the area of real estate financing. Importantly, the
Finance Company Control Law, which forms part of the package, will
bring all finance companies under the direct regulatory control of
SAMA.
In addition, the Government has sought to increase the
effectiveness of the regulation of the real estate sector by
embarking on a number of reforms designed to stimulate investment
activity and protect the market from prejudicial speculative and
uncontrolled conduct. Key measures include:
- Modernization of the title identification and land registration system: In an effort to inject both efficiency and transparency into the land transfer and registration process, the Government has initiated the massive and ambitious task of identifying all KSA land (and all property interests in particular parcels of land) and incorporating that information into a real estate register for each designated realty area.
- Tightening of controls over off the plan sales: In March 2009, the Council of Ministers resolved under Resolution 73 to protect off the plan purchasers against fraud and unfair contractual conditions by introducing a number of controls over such sales in respect of residential, commercial, office, service and industrial units. Resolution 73 is an interim measure pending the enactment of the proposed "Real Estate Developers Guarantee Account Law".
- Regulation of real estate investment funds: Recently, the Council of Ministers approved the establishment of a committee to oversee the offering of shares in projects.
How easy is it to navigate the Kingdom's legal
system as an overseas investor and is this getting
easier?
In general terms, the establishment of the Saudi Arabian General
Investment Authority (SAGIA) some years ago has unquestionably
encouraged foreign investment and injected efficiency into the
practical processes of that investment. SAGIA has demonstrated a
willingness to assist foreign investors together with a driving
ambition to improve the capacity of investors to "do
business" in the Kingdom through the strategic focus and
reforms generated by its mission to position the Kingdom among the
world's top 10 most competitive economies by this year.
This assistance from SAGIA has included the passage of a number of
foreign investment laws (including the real estate laws I mentioned
before) which are readily available in both English and Arabic.
Also, SAGIA is constantly updating and issuing lists of its
requirements for the granting of particular investment
licenses.
These steps, combined with the on-going reform of the judicial
system, have combined to simplify and facilitate legal due
diligence and inject greater transparency into the regulatory
regime which in turn make the Kingdom a more attractive country to
potential foreign investors.
The success of SAGIA is evidenced by the Kingdom's current
ranking of 13 in the latest World Bank survey for Doing
Business.
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