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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