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HIGH EXPECTATIONS? Saudis may be betting too much on mortgage law
Saudi Arabian banking and real estate shares have surged since the government approved a long-awaited law allowing the development of a housing mortgage industry. But investors may be getting ahead of themselves.
July 6, 2012 5:31 by Reuters
The law, which is the country’s biggest economic reform in years, is likely to stimulate new business in the housing sector and provide fresh revenue opportunities to banks.
But analysts contacted by Reuters said they were not revising their share price forecasts, because it would probably take years for the industry to develop and there were still questions over its regulation and profitability.
“The effects will contribute to more building and lending gradually over the long term, but nothing significant will happen immediately on the ground,” said Sleiman Aboulhosn, assistant fund manager at Al Masah Capital in Dubai.
“However, the stock market is a different animal and might continue rallying sharply on future hopes, particularly the real estate sector.”
Hesham Tuffaha, head of asset management at Bakheet Investment Group in Riyadh, said shares could easily drop back after their rally since underlying problems in the real estate sector had not changed.
The real estate share index jumped 8.2 percent on Monday and Tuesday while banking stocks climbed 5.3 percent. Both indexes fell back slightly on Wednesday as investors took profits before the weekend.
Although lending for home purchases already takes place in Saudi Arabia, it is in a very limited form, mostly based on payments deducted by banks from salaries; the new law is expected to permit the introduction of a range of mortgage products.
“Mortgage lending is around 6 percent of our overall loans, which is very small by international standards,” Rehan Khan, chief financial officer at Saudi British Bank, told Reuters on Wednesday. “I’d expect those ratios to change quite a lot over the next five years.”
In the first year or two, however, growth may be slow. Saudi Arabia’s real estate market is constrained by high land prices and limited supply; in some areas, large tracts are owned by influential families which feel little financial pressure to sell or develop the land.
Prices are so high that despite heavy demand for new housing among the country’s fast-growing population, it is often hard for developers to build homes that are affordable for lower- and middle-income Saudis, analysts say.
“I’m still cautious because we need real estate prices to come down by 20 to 30 percent to have more demand for the mortgage loans,” said Tuffaha.
Mahmood Akbar, Riyadh-based analyst at NCB Capital, said many developers might still hesitate to get involved in housing construction, given expensive land and uncertainties related to the new mortgage rules, which have not been disclosed in detail.
“The mortgage law solves one aspect of a larger problem,” he said. “The guidelines are coming a little too late. They do not address the issue of taxing undeveloped land, which could free it up and would be a catalyst for development.”
He added that he knew of one major Saudi bank which had 200,000 clients whom it had identified as potential mortgage customers, but which had been unable to locate properties that would fall in a reasonable price range for its loans.
Another big uncertainty is how the courts will deal with the issue of repossessions of homes; religious authorities in the birthplace of Islam oppose the concept of repossessions, which are also seen as politically sensitive after last year’s uprisings elsewhere in the region.
Some in the industry think mortgages may be guaranteed by the government’s Real Estate Development Fund to ensure defaulters are not evicted. But this is by no means certain, and if such a guarantee were offered, effectively eliminating risk, banks might find it hard to charge lucrative levels of fees on the loans.
Given these issues, long-term investors may hesitate to buy banking and real estate stocks. And property developers’ shares at present are not particularly cheaply valued, analysts said.
Major developer Dar al Arkan, for example, is already up 41 percent since the end of last year, outpacing a 6.5 percent gain for the benchmark stock index. It is trading at 10.2 times its estimated earnings for 2012, nearly double its average valuation in 2009-2011. Emaar Economic City is at about 60 times estimated earnings.
Both stocks are still cheap compared to their valuations during the market boom of 2008; Dar’s ratio was around 25 in that year. But with the world economy uncertain and oil prices unstable, even Saudi Arabia’s speculative investors may hesitate to drive stocks up close to the levels of the boom years.
Akbar said he didn’t expect the mortgage law to have a material impact on companies’ business this year or next. “We will see a positive impact on their stocks but we don’t think the news flow justifies revision in price targets.” (Editing by Andrew Torchia)