Saudi mortgage refinance to strengthen portfolio and issue mortgage-backed securities

Saudi banks sold a record 46.7 billion Saudi riyals of new mortgages in the first quarter of 2021. Saudi Real Estate Refinance Co. provides low-cost financing to banks and financial institutions so that they can offer cheaper mortgage loans to nationals.
Image Credit: AFP

Dubai: Saudi Arabia’s state-backed mortgage refinancing plans to double or triple its balance sheet and start issuing mortgage-backed securities in 2021, according to S&P Global Market Intelligence.

Saudi Real Estate Refinance Co., or SRC, which is sometimes compared to the Fannie Mae of the United States, provides low-cost financing to banks and financial institutions so that they can offer cheaper mortgages to nationals.

It was founded in 2017 following the kingdom’s launch of a national transformation program aimed at diversifying and modernizing the national economy.

The domestic mortgage boom has supported overall credit growth in the Kingdom. Bank lending grew nearly 15% last year, with growth expected to exceed 10% in 2021.

Also in the current year, credit growth will be largely supported by mortgages, which are expected to grow by 30% per year. As government support and the country’s demographic trends, with hundreds of thousands of young Saudis reaching adulthood each year and a gradual trend for smaller families, will drive demand for mortgages.

Support for banks

“We are here to help the banks, the main initiators, to ensure that at no time do access to liquidity or balance sheet constraints prevent them from providing mortgage solutions to Saudi citizens,” said the CEO. Fabrice Susini, quoted by S&P Global Market Intelligence.

Saudi banks sold a record 46.7 billion Saudi riyals of new mortgages in the first quarter of 2021, according to central bank data, up from 42.9 billion riyals in the previous three months and 31.2 billion of riyals the previous year. Banks account for over 60% of the country’s mortgage market share, according to a report by Al Rajhi Capital.

Regulatory and financial support

SAMA, the Saudi Arabian central bank, relaxed capital requirements for mortgages, to help meet a homeownership target of 70% by 2030. In October 2020, Saudi Arabia exempted property transactions of the 15% VAT rate, introducing instead a 5% property tax.

In addition to providing finance, the SRC also buys mortgages from local banks and had a loan portfolio of 6.5 billion riyals at the end of 2020, up from 2.2 billion riyals in 2019. The company , which issued 4 billion riyals in sukuk in March, aims to double or triple its balance sheet this year.

According to the S&P Intelligence report, SRC plans to sell the mortgages it has acquired from banks as covered bonds or mortgage-backed securities.

“There is a lot of discussion going on right now to make sure we have the right framework at the national level to start broadcasting at the national level, based on which we will at some point look at the possibility of tapping into international markets through the through structured finance paper, ”Susini’s report said. .

“We want to have a first securitization before the end of 2021, to lay the foundations. And then we’ll start to develop from there.

The CBC has yet to decide on the size of the show, but it will not exceed 1 billion riyals, Susini said. In April, SRC obtained long-term credit ratings from issuers of two of the three major rating agencies. SRC has been rated “A2” by Moody’s and “A” by Fitch Ratings.

Keep an eye on the rates

The company has been instrumental in the development of long-term fixed rate mortgages, which have become the dominant supply of domestic products and which Susini attributes to growing demand.

The dollar’s peg to the riyal also makes fixed rate mortgages more desirable, as local interest rates have to keep pace with those of the US Federal Reserve and therefore can often not be in sync with the kingdom’s business cycle.

The SRC has made a significant contribution to reducing mortgage costs by creating a fixed long-term benchmark rate. Banks wishing to have SRC refinance their mortgages are encouraged to follow this benchmark.

When the SRC started, the average mortgage rate was around 7-8%, about 300 basis points higher than UAE mortgage rates.

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