PIF-backed Saudi mortgage refinancing firm to expand offering in 2019

Exclusive: SRC to underwrite billions of riyals this year, plus 11bn riyal sukuk programme

The company is part of the Vision 2030 strategy to raise ownership of homes to 52 per cent of citizens from around the current 47 per cent. Waseem Obaidi /The National

Saudi Real Estate Refinance Company, which is owned by the kingdom's sovereign wealth fund, expects to issue its first public sukuk this year and a second private placement in the next fortnight, while developing further plans to finance an expansion of the kingdom’s home mortgage market.

The second tranche of the 11 billion riyal sukuk programme launched last month may be as big as 750 million riyals (Dh734m), chief executive Fabrice Susini told The National in an interview. The first tranche, in December, was 250m riyals.

“This will be our first proper issuance of 2019 and our next step towards increasing our presence in capital markets to grow the Saudi mortgage market,” Mr Susini said. “We are planning a third tranche this year, which we’re hoping will be a public issuance, and developing new products and services to fund our work.”

SRC was founded in 2017 by the Public Investment Fund, the kingdom’s sovereign wealth fund, to increase home ownership among Saudi nationals and develop the mortgage finance market.

The company is part of the Vision 2030 strategy to raise ownership of homes to 52 per cent of citizens from around the current 47 per cent, and boost the contribution of real estate financing to non-oil gross domestic product to 15 per cent from 8 per cent.

The sukuk programme could be expanded to foreign currency issuances to raise more money in time, Mr Susini said. For now, though, it will be limited to domestic-only, riyal-denominated placements.

The cumulative value of mortgage financing provided by banks in the kingdom almost doubled year-on-year in the third quarter of 2018 to 144bn riyals, according to figures from Saudi Arabian Monetary Authority, the kingdom's central bank. However, this represents relatively low penetration of the country’s 32 million population, Mr Susini said. The rate of home ownership  – almost 50 per cent – takes into account private purchases, government subsidies and historic state-backed mortgages, which do not fall under SRC’s remit.

Mortgage refinancing is the process of replacing a mortgage on a property with a new mortgage provided to the borrower, generally with better terms. SRC aims to refinance 20 percent of Saudi Arabia’s primary home loans market within the next decade, which authorities hope to expand to 800bn riyals by 2028.

It has so far operated with financing from PIF and short-term deals with banks and mortgage providers equating to less than 6bn riyals of financing for homeowners. Through agreements with banks and other institutions, SRC expects to commit a further 3bn riyals of mortgage refinancing in the year ahead, Mr Susini told The National.

“We are in discussions with some originators and expect those relationships will translate into new agreements. As it stands, we are ready to commit 3bn-3.5bn riyals of financing this year, depending on demand,” he said.

In addition, the sukuk programme could be expanded to foreign currency issuances to raise more money in time.

For now, though, it will be limited to domestic-only, riyal-denominated placements.

The company is also working to design non-cash solutions, such as derivatives, which are investment securities that provide varying risk and interest-rate returns from bundles of mortgages. However, Mr Susini said any such products must be carefully devised to avoid overheating the market. Unregulated, high-interest mortgage-backed securities were the principal cause of the 2008 subprime mortgage crisis in the US, which then caused the housing bubble to burst and global prices to tumble.

“Right now, the kingdom’s mortgage market is nascent, but healthy,” the chief executive added. “There is not a lot of leveraging, banks are not overstretching themselves, there are no subprime mortgages and no need to reorganise the system.

“But the market is small, and we need to expand the offer and develop the practices, without leading to irresponsible lending.”

At the end of 2017, the Saudi government introduced new measures to bolster mortgage financing, such as waiving administration fees for mortgage holders and allowing them to move from one lender to another at no extra cost.

However, last May, it tightened up regulations governing the market, including imposing tougher requirement to banks to weigh borrower risk profiles before lending.