The Saudi Real Estate Refinance Company (SRC) is making significant strides in revolutionizing Saudi Arabia's mortgage market. As the market is currently dominated by three major banks, namely Al Rajhi Banking & Investment Corp., National Commercial Bank, and Riyad Bank, the SRC's funding is helping smaller lenders gain a competitive edge.
A Growing yet Concentrated Market
With these three major banks holding a market share above 60%, the mortgage market in Saudi Arabia is highly concentrated. In the fourth quarter of 2019 alone, banks in the country issued residential mortgage loans amounting to 26.50 billion Saudi Arabian riyals. This is equivalent to the total value of loans issued in the entire first half of 2019 and surpasses the entirety of loans issued in 2018, as reported by the Saudi Arabian Monetary Authority. However, due to movement restrictions resulting from the pandemic, it is expected that the rate of growth will slow down in the second quarter of this year.
Similarities to Fannie Mae
Often compared to the United States' Fannie Mae, the SRC is a publicly owned mortgage refinance company. With the aim of refinancing 10% of Saudi Arabia's total residential mortgage market by the end of 2020, the SRC has set even more ambitious targets, planning to reach 20% of the market. CEO Fabrice Susini acknowledges that these targets have been extended due to the dynamic growth in the mortgage market over the past year.
"We are happy about that [growth], but we [as a refinancer] are not where we want to be," Susini said in an interview. The company's goal is to achieve a total balance sheet deployment of 23.5 billion riyals by the end of this year, which includes mortgage portfolio acquisitions, warehousing, and other forms of funding drawdowns.
Supporting Home Ownership
The SRC's broader goal is to promote home ownership across the country, aligning with Vision 2030. This initiative aims to increase home ownership, especially among lower-income Saudis. Although the mortgage market is experiencing rapid growth, it is still considered relatively underdeveloped. With approximately 200,000 residential mortgage contracts in a country with a population of around 33 million, there is significant room for expansion.
One factor contributing to the underdeveloped state of the mortgage market is the relatively high profit rates on mortgage loans. These rates are in place partly to incentivize banks to develop the sector. When compared to other G-20 countries or regional counterparts, it is much cheaper to borrow for consumer goods like washing machines or cars than it is for a home loan. Susini highlights the need to improve this aspect of the mortgage market, pushing for greater competition to lower prices for borrowers while ensuring the sustainability of the system.
Targeting Smaller Banks and Mortgage Finance Companies
The SRC initially focused on providing funding to mortgage finance companies, which make up around 5% to 6% of the residential mortgage market. These companies traditionally relied on banks for liquidity, creating an unusual dynamic. However, in 2019, the SRC shifted its focus to banks, particularly smaller banks that lack access to diverse funding sources available to larger banks.
To date, five mortgage finance companies and three banks, including Banque Saudi Fransi, Bank AlJazira, and Saudi British Bank, have signed deals with the SRC. Additionally, the SRC is open to acquiring portfolios from any bank, thereby allowing them to diversify their funding sources and move loans off their balance sheets. By assuming the durational and interest risk of long-term fixed loans, the SRC provides these banks with access to a broader set of hedging tools.
Overcoming Challenges and Ensuring Growth
While some mortgage finance companies have grown their loan books through partnerships with the SRC, the sector as a whole has lost market share to banks. This is partly due to the significance of salary assignments for lending. Smaller banks and challengers face difficulties in competing with established banks that have a vast customer base to rely on. However, these challengers can adopt more efficient mortgage processes, such as digital onboarding, to level the playing field.
As Saudi Arabia aims to increase its home ownership rate to 70% by 2030, banks will need to cater to a larger cross-section of the population. Adjusting their lending models from a high-margin residential mortgage approach to a lower margin per unit of origination will be a central challenge.
The SRC's efforts to support smaller lenders and mortgage finance companies have been instrumental in driving growth in Saudi Arabia's mortgage market. By providing funding and diversifying funding sources, the SRC is fostering competition and pushing for lower prices for borrowers. As the mortgage market continues to evolve, it is expected that the SRC will play a vital role in transforming the landscape of home ownership in Saudi Arabia.
As of June 1, US$1 was equivalent to 3.75 Saudi Arabian riyals.