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Saudi mortgage refinancer to boost portfolio, issue mortgage-backed securities

Dubai: Saudi Arabia's state-backed mortgage refinancer expects to double or triple its balance sheet and begin 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 US’s Fannie Mae, 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 Programme aimed at diversifying and modernizing the domestic economy.

The domestic home loan boom has been supporting the overall credit growth in the Kingdom. Bank credit grew close to 15 per cent last year with an expected growth in excess of 10 per cent in 2021.

During the current year too, credit growth will be significantly supported by mortgages that are expected to expand by 30 per cent per year. While 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 boost mortgage demand.

Support to banks

"We're there to help the banks, the primary originators, to make sure that at no point access to liquidity or balance sheet constraints prevent them providing mortgage solutions to Saudi citizens," CEO Fabrice Susini was quoted by S&P Global Market Intelligence.

Saudi banks sold a record 46.7 billion Saudi Arabian riyals of new mortgages in the first quarter of 2021, according to central bank data, up from 42.9 billion riyals in the preceding three months and from 31.2 billion riyals in the prior-year period. Banks account for more than 60 per cent of the country's mortgage market share, according to an Al Rajhi Capital report.

Regulatory and funding support

SAMA, the Saudi central bank has eased capital requirements for mortgage lending, to help achieve a home ownership target of 70 per cent by 2030. In October 2020, Saudi Arabia made real estate transactions exempt from the 15 per cent VAT rate, instead introducing a 5 per cent 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 in March issued 4 billion riyals of sukuk, aims to double or triple its balance sheet this year.

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

"There are a lot of discussions at the moment to make sure we have the proper framework domestically to start issuing domestically, on the basis of which we will look at some point at tapping international markets through structured finance paper," the report quoted d Susini.

"We want to have a first securitization before the end of 2021, to lay down the foundations. And then we'll start developing from there."

SRC has yet to decide the size of issuance, but this will not exceed 1 billion riyals, said Susini. In April, SRC obtained long-term issuer credit ratings from two of the big three ratings agencies. SRC was rated ‘A2’ by Moody's and ‘A’ by Fitch Ratings.

Keeping a lid on rates

The firm has been instrumental in developing long-term fixed-rate mortgages, which have become the dominant domestic product offering and which Susini credits for surging demand.

The riyal's dollar peg also makes fixed-rate mortgages more desirable, because local interest rates must follow those of the US Federal Reserve and so can often be out of sync with the kingdom's economic cycle.

SRC has been largely instrumental in in helping lower mortgage costs through its creation of a long-term reference fixed rate. Banks that want SRC to refinance their mortgages are urged to follow this benchmark.

When SRC started, the average mortgage rate was around 7 per cent to 8 per cent, which is about 300 basis points higher than UAE mortgage rates.