The Saudi Real Estate Refinance Company (SRC) is making significant strides in bolstering smaller lenders in Saudi Arabia's mortgage market. With the market currently dominated by three banks - Al Rajhi Banking & Investment Corp., National Commercial Bank, and Riyad Bank - the SRC's funding has provided much-needed support to diversify the lending landscape.
Growing Market Share
According to a report by Al Rajhi Capital, the three major banks hold a combined market share of over 60%. In the fourth quarter of 2019 alone, banks in Saudi Arabia wrote residential mortgage loans worth 26.50 billion Saudi Arabian riyals, surpassing the total value of loans issued in the entire first half of the year and even exceeding the entirety of 2018. However, this growth rate is expected to slow in the second quarter due to pandemic-related movement restrictions.
SRC: The Fannie Mae of Saudi Arabia
Often compared to the United States' Fannie Mae, the publicly owned SRC aims to refinance 10% of Saudi Arabia's total residential mortgage market by the end of 2020. While CEO Fabrice Susini acknowledges that these targets have been extended due to the rapid growth experienced in the past year, the SRC remains committed to its long-term plan of reaching 20% of the total market. Susini stated in an interview that the company aims to achieve a total balance sheet deployment of 23.5 billion riyals by the end of this year through mortgage portfolio acquisitions, warehousing, and other funding drawdowns.
Underdeveloped Yet Promising Market
Despite the remarkable growth of the mortgage market, experts believe it is still underdeveloped. With only around 200,000 residential mortgage contracts in a country with a population of approximately 33 million, there is immense potential for expansion. Susini emphasized that the high profit rates on mortgages, compared to other G-20 countries or regional counterparts, are intended to encourage banks to further develop the sector. Efforts are underway to push for lower prices for borrowers while ensuring the sustainability of the system, especially since many of these loans are supported by the government.
Targeting Mortgage Finance Companies and Smaller Banks
Initially focusing on mortgage finance companies, which represent about 5% to 6% of the residential mortgage market, the SRC expanded its reach to smaller banks in 2019. Smaller banks often lack access to diverse funding sources available to their larger counterparts, and the SRC's involvement has provided them with the necessary liquidity. The SRC has already signed deals with five mortgage finance companies and three banks, thus diversifying their funding sources and allowing them to move loans off their balance sheets.
The Path Forward
To meet the ambitious target of 70% home ownership by 2030 (up from 50% in 2018), banks will need to lend to a larger cross-section of the population. This will require a shift away from high-margin residential mortgage lending models towards a lower margin per unit of origination. The SRC continues to play a crucial role in facilitating this transition by assuming durational and interest risks associated with long-term fixed loans in portfolios it acquires.
Conclusion
The Saudi Real Estate Refinance Company is revolutionizing Saudi Arabia's mortgage market, enabling smaller lenders to thrive and increasing accessibility to homeownership. With the SRC's ongoing efforts and strategic partnerships, the mortgage market is poised for further growth and development. As Saudi Arabia progresses towards Vision 2030, the SRC's initiatives align with the goal of fostering broad home ownership across the country, particularly for lower-income Saudis.