“1 Million Applicants for Housing in Saudi Arabia” says Dar Al Tamleek

Interview with Yasser Abu Ateek, CEO of Dar Al Tamleek

What is your general assessment of the financial services sector in Saudi Arabia, including its depth and sophistication?

That´s a very good question. In Saudi Arabia the financial sector is quite advanced in many areas in comparison to the rest of the Middle East. However, for certain reasons, mainly the fact that here people pay a lot of attention to Shariah compliant products, nobody shows much interest in deposits. That helps in some ways and in others it doesn’t. It helps in the sense that it gives banks more profit, and the ability to train and educate more people. You will find plenty of Saudis who work in the banking sector become leaders elsewhere. In the last cabinet there were a couple of bankers who became ministers or key figures in the new government. That is mainly because banks in the past paid a lot of attention to training talents and attracting talent etc.

I think that there is still room for development in terms of customer services etc. which is something that is not that developed, maybe because it was easier here in Saudi than elsewhere to make profit. 

So the financial sector is advanced in some areas and needs improvements in other areas. I think we are on the right track. What worries me a little bit is the global trend to focus on increasing profits or returns for shareholders without paying enough attention to ethics. I think there is something going on around the world called responsible lending but we need to make a lot of effort to improve or define this responsible lending.

Tell us more about what needs to be done to improve the financial services sector in your opinion?

In my opinion, the regulator of the financial sector, SAMA, the Saudi Central Bank, is on the right track. They are introducing regulations after regulations particularly for consumer protection which is what we need to focus on in the future, keeping in mind what happened in 2008 around the world when the irresponsible lending took place and banks wanted to lend more and more, making more profit without looking at the full picture, or without paying much attention to whether the customer was going to be hurt in the future.

I am seeing a lot of regulations here, mainly protecting customers, which is new for Saudi. I see a new trend from the government to provide protection for consumers in the financial sector and elsewhere, which is also a new trend in Saudi. I think we are on the right track, it will take us some time but we are heading in the right direction.

What is the outlook for the real estate sector, especially housing?

It is not the best time at the moment. Actually it may be the most difficult time we have been through. It is a cycle; we will reach the other side. However, right now the cycle seems to be on hold slightly. Housing or real estate in Saudi at this time is facing plenty of challenges, mainly a lack of clear vision. There are a lot of things going on and the direction is not clear. The Ministry of Housing is playing a major role confusing the market and all participants.

We don’t have a clear vision of what is going to happen. In order to do product planning you need data and unfortunately accurate data is not available in Saudi. If you want to plan for the next five years you need to know how many houses are going to be built, how many exist, how many are going out of the market, how many permits have been approved etc. all of this data is not currently available or it is available but it’s not accurate. With a lack of data you can’t plan accurately because you don’t know in two years’ time what your shares from houses built will be, what sales will be happening with existing houses etc.

We do planning based on our best scientific guess, which is not a proper thing to do.
At this time there are plenty of factors going on and these factors or the decisions made in the future will change the whole market. There is talk about putting taxes or fees on land and if that happens, that will change the market. Until just a few months ago, we didn’t know whether the Minister of Housing was going to deliver 500 thousand houses or not.

A decision was made four years ago to build 500 thousand units, but last month the Minister of Housing announced that they are not going to do that anymore.

They have 13 thousand projects and 13 thousand units and that is it.  So now they are talking about a loan-land product, but we don’t know what type, when or how, we have no idea. At this time as I said, the real estate sector is losing track; we don’t know what direction we are going in, especially with housing.  Plenty of developers in the last 4 years have left the market, especially small developers. It is very strange and different in Saudi; 80% of the supply i.e. new houses on the market were driven by small developers who built 5 or 10 units and once they are finished built another 5 or 10.

When the Minister of Housing announced last month that they are not going to build the 500 thousand houses it was not a public announcement. They didn’t announce their new plans publicly so that all players on the market could know what was going on. Right now, it seems like there is going to be a bank providing free loans so how that is going to impact the market no one knows. Clarity is important for any investment, when there is uncertainty investors run away from any sector.

Right now, uncertainty is extended to the consumer. Nobody is taking decisions to buy a house because no one knows what is going on. There are a lot of rumours that prices are going to go down so people are waiting to see; there are rumours that maybe the Minister of Housing will give free loans or a house or a plot of land… nobody knows anything.

There are 750 thousand applications for the Ministry by itself, and there are more than 400 thousand applications in the REDF (Real Estate Development Fund) which used to do what the Ministry of Housing is going to do in the future. That is 1 million applicants who are looking for the government to provide them with support.

What type of support is unclear; they talk about housing products but we do not know what these products may be. What the market lacks is supply, more houses. It is basic. I read a book about the US experience; they looked at data over a hundred years and found that the major factor that impacts housing prices is supply. If you have more supply, housing prices go down; if there is a lack of supply, prices go up.

This was the case in Saudi ten years ago and is still the case today. We don’t know if the supply is going to increase or how. There is also a lack of large developers that can supply 10 thousand units for example. The largest developer provided just one thousand units in one year. This was done once and was never repeated. There are other factors that impact supply, for example it takes three years to get a building permit.

There are a lot of government issues and nobody pays much attention to these factors. We are focusing only on demand which is represented by loans etc. Nobody plays a major role in the supply. There has been a lot of intention in the private sector, especially in the last ten years to do so but there was no real support. We need to shift the focus to supply, and do whatever we can to help the private sector come up with a creative solution instead of the government itself.

There has been no government around the world that has succeeded in providing housing by itself. We can look at the US, UK, Europe… all of them failed when they tried to do it themselves. However there are a lot of successful stories when they have a partnership with the private sector that encourages them, providing them with a creative environment and solution. This is what we need to do in Saudi.

We need to provide the environment and atmosphere, along with all the tools necessary to focus on supply and to come up with a creative solution. We mustn’t look at traditional solutions or one size fits all solutions. We need customised solutions which come from the right tools, encouragement and atmosphere.

I believe you recently published a paper on this?

Yes, it talks mainly about this. The risk we are facing right now is who is going to provide this supply, especially in the segment where the Minister of Housing´s task was to provide 500 thousand units in the range of 500 thousand riyals. In that range, all of the developers left this type of housing to the government as no developer can compete with the government. So, who is going to provide this low cost housing? What is going to happen? In the near future, I think we face a real challenge in supply especially in this segment.

All the developers focus on the higher segments. Even we, as a lender, focus on the higher segment, despite the fact that plenty of customers want to buy a house for 500 thousand riyals, however those houses don’t exist anymore. The majority of the population are middle to lower class; we have a young population, more than 50% of our population is under 30 years old. From our experience, the age of owning a house starts after 30; between 35 to 49 years old tends to be when people really look to find and own a house. There is no proper house for this segment at this time and I don’t see a real effort being made to provide these houses in the near future.

My paper was mainly asking government or the highest economic council where all the Ministers attend, to focus on providing the right environment and for them to leave it to the private sector to come up with a solution in terms of supply. All they need to do is say to the private sector: if you come up with a unit within 500 thousand riyals and you find customers who accept that unit and it matches the Saudi building code, then we are willing to buy it. Developers will come up with a solution if they know that there are a million people who are going to buy units. They will come up with the solution. Leave it to the private sector.

What does it mean in a larger sense, in a socio-economic sense if we do not see this supply?

We will have an increasingly difficult time in the housing area because all of us right now are trying to provide a solution for housing but we are focusing on the higher segment. There is also the new mortgage regulation that was set up three months ago where there is a 30% down payment requirement. It has impacted the market quite a lot. Having all of these circumstances come together has meant that the market is on hold right now.

We have never seen, and I have been in this business for almost 7 years, such a slowdown take place. There are very few transactions taking place. Everybody is waiting to see what is going to happen. Many people are expecting real estate prices to go down and so they want to take advantage of that. Others are waiting for the tax decision or fees decision on land to be made which will impact the housing prices, making them go down. There are a lot of rumours. There are a lot of people still waiting who are not aware that the Minister of Housing is not going to build houses anymore. The picture is not clear to anybody, whether you are a large player or just someone wanting to buy a house.

There is also not enough customer awareness. A typical case here tends to be for example, I am renting a house right now, a two bedroom house and I pay 40 thousand per annum rental. When I want to buy a house I want to buy a villa, it doesn’t matter how much I earn, this is my dream house. I am not going to move to another apartment. We don’t have the first home buyer culture where you need to replace rent with something you own. We are trying to raise awareness in this respect. People need to change first of all from instead of paying 40 thousand in rent, paying 45 thousand to own the same apartment. In that way you build assets and then you move to something larger, then in ten or fifteen years’ time you reach your dream house. You cannot move from your current situation to your dream house straight away. We are seeing a better trend right now. More people are beginning to understand this concept but there is still a lot of work to do.

What do you think is the outlook for the mortgage law? I have read that the 30% down payment has caused rental prices to shoot up.

That is correct and prices do not go down dramatically. There is some speculation taking place outside of city zones. These always go up and down, but inside the city we haven’t seen a real decline in real estate  prices. We haven’t felt that. We see some transactions which might be priced wrongly which tends to be where a small developer builds a house that cost them 1 million but they want 2 million for it.

There is no reason for it to cost 2 million. So if we reduce it to 1.5 or 1.6 million, you can’t really call that a fall in prices because it was mispriced to begin with. We haven’t seen a real decline in real estate prices. We are seeing a freezing in transactions but that is not extended to impact the real estate prices. The mortgage outlook?

The future is promising. As I said, 50% of the population is under 30 years of age. Until now, there are 4.6 million units in Saudi, these are numbers from the Minster of Housing.

The financed contract in the market does not exceed 200 thousand. You can do the maths. It is very little. We haven’t started yet. I think in the future, 5 years from now, the future of the mortgage industry is bright, but we need to pass this difficult time. Who is going to keep entrance, who is going to leave, is the question. I think the future is bright but it is a difficult time right now.

How do you characterise your strategy despite all of these developments?

We need to adopt these changes. My strategy is betting on the future. We are trying to focus more and more on how we can help supply i.e. how can we work with the small developers to provide more supply. We believe the supply is the name of the game. At the moment the banks are not touching real estate at all, not for small developers or for larger developers. Unlike elsewhere, developers don’t get finance from banks easily. We are trying to play major role in that area. We are trying to focus more on technology, social media etc. being closer to the youth. These people are going to look for houses and it is getting more difficult. In the past we just drove around and found the house that we wanted. Now it is not like that anymore.

Our strategy focuses on supply and awareness. We are looking at how we educate our customers, and how we make a housing solution much easier for them. We are betting on the future and I think we are on the right track.

How can you compete with the large banks?

That is a very good question. It is the question I asked myself when I received the business plan. I am the founder of this company but I am not behind the idea. The shareholders got together and agreed to build this company and they gave me the business plan. That was my first question: how was I going to convince customers not to go to the bank that they have been using for ten years but rather to buy their house through me. It is a very difficult approach. However we found out that there is a lack of good customer service in the market, and a lack of education.

So if you go to a bank you deal with a customer service department that is serving ten others at the same time and that is not really familiar with all of their products. When you go to Dar Al Tamleek and visit one of our branches, you sit down with a specialist who will spend an hour with you exclusively to explain everything to you. So it is all about customer service. We are playing a major role in providing customer information, in educating our customers, advising them on what the best solution for them might be. Not just process and transactions. That is the difference between us and the large banks.

At the same time, these banks have excellent training, they are one of the best employers in the country and supposedly they have educated mortgage personnel.

Not yet. They have one customer service department that sells products and understands a little bit about each product. Competition is very good for the end consumer. If you look at the market now and compare it to five years ago, it has changed completely. We are catching up very fast. What took other countries 50 years, has taken us 5 years. We are seeing plenty of techniques that are being used in the West and it has taken us 5 years to implement them. I think competition is healthy, at the end of the day the consumer benefits from competition.

What if the major banks start bringing in Western know-how, best practices in the mortgage industry…

They already did that.

HSBC can come in and advise…

They are already doing that. You are talking about what has happened over the last 5 years. Everybody…

Can you still be competitive in the long run?

There is one thing where banks in Saudi focus on something called salary assignment. I don’t know if you are familiar with that? Salary assignment is where say for example you work for the government and most customers targeted by banks are government employees because nobody can fire them and so their jobs are secure… These customers work in an agency, they have an agreement with a bank whereby their salary goes through the bank and the bank deducts its instalment first. So the banks are focusing on salary assignment. 
We on the other hand don’t have a default salary assigner so we represent financial freedom for customers, where they can transact with any bank and buy their house through us. Financial freedom is becoming more important. In the past people used to deal with one bank for all of their transactions. Right now, the young population is thinking why would they want to get stuck with one bank for the next 20 something years? I don’t think anyone wants to do that right now.

Is it possible to change mortgage providers after a certain fixation period in the market?

Yes. It is not as active as in the West yet because we are in the lowest interest rate environment. This will happen when interest rates go up and then down again. It is already happening, for people to get better terms and conditions etc. but just not as much as in other regions. It is called refinancing, in the West it is very advanced and represents a large portion of the market there. In Saudi it is not so, but it is happening, we are seeing more refinancing transactions. People are looking for better services.

Can you comment on your financial figures? What is your growth rate? Are you making good profits?

We have been making around 9% returns on equity in the last five years. We have a larger return on assets than the banks. We are still working on improving our returns to be satisfactory for our shareholders. Overall, we have done very well over the last 6 years. We have a good share of the mortgage industry. We are looking to go public in the next few years and I think we will continue to do very well. In terms of defaults for example, the default rate in the industry is 0.84 which represents the banks.

We have three times less defaults than that. Investing in Dar Al Tamleek is like investing in AAA bonds. Your investment is very secure and you get a reasonable cash dividend every year, of about 5%. It has been about 5% for the last 4 years. We have existed for 6 years. We made profit in our second year of operation. We have been giving dividends to our shareholders for the last 4 years of 5% minimum, some years higher.

How big is the mortgage market in Saudi Arabia compared to other countries? What is your market share?

It is very small. As I said there are 200 thousand contracts out of 4.6 million units and if you look at GDP it doesn’t represent more than 5% currently. If you compare that to the UAE, there it represents 30%. We still have potential for growth. Our average market share was around 10% in the last 5 years.

What is your strategy? Do you want to grow your market share?

 Yes we want at least 20% market share. It is a challenge but that is our goal over the next 5 years.

Is the mortgage segment something that everybody is looking at?

It was in the past, before the regulations came out. Right now there are only four players and there is one struggling to come up, the fifth new player. It is very difficult to start a mortgage company right now. I think with the circumstances I explained earlier about what is happening in real estate, the attraction is not there anymore. Only the ones who came into mortgages for the long run and are staying focused will continue. It is not an easy job, although it may have looked so ten years ago, when everyone was talking about mortgages being the next hot thing coming into the market. Right now, it is a very tough business and you have to compete with the largest companies in Saudi.

You mentioned five main mortgage companies in the market? And four specialised companies?

Yes, there are currently four specialised mortgage companies and one is establishing itself.

What is the percentage of these mortgage companies in the overall mortgage market as opposed to the big banks?

I think that all of us represent maybe 25%.

Which bank is the largest player in the market?

Al Rahji is the largest player in the market because it is perhaps the largest in retail. HSBC is also a large player along with Riyadh Bank. These have the largest share of the mortgage sector.

Are interest rates something of a challenge for you?

Interest rates are not a challenge but long term funding is a challenge here in Saudi. It does not yet exist here. Part of the regulations that the government need to establish is regarding providing liquidity in the market and they are working on that. It is still a small portion of the financial market, the total outstanding in mortgages is something like 90 billion riyals, which is nothing really; it doesn’t even represent 10% of the total assets in the financial sector. Long term funding is a real challenge. The government is establishing a refinance company to provide this liquidity, so things will look better in the future. Right now the legal framework is protected by regulations. In the past we used to work without having any legal protection, we did our best to protect ourselves. Right now there is a clear regulation. Now the financing and funding aspect is being developed as well as the supply. These three elements were lacking in Saudi but they are now coming into the market.

Is it the right time to buy a house?

That is a very good question! I always like to be asked this question. If you ask me as an individual who wants to buy a house, my answer is that housing is not a stock market. When you can find the right house for you, when you can replace your rent and can afford an instalment, then that is the best time for you to buy a house. Forget the price, find a suitable house for you in all aspects and replace the rent. It doesn’t take much of your income, so you can keep your lifestyle as it is.