Leading mortgage provider discusses housing and the mortgage market in Saudi Arabia

Interview with Yasser Abu Ateek, CEO of Dar Al Tamleek

Last year you published a paper where you talked about the inconsistencies in statistical information and access to information and you discussed the housing sector where there is huge pent-up demand. Some estimate about half a million to one million units are needed for the market. Announcements keep coming from the Ministry of Housing which are very confusing and inhibit the private sector from entering the market for affordable housing which people really need, especially the units worth about half a million Saudi riyals. With all of these developments, what should be the main priorities for the market and for the authorities?

That is a very difficult question. We talk about numbers and it is not clear what the right number is. Right now it is a different story, there are some journalists or activists that claim that there are one million units available i.e. one million units not occupied.

The Ministry of Housing is claiming they need 1.5 million units over the next five years.

So if we have one million units not occupied, why aren’t we using them? There is a big gap between information and statistics. It is clear there is a big need for housing, especially affordable homes. There is a mix-up sometimes because most of these people, who claim there are a million units, when asked about their source of information, some of them mention the Saudi Electricity Company. Which doesn’t give a clear indication because these units might be for people who are living or studying abroad, some units might not be good anymore and should be off the market, some are traditional housing which have no foundations to be considered as a housing unit etc. Information is very critical in this industry.

We just know that there is a huge demand but we can´t confirm it. Of course the Minister of Housing lists 1.4 million or 1.3 million and that shows a big demand. There is a lot of youth coming to the market, some estimate 300,000 who need to find jobs every year, those are graduates from schools that need to find jobs and these people usually look for housing.

There is one priority right now for the market and that is clarity. Right now, uncertainty is controlling the market, nobody knows in what direction we are heading. Uncertainty doesn’t help the consumer, it doesn’t help the investor and it doesn’t help people in the market.
A lot of people are hesitating right now about what to do next. Projects are on hold, the circumstances don’t look good, the oil price is down, and morale is down. We are not at our best; all of these elements play a role but uncertainty is the major problem we have in the housing sector.

There is one thing that the market is waiting for and that is the fees on land. We need to know the impact of that. How it is going to be implemented and how it is going to affect land prices?

That will be something very important that we need to understand and absorb. We shall have to see what the reaction to it is and I hope that it is the last thing the market is waiting for.

After that we are not going to pay attention to small initiatives here and there. This is a major thing and it is the first time it has happened in Saudi Arabia and nobody really understands what the outcome will be. Some are claiming that consumers will pay and other claim that real estate prices or land prices will go down as a result.

Already during 2016 we have seen some prices going down and there are plenty of offers. That was not the case before. So I think uncertainty is the major thing right now that is affecting the market. It affects everybody; the consumers don’t know if it is the right time to buy or to wait for real estate prices are going down.

I hope we can resolve this uncertainty as soon as possible.

Total volume of mortgages to GDP in Saudi Arabia is less than 5%, whereas in the developed countries the ratio is 70% to 80%.

Right now the mortgage industry is the only part of the market that is optimistic. We are very optimistic about the future, once this uncertainty goes away. I believe we have a very strong potential and a very promising market.

There are only 200,000 people who have borrowed to buy their homes through banks and mortgage companies out of 4.6 million  outstanding homes right now (estimated housing inventory). We have huge potential. We need to take off. The timing is good for mortgage companies.

SAMA has accomplished a very important thing last month. In that they reduced the down payment for mortgage companies to 15%. A lot of people ask the question “why mortgage companies?” I think we have to go back, “why were mortgage down payments 30% in the first place?” The 30% took place because SAMA wanted to protect depositors’ money. Banks work with depositors’ money, so they want to protect that. They are trying to follow best practice from around the world, mainly to protect consumer’s money.

In our case, usually all financing companies by default take more risk because it is investors’ money, it is not a consumer’s money or a depositor’s money, it is a an investor who chooses to invest in that industry and who understands the risks very well and are willing to take more risk.

Usually financing companies take more risk because they can evaluate, understand, mitigate much better than banks. Banks do a lot of things and these transactions are very small for them so the senior people don’t give much of their time to review, understand, and mitigate.

On the other hand that is the only business we do, whether it is mortgages to financing companies, that is one thing. We understand the risk; we try to take a more calculated risk. It has been reduced because we invest investors’ money, not depositors’. The people who invest in our companies whether it is mortgages or consumers choose to do so and they understand the risks involved.

That is why we had a chance to take more risk and we are taking it very slowly. We try not to grow exponentially because the market is right now on the down side so we need to be careful how we manage it.

But I think in four or five months things will be cleared up and the mortgage industry will take off. I am very optimistic about the second half of the year.

What can you tell us regarding your new projects?

It is not a project; it is a service that the market really needed. I don’t want to talk about it much because it is going to be launched very soon. It is mainly about housing and how to help people find their houses in a much easier way. It is not something totally new.

What strategies are you implementing vis-a-vis your company?

Right now the main thing in our business is finding the right home for you. That is the main thing: finding a home that suits your needs and that you can afford. We are trying to create a market where buyers and sellers can meet easily and transactions can take place in a much faster way. That is the main idea.

Have you been affected by recent developments?

No, actually in 2015 we did really well. We studied the market when the regulations took effect in July 2012. We read it, understood it, observed, planned accordingly and we had a very good strategy. It paid off well in 2015.

The whole market went down by 67% last year with mortgage originations of only 8 billion compared to 24 billion in 2014.  . The growth was very slow. However we increased our mortgage originations by close to 20% .   

We went the other way, the market went down but we went up. We are doing fine. We hit our targets for the first quarter of 2016 and we did a 20% increase year-on-year.

The main victims of this were the banks.

Yes, the banks mainly. Although they don’t suffer, they have other products.

What is the structure of the mortgage industry in Saudi Arabia?

Why did mortgage companies or financing companies come about? Let´s talk about that. It is to stay away from regulation. Banks are heavily regulated. They create a mortgage company or go into partnership with a mortgage company just to avoid the regulations.

By default mortgage companies take more risk. In Saudi Arabia unfortunately the banks don’t take risk. They only have your salary and they do whatever they want, it is not a risk they are taking and that is why they don’t understand the transaction. “Give me your salary, I will give you a million riyals, buy a home for twenty years, I will have your salary as long as you work.” That is not taking risk.

Banks have been aggressive over the last few years.  Consequently the default rate increased and the mortgage industry overall became driven by the banks.

There is something we are trying to adopt and encourage in the home industry, and it is an international trend, which is responsible lending. What banks do right now in Saudi Arabia is they only check your willingness to repay by using the credit bureau credit reports to review your credit behaviour, then you have your salary with the bank and you can get the mortgage. They extend your purchasing power by deducting more from your salary.
In some cases we have seen two thirds of your salary going to the bank towards buying a house. There is a lot of expense in buying a new house. You are responsible for the maintenance, the electricity, the water etc. and right now everything is more expensive.

Costs of funding also increased so imagine I started with you two years ago, I take two thirds of your salary, on a variable product which means your interest is going to be reviewed every two years then if cost of funding goes up, which is the case right now, your deduction goes up. Some banks are deducting 80% or 85% of someone’s salary. They are putting you in a place where you have to choose between feeding your kids and paying the bank.

In fact you don’t have a choice because the bank takes their money first. This is a very dangerous situation. I think right now, things are changing. We are all calling for responsible lending. It is not enough to check a willingness to repay by reviewing credit etc. You have to make sure of the consumer ability to repay. You need to use other tools, you need to check what his disposable income is, how many kids does he have, how many people does he support? We know this. The consumer doesn’t know this.

As long as you provide them with credit they think they can take. We are the ones who know. We should study any consumer’s ability to repay and make sure that they can pay in the future and not because the consumer is harmed or put in an impossible position. At Dar Al Tamleek we have had this belief since we started and we don’t have this salary assignment that I have just mentioned. All of our consumers have the choice to pay or not.

Our default rate is 15% of the industry default rate. It is much less. We have a much higher quality of assets because we study their ability to repay. It is by default. Banks don’t need to as they have your salary and they can take it before you can. That is why the responsible lending concept might help us to understand the market better.

There are also specificities of the local market for example that the mortgage law is not singular. There are a few things which are different with regards to your salary.

Yes the salary assignment is mainly because at the time there was no regulation but right now we have had some cases where we were wondering about the execution of the law. I think the law is working fine. We will reach the foreclosure process very soon. It is a new thing.

What the regulation does is it tries to protect consumer payment instead of the financial entity deciding how much you own or how much you can pay. It has to be declared from the beginning, it is about transparency. There is no issue of ownership. Consumers pay a portion, that portion is considered an ownership right. If a foreclosure takes place, the consumer has the right to get that back after the sale takes place.

You mentioned that you are optimistic about the second half of this year.

I am very optimistic about the mortgage sector. Once clarity takes place in the market the market will lift-off. In the last few years we have seen plenty of people who can buy a house and who want to buy a house but they are not buying because people are saying that prices are going down, so they might get a better deal if they wait.

The last thing left are land fees, which are a big thing. It is not an easy thing; it is new to the market. It has never happened before so nobody knows how it is going to be implemented. Officials are saying we don’t need to worry and that it will be implemented well, that they are considering all factors in the market, trying to protect all parties.

However there is a fear in the market, especially from those who own land. We are seeing land offered right now where we don’t know, who the owner is, but right now if you go and take a look around you will see a lot of signs of “For Sale” signs. Once this comes out we will need a few weeks or months to see how the market reacts. Then I think it will take off. I am sure it will.

Do you have a final message you want to give about your future plans?

I have just one message to whoever is in charge of this market. Don’t try to come up with new ideas every day. Just show us the road map, give us a timeline, give us your vision and work on it.

We need clarity. Any investors, where there is uncertainty, will run away, no matter how good their intentions are or how well they might do. Creating this continuous news about things we don’t understand creates uncertainty and it doesn’t help in any market. We need a clear road map, a clear vision, and a timeline for implementation.