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Meet SRC, the company driving Saudi’s housing sector by leveraging secondary mortgage market

SRC provides capital and risk management solutions to lenders, including purchase without recourse and liquidity and hedging solutions

The Kingdom of Saudi Arabia, whose economy used to be heavily dependent on the energy trade till a few years back, has now set an aggressive diversification agenda under its ‘Vision 2030’.

The Kingdom’s real estate sector, seen as one of the flag bearers of the country’s economic diversification efforts, is now witnessing significant growth. As of 2023, the property sector is contributing 7% to the Kingdom’s GDP.

Understanding the housing market’s real potential

The sector’s expansion has now been seen as a crucial gauge of Saudi’s economic growth, influenced not only by the country’s GDP but also by factors such as urbanization rates, construction activity, and population growth that impact supply and demand dynamics.

The government has also taken initiatives to stimulate the domestic economy through infrastructure projects and other investments, which is also propelling the growth of the housing market.

In 2021 alone, the sector created around 40,000 job opportunities, and its importance in driving economic development and supporting other industries will continue to increase in the coming years as well. The ambitious ‘Vision 2030’ roadmap also includes the ‘Housing Program’, which has a goal of increasing the contribution of the real estate sector to the Kingdom’s GDP to 10% and expanding the homeownership among Saudi citizens from 47% to 70% by 2030. The homeownership rate in Saudi Arabia has risen from 47% in 2016 to 62% in 2020.

The leadership of His Excellency Majed bin Abdullah Al-Hogail, Minister of Municipal and Rural Affairs and Housing (MoMRA), has played a crucial role in driving the Kingdom’s economic growth and overall development. To accelerate this further, the minister has now introduced several initiatives aimed at meeting the Kingdom’s increasing housing demand.

As per a report by PwC Middle East, Saudi’s housing demand will experience a significant increase in the coming decade, with projections indicating that the number of homes will rise from 99,600 in 2021 to 153,000 by 2030, thus representing a growth of over 50%. The Kingdom needs to create approximately 1.2 million new homes by 2030, thus bringing the total housing stock to 4.96 million houses.

To meet this rising property demand, the Saudi government has implemented a range of policies and initiatives, which will improve access to financing for its citizens. Over the past decade, the Saudi Central Bank has introduced several measures, which make it easier for people to obtain mortgages, including the Real Estate Mortgage and Financial laws and a reduction in the minimum down payment required for property purchases from 30% to just 5% of the purchase price. These measures have contributed to a significant expansion of the Kingdom’s mortgage market, with 295,590 contracts worth SAR 140.7 billion being offered to Saudi families in 2020 alone.

Tracing SRC’s formation

As a pioneer in the development of a robust secondary market for housing finance, Saudi Arabia has taken decisive action to increase credit accessibility and provide sustainable housing solutions for its citizens.

A key effort towards this direction has been the formation of a government-owned entity called Saudi Real Estate Refinance Company (SRC) in 2017. The organization, overseen by the Public Investment Fund (PIF), serves as a vital bridge between traditional lenders such as commercial and investment banks, and borrowers including mortgage finance companies and asset developers. By offering affordable refinancing terms to borrowers and utilizing asset-backed transactions, SRC is helping to reduce exposure risk and mitigate against future global financial crises, and in the long run, working towards enhancing the stability and accessibility of the Kingdom’s housing market.

SRC’s originate-to-sell business model has facilitated a significant and well-studied shift in the housing finance market, as reflected in the company’s expansion of refinance transactions. SRC is also providing capital and risk management solutions to lenders, including purchase without recourse and liquidity and hedging solutions.

SRC has emerged as a driving force behind the development of a strong, efficient, and liquid secondary market for housing finance, by forming strategic partnerships with banks, mortgage finance companies, government-related entities, and corporates. These partnerships have allowed SRC to reach a wide range of originators across the Kingdom and to effectively fulfil its role as a catalyst in the housing financing ecosystem. Till May 2023, SRC has successfully refinanced a total of SAR 30 billion (approx. USD 7.9 billion) in portfolios, apart from setting an ambitious goal of refinancing 20% of Saudi Arabia’s total residential mortgage market by 2025.

LTSD and LTFR: SRC’s game-changing solutions

Currently, there are no deposits terms available in the market that extend beyond three years. However, SRC has changed the playbook here, as it has introduced the long-term structured deposit (LTSD). This is a unique offering which provides a source of stable, long-term funding for banks through deposits and stability for the market through pre-agreed sales to SRC. The LTSD also offers partners a long-term deposit with a term of between five and ten years, which amortizes in tandem with the pre-defined mortgage portfolio sales to SRC over the same period.

To establish a benchmark for housing financing rates in the Kingdom, SRC introduced the innovative long-term fixed rate (LTFR) solution for borrowers and lenders. In 2020, LTFR was adopted as the market benchmark rate and originations were capped at LTFR, leading to the successful achievement of the Kingdom’s homeownership target for that year.

With LTFR among the lowest rates available for home financing products in the Kingdom, it has played a crucial role in normalizing housing financing practices within the industry and providing homeowners with stability and affordability through fixed instalment payments over the life of the loan.

In 2022, SRC announced the extension of the maximum eligibility tenor to 30 years from the previous period of 25, in an effort to further support the development of a robust mortgage market in the Kingdom and provide longer-term liquidity to primary originators. This move will give the Kingdom’s lenders greater flexibility and the ability to offer more sustainable mortgage solutions to borrowers.

The road ahead

As the housing finance market continues to evolve and grow, sustained efforts by third-party refinance institutions such as SRC are crucial in ensuring its continuity and supporting various stakeholders in unlocking new and emerging opportunities. In line with the goals of the Kingdom’s ‘Vision 2030’ program, SRC is empowering mortgage providers to accelerate the delivery of affordable home ownership for Saudi citizens.

Saudi’s thriving housing market has been a driving force for the country’s recent economic growth and development. Realizing the sector’s potential in fulfilling the country’s economic diversification goals, the government and stakeholders have implemented policy reforms to improve access to financing and make homeownership more attainable for citizens.

The secondary mortgage market, supported by institutions like SRC, is now playing a key role in providing liquidity and stability to the market, thus enabling lenders to offer flexible financing solutions to borrowers. Through these efforts, the Kingdom is making significant progress towards achieving its ‘Vision 2030’ goal of increasing homeownership rates and furthering economic development. As the market continues to evolve, these efforts also need to pass the sustainability and financial inclusion tests, in order to benefit the Saudi society.

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