In July 2012, Saudi Arabia witnessed the official launch of the real-estate finance industry as part of the country’s economic financial development plans. To promote the local competition between banking and other financial sectors, and the economy’s overall global competitiveness, non-banking corporations may now finance real estate in Saudi Arabia.
The Real Estate Development Fund (“REDF”) is the country’s main provider of housing finance. REDF was unable to meet the rapidly increasing demand, while other real estate financing was limited due to absence of a well-structured regulatory framework. For example, the industry lacked effective land registries and foreclosure regulations for properties in default. Individual real estate financing was done against the transfer of title deeds rather than as an official mortgage. In addition, lenders have been conservative with their loan standards, resulting in a low mortgage penetration rates.
Making mortgages available to public will address the imbalances occurring in the market with supply twisted to the high end. The new Saudi laws tackle the chronic shortage of home ownership, particularly in the affordable middle- and lower-end markets. More financing opportunities are needed, even though additional time may be required for the market to safely adopt such laws.
These laws are tools to open safe and continuous investment channels. They encourage national economy leaders to diversify income sources and create job opportunities and investments in the country. They also satisfy growing demands for appropriate and safe housing offers. These steps aim to develop mechanisms that preserve homeownership rights, while stimulating financial institutions to lend more frequently, reduce the cost of mortgage financing and provide differentiated products for multiple segments of society.
The new set of laws comprise a range of integrated systems that develops the legal structure and regulatory aspects of real estate finance structuring so as to achieve equivalent protection of citizens and guarantee the rights of investors.
The Registered Real Estate Mortgage Law (“RREML”)* protects citizens’ investments and gives them the opportunity to improve their investments through mortgages on their properties. The RREML distinguishes between real estate that is registered in accordance with the provisions of Real Estate in Ram Registration Law and that which is not. Where registered, the real estate registration shall be in accordance with the provisions of that law. Those mortgages not subject to the Real Estate in Rem Registration Law are to be carried out by a notation on its register at the competent court or notary. The law also provides the pledgee a right to request the court to stop the acts that may inflict damages or defects upon the mortgaged real estate, or leave it insufficient for the pledge, and take the measures necessary to prevent damages in accordance with the provisions of summary jurisdiction.
The Real Estate Finance Law (“REFL”) establishes a general framework for the real estate finance industry, explains the conditions of entry, locates the basis for the interdependence of the primary market for financing. The REFL lays the foundation for secondary markets, where refinance financiers and recycling liquidity usually occurs. This law determines the entities allowed to engage in real estate finance activities. The Saudi Arabian Monetary Agency (“SAMA”) is responsible for regulating the real estate finance industry; it shall review the model finance contracts issued by the real estate financers. The REFL also gives the licensed real estate financers the opportunity to access and obtains the information in the property records in courts and public notaries, which will reduce the risk element prior to entering into a financing transaction, and increase the level of transparency and clarity. The law granted real estate financiers the right of refinancing through refinancing companies or securities in accordance to the provisions of the Capital Market Law.
In addition, the Finance Companies Control Law (“FCCL”), which is a counterpart to the Banking Control Law, sets the systems to monitor financing companies. It sets the standards and controls to establish finance companies specializing in an activity or more of the financing activities. The FCCL states that a percentage of the finance company ownership shall be offered for public offering after at least two fiscal years provided that the specified profit percentage has been attained. SAMA will provide detailed provisions for the Law by issuing implementing regulations, including, for example, consumer rights and mechanisms to support the real estate financing beneficiaries and the maximum limit of finance that may be given by a finance company.
The Finance Lease Law regulates the finance leasing contracts, which are an important financing tool for citizens, the contracts register and the resolution of arising disputes. Tradable securities may be issued against the lessor’s rights in accordance with the rules and regulations issued by the Capital Market Authority.
Finally, the Enforcement Law motivates the financier and trader by setting the regulatory framework for the implementation of the provisions of the laws and eliminates any delay in payments. The law gives the enforcement judge a jurisdiction over the enforcement disputes regardless of their value, and the power to issue the decisions and orders related to the enforcement. The enforcement judge may not enforce the foreign judgment or order unless on the basis of equality and reciprocity and after verification of certain conditions.
To keep pace with development in real estate industry, amendments were made to the Capital Market Law, which has the sole authority to regulate and license the establishment of special purpose vehicles, organizing and controlling their business, their uses, the issuance of securities, and record in the log it has established. These vehicles expire at the end of which reason it was founded for and in accordance with the rules and provisions issued by the Capital Market Authority.
Finally, to guarantee the absence of credit problems that may lead to a financial crisis, the regulators and financers must pay attention to the solvency and creditworthiness of borrowers, and take into account the amount of income for an individual when deciding the amount of funding. This protects citizens from being involved in a debt beyond their ability to repay, and as a result bear the financial markets the risks of inability to pay their debts.
Editor’s Note: New Laws are available upon request. (Email the author at alfozan.maha@gmail.com).