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Saudi Arabia housing plan spurs lending

RIYADH -- Saudi Arabia’s plan to build 500,000 homes as part of infrastructure investments exceeding $500 billion is spurring the fastest pace of construction industry lending in at least four years.

Bank loans dedicated to building and construction surged 34 percent to 72.5 billion riyals ($19 billion) in the first nine months, according to central bank data.

That’s the fastest growth for the same period since at least 2008, when Bloomberg News started tracking the data.

Saudi lending rates have jumped this year, triggering the widest spread over U.S. rates in almost four years, according to data compiled by Bloomberg.

King Abdullah Bin Abdulaziz Al Saud set in motion a credit revival with last year’s announcement of social initiatives valued at about $130 billion in part to build more affordable homes in the nation of 28 million, introduce an unemployment benefit and give bonuses to state employees.

A separate $384 billion government investment plan encompasses roads, airports and industrial projects.

“When you look at the thrust of government spending, it is built around the infrastructure side of the economy,” Murad Ansari, a Riyadh-based analyst at investment bank EFG-Hermes Holding SAE, said Sunday.

“So it’s not a surprise that you are seeing lending to the construction and building segment growing at a faster rate than the rest of the economy.”

New homes

Loan growth to private businesses in the largest Arab economy reached 15 percent in September, the most in more than three years, according to central bank data.

The economy of the world’s top oil exporter is set to expand 5.1 percent this year, the second-fastest pace in the Gulf Cooperation Council (GCC) after Qatar, according to the median forecast of 15 economists compiled by Bloomberg.

Mecca-based Jabal Omar Development Co. finalized a 5 billion-riyal loan in September to build hotel towers to help accommodate the 10 million people who make their pilgrimage to Islam’s holiest city each year.

Tibah Airports Development Co. in June borrowed 4.42 billion riyals in a three-part syndicated loan, data compiled by Bloomberg show.

King Abdallah’s string of social spending initiatives were unveiled as autocratic regimes in Egypt and Tunisia were toppled in the first quarter of 2011 amid the so-called Arab Spring.

The kingdom approved its first mortgage law in July after more than a decade of debate.

This month, it issued regulations on real estate financing for public consultation.

Mortgage law

“If the real estate, especially the residential, sector picks up properly and if the mortgage law does kick in as people are hoping it will, I think there will be a lot more years left for the construction boom,” Asjad Yahya, an analyst at Shuaa Capital PSC in Dubai, said by phone Sunday.

The three-month Saudi Interbank Offered Rate known as Saibor, the benchmark used by banks to price loans, gained most in the six-nation GCC this year amid the nation’s credit revival.

Three-month Saibor advanced 19 basis points, or 0.19 percentage point, to 0.97375 percent Monday.

The rate’s spread over the London Interbank Offered Rate more than tripled to 66 basis points, the widest since January 2009, according to data compiled by Bloomberg.

Rising provisions

Still, credit to the construction industry accounts for only 7.5 percent of total loans and banks’ willingness to lend to the industry has been affected by a rise in provisioning against bad loans from construction companies.

Third-quarter earnings of the nation’s banks missed analysts’ estimates after contractor Mohammad Al-Mojil Group Co. defaulted on loans, Arqaam Capital Ltd. said in October.

Outstanding loans to the construction industry fell 1.3 percent at the end of September from three months earlier, according to central bank data.

“There might be a few cases like Mohammad Al-Mojil Group, but it doesn’t look as if the whole sector is in trouble,” Ansari of EFG-Hermes said.

Most construction loans are approved against the expectation for periodic cash payments as construction milestones are reached, he said.

Dar Al Arkan Real Estate Development Co., the largest Saudi developer by market value, is set to post 6 percent growth in profit for 2012, snapping three years of drops, according to the average estimate of 10 analysts compiled by Bloomberg.

The yield on the developer’s 10.75 percent bonds due in February 2015 has dropped 84 basis points so far this quarter to 6.7 percent Monday.

Housing shortage

A number of projects needing financing in industries including petrochemicals will also buoy demand for loans.

Saudi Arabian Oil Co. and Sumitomo Chemical Co. plan to invest $7 billion to expand a petrochemicals plant at their Rabigh Refining and Petrochemical Co. along the Red Sea.

Saudi Arabia’s housing stock is poised to expand by 2.4 million units in the next 10 years, with annual demand rising to 264,000 units by 2020 from 195,000 in 2011, National Commercial Bank said Oct. 1.

Banks may double real estate financing to meet demand, the nation’s biggest bank said.

“Housing shortage is huge in Saudi and housing affordability is a big problem,” Yahya at Shuaa said. “The mortgage law addresses one of the big concerns of the population and that’s why they have moved much faster on the law in the past 10 months than they have in the past 10 years.”

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