Saudi banks’ real estate loan portfolios hit $213.5bn in Q1 2024

Saudi banks’ real estate loan portfolios reached SR800.5 billion ($213.5 billion) in the first quarter of 2024, a 13 percent increase from the same period last year, the latest official data showed.

Figures released by the Saudi Central Bank, also known as SAMA, revealed that 78 percent of these loans were retail, while the remaining 22 percent were corporate.

Despite constituting the largest share of real estate lending from banks, loans to individuals recorded a slower annual growth rate of 10 percent compared to the 26 percent growth for the corporate sector.

Several factors, including high interest rates, could have dampened individual borrowing due to the increased cost of credit.

In contrast, the rapid implementation of the Kingdom’s giga-projects in line with Vision 2030 has likely spearheaded the rapid growth in corporate real estate lending. These large-scale projects require substantial financing, driving significant demand for corporate loans and accelerating their growth rate.

Additionally, data released by the General Authority of Statistics indicated that residential real estate prices increased by 1.2 percent during the first quarter of the year, while prices in the commercial real estate sector decreased by 0.5 percent.

This difference in price trends likely made commercial properties more appealing and affordable for corporate investors, boosting demand for commercial real estate loans. Conversely, it may have tempered individual borrowers, resulting in a slower growth rate for retail real estate lending.

According to SAMA data, new residential mortgages issued by banks to individuals totaled SR27.44 billion in the first four months of 2024, marking an increase of 2 percent from the same period last year.

Despite making up 67 percent of the new loans at SR18.25 billion, lending for houses fell by 1 percent. In contrast, lending for apartments increased by 9 percent, reaching SR7.6 billion, while land credit grew by 5 percent to SR1.62 billion.

According to a study by PwC, Saudi Arabia has ambitious plans to double Riyadh’s population and attract 9 million people to The Line, a revolutionary urban development project, by 2045.

Many of these newcomers will be expatriates, supported by recent visa reforms. The Premium Residency Program — which offers benefits such as property and business ownership and the right to work without a sponsor — aims to attract highly skilled expats, investors, and entrepreneurs to create jobs and bring in investment.

In a survey conducted earlier this year by global property consultancy Knight Frank, 77 percent of 241 Saudi-based expats expressed a desire to buy property. The primary motivation for real estate purchases in the Kingdom, especially among millennials, was its perceived status as a good investment.

The shift from villas to apartments among the majority of respondents was likely influenced by factors such as the higher costs associated with villas, affordability considerations, and possibly differing cultural preferences compared to Saudi nationals, the firm said.

Additionally, in the wake of the global financial crisis, over-collateralized security and full-recourse financing have become more common, according to Baker McKenzie Research Hub. Borrowers now face stricter requirements, including lower loan-to-value ratios, meaning they cannot borrow as much as they could before the crisis.

SAMA has capped the loan-to-value ratio on residential mortgage loans at 90 percent. This policy aims to balance promoting homeownership with maintaining a stable and sustainable housing market and financial system.

Therefore, according to the research, despite the strong demand for housing, Saudi Arabia’s mortgage finance market is still developing, and consumer lending practices remain strict. This strict lending environment is expected to become even more stringent once the Registered Real Estate Mortgage Law is fully implemented and enforced.