Saudi banks’ real estate loans reached SR816.83 billion ($217.82 billion) in the second quarter of 2024, marking a 12 percent annual increase, according to data from the Saudi Central Bank (SAMA). This amount represents about 30 percent of the banks’ total loan portfolio for the three-month period.
Retail real estate loans constituted the largest portion, making up 79 percent of the total and growing by 10 percent to reach SR641.72 billion. Meanwhile, corporate real estate loans, which accounted for 21 percent, grew at a faster rate of 18 percent, totaling SR175.12 billion.
The share of real estate loans within Saudi banks’ total loan portfolios has steadily increased in recent years. Five years ago, these loans accounted for approximately 17 percent of total lending. By 2021, the figure had risen to 18.5 percent, then jumped to 28.5 percent in 2022, and 29.6 percent in 2023. As of the second quarter of 2024, real estate loans now comprise 29.7 percent of the total.
Several factors are driving this growth, including urban development, changing lifestyle preferences, and the rise of e-commerce. Additionally, there is a growing focus on sustainability, remote work, demographic shifts, and supportive government policies. These trends have led to increased demand for various types of properties, ranging from residential apartments and villas to commercial offices and retail spaces. Hospitality venues are also seeing heightened interest as mixed-use developments, which combine residential, commercial, and recreational areas, become more common.
Macroeconomic trends such as population growth, urbanization, and economic stability are further strengthening this market. Strategic initiatives like Vision 2030, aimed at diversifying the economy and attracting foreign investment, are providing a robust framework for sustained growth. As a result, real estate companies in Saudi Arabia are increasingly focusing on affordable housing and sustainable construction, recognizing the long-term potential of these areas.
The Kingdom’s real estate sector is emerging as a compelling opportunity for investment and development, attracting both local and international players looking to capitalize on the country’s evolving landscape. According to a study by Mordor Intelligence, the commercial real estate market in Saudi Arabia is highly fragmented and competitive, driven by increasing demand for new properties due to growing commercial activities. Developers are competing based on factors such as land banks, property location, upcoming projects, construction costs, and company reputation. The study highlighted prominent real estate development companies in the market, including Al Saedan Real Estate, Kingdom Holding Company, and SEDCO Development. Other notable companies include Jabal Omar Development Company, Makkah Construction & Development Co., Dar Alarkan Real Estate Development Co., and Saudi Taiba Investment and Real Estate Development Co.
In parallel, home financing is experiencing significant growth, aligning with the government’s goal to increase homeownership among Saudi nationals to 70 percent by 2030. In 2016, SAMA revised regulations to increase loan-to-value (LTV) ratios for financing companies from 70 percent in 2014 to 85 percent. By 2017, the LTV cap was extended to 85 percent for citizens seeking their first home through banks, and it further increased to 90 percent in 2018.
As the government continues to boost the supply of affordable housing, the creation of the Saudi Real Estate Refinance Company (SRC) in 2017, a subsidiary of the Kingdom’s Public Investment Fund, has strengthened the provision of mortgage-backed securities for investors. The demand for real estate financing is expected to grow from SR280 billion in 2017 to SR500 billion by 2026, driven by robust economic growth. SRC plays a vital role in this expansion by making the housing market more accessible to both local and international investors.
A study by Deloitte noted that the lack of refinancing firms in the Saudi mortgage market had previously constrained banks’ ability to expand their loan portfolios within any single sector. However, the establishment of SRC has changed this dynamic, allowing banks to package their loan portfolios into mortgage-backed securities that can be sold to investors.
The Saudi real estate market has also been significantly impacted by fluctuations in interest rates, closely tied to U.S. monetary policy due to the Saudi riyal’s peg to the U.S. dollar. As the Federal Reserve raised rates to combat inflation, Gulf Cooperation Council nations, including Saudi Arabia, followed suit, leading to higher borrowing costs across the region. Initially, these elevated interest rates created challenges for individuals and companies seeking real estate financing, causing potential buyers to hesitate, particularly as property prices were already rising.
Despite the persistence of high interest rates, the market has shown resilience and begun to regain momentum. Elias Abou Samra, CEO of Rafal Real Estate Development Co., noted in an interview with Arab News in July that the market has adapted to the “higher-for-longer” interest rate environment. Buyers have come to terms with the fact that waiting for a reduction in rates could be offset by further increases in property prices, prompting many to move forward with their purchasing decisions, boosting demand for mortgages and real estate transactions.
Another contributing factor is the significant increase in construction activity across Saudi Arabia’s giga-projects and other major development initiatives supported by the Public Investment Fund (PIF). These large-scale projects have maintained momentum in the real estate market, helping to counterbalance the effects of higher borrowing costs.
In August, the U.S. Federal Reserve indicated its readiness to cut interest rates, expressing confidence that inflation is easing and caution over potential further slowing in the job market. While Fed Chair Jerome Powell did not specify a timeline or the extent of the potential rate cuts, his comments suggest a possible reduction at the upcoming mid-September policy meeting. There is uncertainty about whether the Fed will implement a more aggressive cut, such as a half-point reduction, instead of the usual quarter-point.
For Saudi banks, expected rate cuts could spur corporate loan growth, while their strong asset quality is likely to mitigate any downside risks in 2024. Fitch Ratings recognizes the Kingdom’s banks as having the strongest risk profiles among GCC lenders, thanks to robust asset quality, conservative underwriting standards, and strict regulation by SAMA.
