By Angus McDowall

Saudi Arabia is studying draft regulations that could see the creation of a real estate refinancing company similar to U.S. firm Fannie Mae, according to proposals published by the central bank this week.

The regulations are part of long-awaited government efforts to develop a housing mortgage sector in the conservative kingdom where the restrictions of Islamic sharia law have made it difficult to secure lending against property.

The world's top oil exporter faces a housing shortage, particularly among lower and middle-income people, as land prices rise rapidly. In July, the government passed laws to regulate mortgage and lease lending.

The regulations proposed this week fleshed out the laws, principally by saying the government may establish Saudi Real Estate Refinancing Corp to develop a secondary market in home mortgages.

A secondary mortgage market allows lenders to spread risk, and tap new sources of funds. Fannie Mae was established by the U.S. government in the 1930s to finance such a market.

The new corporation, with a minimum registered capital of two billion riyals ($535 million), would have to stay majority state-owned. But real estate financing companies would be allowed to acquire stakes up to a combined total of 30 percent.

The corporation might also offer shares to the public. It could provide the secondary mortgage market with access to both local and foreign financing instruments, the draft said.

DEFAULTS

Local financial firm Arqaam Capital has said the introduction of a legal framework for mortgages will see the amount of lending to purchase housing in Saudi Arabia eventually double to 12 percent of gross domestic product. The country's GDP is about $650 billion.

However, the full framework is some way from being established. Implementing regulations on how defaults will be handled, a big concern for lenders who fear sharia courts and Saudi police will not evict people who fail to pay loans, have not yet been published.

Some lenders already offer mortgage-like products. But the lack of a clear legal framework has restricted the market to comparatively wealthy Saudis in high-paying jobs, whose payments can be deducted by the bank from their salaries.

"The problem was how do you get that person to repay if they cannot be kicked out of their house," said Nicholas Diacos of The Law Firm of Salah Al-Hejailan.

"In terms of making competitively priced financing in this market, it was a nightmare because the financiers were pricing the risk into their finance."

While lower income borrowers can rely on a government housing fund, the lack of a range of financing options has contributed to the home shortage because developers tend to focus on the top end of the market where profit is higher.

Mortgage-related regulations released so far suggest an increasing reliance on structures compliant with sharia law, said a Gulf lawyer who follows Saudi Arabia closely.

He said Saudi economic reforms typically involved a long process in which layers of additional reforms were added to any groundbreaking law, as it happened with capital markets legislation in the past decade.

"It is a continuum. There is a lot more that will need to be fleshed out over the course of the next 12 months and beyond as people put these structures into place. It is not a panacea, but I do think it is a good start," he said of the mortgage rules.

Saudi developer looking to buy foreign properties

By Angus McDowall and Asma Alsharif

Saudi Arabia's largest listed real estate developer, Dar Al Arkan, plans to buy assets in Asia as part of its strategy to diversify revenue streams, its chairman Youssef Al Shelash told Reuters last month.

Shelash said the company owned just under 35 million square metres (8,650 acres) of land, and in the past, it has relied heavily for revenue on sales of land within Saudi Arabia.

Its decision to branch out overseas illustrates how a growing number of Saudi companies, buoyed by the economic boom of the past two years, are looking to diversify abroad.

Outward flows of foreign direct investment from Saudi Arabia hit $3.4 billion last year, close to a record $3.9 billion recorded in 2010, according to the Arab Investment and Export Credit Guarantee Corp.

"We are targeting some geographical diversification. We have a concentration issue. Most of our assets are in Saudi, so we would like to diversify outside Saudi Arabia through a long plan over five to seven years," Shelash said at the Reuters Middle East Investment Summit.

He said the company was targeting assets outside the Gulf and North Africa, "maybe in Turkey or Asia, Malaysia, Singapore, some stable countries", and that it would look to buy existing buildings rather than develop new sites.

"We would like to get some stability in the company income," he said, but added that it would likely take five to seven years to generate 40 percent of revenue from rental income, a goal which he said last year would hopefully take three years.

Shelash added the company was still finalising a more detailed strategy, which it hoped to have ready early next year.

RECOVERY

Dar has enjoyed a dramatic recovery in its fortunes over the past two years, which to some degree, mirrors the fortunes of the Saudi economy.

Saudi Arabia was hit by the global economic crisis of 2009 and 2010. But after the Arab Spring uprisings of early 2011, the government boosted spending heavily in order to ease social tensions. This has helped Dar and many other Saudi companies.

When Dar issued an Islamic bond or sukuk in 2010, investor demand was sluggish and the company had to settle for raising $450 million instead of its target of $500 to $700 million.

This year, however, its sukuk yields have dropped sharply and its share price has jumped 14 percent, far outperforming a 4 percent gain by Saudi Arabia's main stock index (TASI) - although the stock's value is still less than a quarter of its 2007 peak.

Although Dar is not explicitly backed by the government, official action has convinced investors that authorities would like to see the company succeed.

Last October, the country's Public Investment Fund approved a four billion riyals ($1.1 billion) facility to finance one of Dar's biggest projects, the Qasr Khozam development in Jeddah, estimated to cost 12 billion riyals.

The company now has outstanding debt of around 4.4 billion riyals, with sukuk of 750 million riyals and 1.69 billion riyals maturing in May 2014 and February 2015 respectively. It also has short-term murabaha Islamic loans with local and international banks, which it plans to roll over.

Dar, which posted third-quarter net income of 867 million riyals, paid off a $1 billion sukuk in July this year after selling land.

Shelash said the sukuk maturing in 2014 and 2015 could be paid off through company earnings without selling assets and would not be rolled over, adding that the company was waiting to see the impact of the U.S. "fiscal cliff" on international debt markets before it could consider raising more money.

MORTGAGE LAW

Saudi Arabia's real estate market, characterised by high land prices and pent-up demand for low-cost housing, is on the brink of potentially significant changes. A law to regulate mortgage lending for the first time was approved this year.

Shelash said it was too soon to predict the impact of the law on the real estate sector, but that it was likely to increase prices as lenders eventually gained confidence in the regulatory system and more consumers gained access to financing.

"It will add new additional demand. It will also make the price ... to be a little bit up," he said. He added that he was not sure what the direct impact would be on Dar's business.

Although the cabinet approved the law in July, details have yet to be made public by the central bank.

Analysts have said most housing demand in Saudi Arabia is among lower income Saudis, while many developers have tended to focus on building more expensive properties which yield higher profits.

Rising land prices mean it is sometimes more profitable for firms to simply trade land than to build low-cost houses.

Shelash said a housing loan company partly owned by Dar would likely focus on the upper middle segment of the housing market.

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