Banking, Trading and Commerse | Finance news

Mideast money slow pace of housing reform frustrates saudis


But a huge housing shortage in the country has led the 46-year-old father of five to accept that he will be unable to afford a home for his family until he retires from the medical firm where he works and moves to a remote village."To buy land in an average area in Riyadh would cost at least 750,000 riyals ($200,000), and to build and furnish the house would cost at least another 1 million (riyals)," he said. Shahery's difficulties are shared by many citizens of the world's biggest oil exporting-country, where a doubling of the population in the past 20 years and the arrival of property speculators have sent house prices surging by an average 10 percent annually in recent years. Analysts say the kingdom needs to build up to 275,000 new homes a year for the next five years to satisfy demand for about 1.65 million new homes. Property consultancy Jones Lang LaSalle (JLL) forecasts land prices will rise by at least 10 percent this year while house prices will increase by another 7-10 percent. Keenly aware that the housing shortage is a major social problem in a nation that avoided uprisings elsewhere in the region last year, the government has set up a new housing ministry and pledged to construct half a million new homes at a cost of 250 billion riyals ($67 billion). However, that plan is likely to take years to realise and economists say more far-reaching reforms are needed to encourage home building, including passing a long-awaited mortgage law and taxing undeveloped land. A short drive along the congested streets of Riyadh reveals an anomaly: large stretches of undeveloped land in attractive residential areas, belonging to wealthy landowners who are in no rush to build on it or to speculative investors who aim to sell the land undeveloped for a quick profit. Property developers for their part are being deterred by the high costs of development and lengthy bureaucratic procedures. In recent years they have preferred to focus on more profitable, higher-end housing projects instead of addressing demand for cheaper properties, although analysts say that trend may be starting to change."The Saudi government is doing the right thing by focusing on supply, rather than increasing demand through providing funding (from banks) .. . th ings are starting to happen and Saudis will see more solutions in the next five years," said John Harris, director of JLL's Saudi arm. Demand for housing is most acute, he says, among middle income families earning around 8,000 a month who are looking for a more spacious family home that will cost them 700,000-800,000 riyals in Riyadh and other major cities.

MORTGAGE LAW A proper mortgage law would help make property more affordable to a wider section of the population but t hat has been promised for almost a decade and there is no indication on when it will be introduced. Without it the kingdom has no proper framework to govern property ownership. Implementation of the law has been complicated by the political difficulty of allowing houses to be repossessed and families evicted for non-payment in a country where citizens have no vote but receive generous financial protection from the government. Some banks already offer housing loans, but in the absence of legislation allowing repossessions, these must be secured against salaries, making them available only to Saudis employed by leading companies. As a result, only about 2 percent of homeowners have a mortgage, industry experts say, and foreign banks and private developers have shied away from the market.

Less than half of Saudi households own their home and that figure drops to around 30 percent in younger households where the occupiers are below 30 years of age, a trend that is prompting young Saudis to put off getting married because they cannot afford their own home."My monthly salary is 8,500 riyals and I pay (1,500 a month in) installments on a car loan. The high rent plus the car loan did not allow me to get a suitable loan to own a house," said Abdulrahman al-Anzi, a 27-year-old English teacher. SIGNS OF A BUBBLE In February, the Shoura Council, a body that advises the government on new laws, proposed an annual tax on undeveloped land to encourage landowners to release sites for homebuilding.

"There have been signs of a speculative bubble (in the market). Taxes on undeveloped land or higher fees on land transactions should reduce the amount of speculative land transactions," said Paul Gamble, chief economist and head of research at Jadwa Investment in Riyadh. However, there has been no government decision on a tax and the issue is sensitive because a lot of land is owned by princes and leading businessmen. An official of Eastern Province was quoted by al-Hayat daily this month as saying real estate businessmen own a fifth of undeveloped land and do not want to sell. A November 2006 U.S. Embassy cable released by WikiLeaks charged that some of the country's several thousand princes had confiscated plots for their own gain. Abdulwahab Abu-Dahesh, vice chairman of the real estate committee at the Saudi Chamber of Commerce in Riyadh, said taxing undeveloped land may not be enough to spur property development."I do not think that imposing tax on undeveloped lands would solve any problem or would decrease prices, especially given that the market is not well regulated," he said."Most of the undeveloped sites do not have services like water, electricity and sewage and the developer incurs their cost without any aid from the government," he added. Salman al-Saeedan, who owns a real estate company, said the government also needs to cut red tape, which currently requires a developer to obtain several different licences before it can start a project. Obtaining the necessary licences can often take two years or more."Complicated procedures take a long time, and the absence of a clear vision pushes developers away from the market," he said. For aspiring homeowners like Shahery in Riyadh, the slow pace of reform is dampening confidence they will ever get a foot on the property ladder."I have been waiting for the right time for prices to decrease and for new developments to come in Riyadh, but this time has never come and I think it never will," Shahery said.

Money markets ecb deposit rate cut may do more harm than good


* Money markets increasingly pricing in ECB depo rate cut* Such a move may have adversely impact repo markets* May also increase volatility in sovereign bond marketsBy Marius ZahariaLONDON, June 25 Money markets are increasingly pricing in a near-term cut in the European Central Bank's deposit facility rate, but some players warn that such a move may do more harm than good by lowering banks' incentives to lend. With the euro zone economy faring worse than expected, the three-year-old sovereign debt crisis intensifying day by day and waning hopes that politicians can get a definitive grip on events, markets are increasingly banking on support from the ECB. Analysts say forward euro overnight Eonia rates are pricing in an over 50 percent chance that the ECB will cut its deposit facility rate from 25 basis points to zero later this year along with its 1 percent refinancing rate. But while this would be intended to give a further push to banks to lend to each other and then to businesses to help the real economy grow, it may actually have the opposite effect. Analysts say the few banks that are willing to lend in unsecured lending markets may stop doing so as their return on such transactions may fall below the cost.

More importantly, it could create distortions in the most active sector of the money markets, repo transactions, in which investors raise cash backed by collateral, usually government debt. The rate to borrow cash using top-rated general collateral (GC), such as a basket of German or French government debt, has recemtly traded 20 basis points below Eonia, the overnight rate for unsecured lending, because of the quality of the bonds on offer. Eonia, in turn, has settled 10 bps above the deposit facility rate on average in recent months - on Friday it fixed at 0.325 percent. Once the deposit rate is cut to zero, Eonia is expected to fix at around 0.1 percent.

"That would mean that the GC rate will be negative, limiting the ability to get money using the bonds. It can create a distortion in the repo market," said Alessandro Giansanti, rate strategist at ING. BOND MARKET IMPACT Any repo market distortion could also lower volumes in sovereign bond markets, as investors who buy government debt to raise cash will no longer have a reason to purchase them.

"This could add to the negative momentum observed in sovereign bond markets, which is reinforced by increased volatility and already impaired liquidity," Commerzbank rate strategist Benjamin Schroeder said in a note."Within the context of the broader sovereign crisis, it would be worrying if the ECB risked endangering the still very fragile bond markets in return for questionable positive effects for interbank lending."Not all analysts are worried that a cut in the deposit rate will have side effects on repo markets. Max Leung, a rates strategist at Bank of America Merrill Lynch Global Research, said repo rates on a few German bonds - posted as collateral individually rather than as part of a basket - have already turned negative and volumes have not dropped."Negative rates is never a good thing because you penalise people for lending, but there are securities which are already trading at negative levels because of flight-to-quality flows," Leung said."As far as banks are concerned it still represents business. For the repo desks, they can still charge relatively wide bid/offers so we don't think volumes will necessarily fall because of that."