JEDDAH: The Housing Ministry is planing to create its own development company and start a mortgage-guarantee fund to encourage banks to increase lending, Minister Majed Al-Hogail was quoted as saying said in an interview with Bloomberg in Riyadh.

The Kingdom is taking a hands-on role in housing finance and development, Bloomberg added.

“We are looking to improve the productivity of the local developers but also trying to attract international developers and teaming consultants and builders for some projects,” Al-Hogail said in the report.

Saudi Arabia faces a shortage of more than 1.5 million homes over the next five years, according to the report.

The government recently imposed a tax on urban land that’s not being developed by its owners. And the ministry is now turning to a profit-sharing plan that helped Dubai turn desert land into a thriving metropolis, Bloomberh reported.

It said that the new development company will give businesses plots of land to build homes and help them secure financing by providing some loan guarantees. The funding assistance will also be extended to some home buyers.

Saudi Arabia must attract large foreign builders because the capacity of local contractors is too small to manage the scale of projects that the country envisages, the minister told Bloomberg.

The ministry is in talks with Turkish, Egyptian, Chinese and Arabian Gulf builders, he added.

Saudi Arabia signed a preliminary agreement with a Korean-Saudi group to erect 100,000 homes in Riyadh, valued at $20 billion and the minister said he expects a final deal soon.

The companies are Hanwha Engineering & Construction, Daewoo Engineering & Construction and Saudi Pan Kingdom for Trading, Indiana & Contracting known as SAPAC.

The development and financing measures are part of a raft of actions the government is taking as the country tries to diversify its economy.

The Housing Ministry is looking to double housing-density limits, create an office where all development approvals can be granted in the same place and allow the sale of homes before they’re built.

The ministry is lobbying the Saudi Arabian Monetary Agency (SAMA) to allow lenders to differentiate between first home buyers and others seeking mortgages.

SAMA earlier this year halved the down payment required by mortgage seekers to 15 percent.

The creation of a state-owned mortgage firm similar to the Fannie Mae and Freddie Mac in the US is almost complete and the refinance company, which is critical to developing a secondary market for home loans, will start operating by the end of this year, the minister said.

According to Bloomberg, the minister said that Saudi Arabia’s mortgage market, estimated at around SR94 billion now, “is very small,” Al-Hogail said.

But that will grow by SR20 billion to SR30 billion a year, boosting the mortgage loan book to about SR250 billion through 2020.

International investment banks are seeking opportunities in mortgage securitization, Al-Hogail said.

Several investment banks have approached the ministry to express interest in issuing Islamic bonds and securitizing the portfolio of the real estate development fund. The REDF has SR190 billion and more than SR150 billion of receivables, he said.

And as the mega projects start, bank loans won’t be enough to finance the construction and “bonds will play a larger role especially with the limited options,” he said.

According to Bloomberg, Al-Hogail also said that the ministry’s aim is to “initiate a path to home ownership” where developers know where the majority of demand is and where the state can help match homes being built with government grants to low-income citizens.

“We think within seven to eight years we should meet a good amount of this demand,” the minister said.

“Our objective is to reduce the risk for the developer and reduce the cost of homes for the buyers.”