The GCC mortgage market is potentially tens of billions of dollars in size, and according to several mortgage providers more customers in the GCC are opting for Islamic mortgages. For instance, Sakana Holistic Housing Solutions, the Bahrain-based dedicated Islamic mortgage provider, which was established some four years ago, reports that 40 percent of its customers are non-Muslims. One of the most experienced mortgage bankers in the GCC is Raman Lakhsmanan. He pioneered mortgages in the region, first in Oman where he was involved in the first mortgage bank, Alliance Housing Bank, there in 1998 and then as a senior manager at Amlak Finance, the Islamic mortgage finance entity of Emaar Properties, in Dubai in 2003.
Since then has been at the helm of Sakana driving its business through both the boom years of yesteryear and the tough market of today in the aftermath of the global financial crisis. Here Raman Lakhsmanan, CEO, Sakana Holistic Housing Solutions, discusses the current state of the mortgage market in Bahrain and the GCC; the potential impact of the pending Saudi mortgage law on the regional market; the regulatory and legal issues that still need to be resolved; and the challenges and prospects for the mortgage market going forward.
What is the state of mortgage market in the GCC and how has this affected Sakana?
With the financial crisis, things have slowed done considerably in the Gulf. Sakana too has been impacted by the slowdown in business. The cost of funds has gone up. As a result we had to push up our prices. At the moment we are not writing much new business. But our portfolio is doing really well. Customers are repaying their obligations on time and we have not had a single repossession. Our profits have grown in 2009 compared to 2008. We hope our funding issue will be addressed shortly because we are looking at increasing our capital. Currently it is BD20 million ($53 million). We are looking at increasing our capital by another BHD20 million to take it up to $106 million.
What is the mortgage market size in Bahrain and the GCC?
The mortgage market size has increased significantly in the GCC region. For instance, in Bahrain alone, the market size is more than $1.5 billion. In terms of GDP (gross domestic product) per capita, mortgage penetration in Bahrain is 4 percent, this is compared to countries of similar size to Bahrain in Europe where the figure is on average 23 percent. In the US and UK the figure goes up to 50 percent to 70 percent. Home ownership is also quite low. For instance the Saudi Arabia home-owner rate this is about 20 percent, and Saudi Arabia alone needs about 1.5 million new homes over the next few years. Even in Bahrain, about 50,000 new housing units are needed and there is a waiting list of about 10 years.
In terms of the high-end, middle-income and affordable housing, what is the breakdown?
A substantial part of the market will be at the luxury and top-end. As a rough estimate I believe this to be about 70 percent of the market.
But didn't the governments' realize this lopsided development in the markets?
Unfortunately the regulations did not catch up with the pace of developments in the real estate market. We need the regulators to do their job. This has started, for instance in the UAE, we now have a real estate regulatory authority (RERA), which is monitoring the licensing of some these developments, the registration of the developers themselves, and the off-plan market, especially the escrow accounts.
In terms of mortgage finance and the market going forward, which option would be more attractive-conventional mortgages or Islamic mortgages?
To me it boils down to whether there is value proposition on the table irrespective of whether it is a conventional or Islamic mortgage. For example, Sakana has been a dedicated Islamic mortgage finance provider for the last three and a half years. In that time we have seen that about forty percent of our customers are non-Muslims. They have come out of their own choice. In my experience an increasing number of non-Muslims are opting for Islamic mortgages. In Dubai, the two Islamic mortgage providers, Tamweel and Amlak Finance, at one stage commanded 60 percent market share. In Bahrain, the Islamic mortgage market share is about 25 percent. Bahrain has more than a dozen mortgage providers, of which about a half are Islamic mortgage providers.
Is your mortgage pool big enough for securitization possibilities?
In terms of assets we have about US$100m. It is not a big amount of money in terms of securitization. Give us a bit more time. Once the portfolio is big enough we may issue a Sukuk in this respect.
Legal certainty is the cornerstone of mortgage laws in the developed economies. Does Bahrain have a mortgage law?
Bahrain does not have a mortgage law as yet, but has a relatively robust legal system and there have been cases where mortgage providers have been able to enforce the security on the assets and repossess the property. But it will be challenging in the case where the customer is a Bahraini national and he does not have any other accommodation to live in. To force a repossession in such a case will be very long and drawn-out, unless alternative accommodation is made available to the customer.
From a GCC perspective things are also changing. For instance in Oman, when I joined the first private sector housing bank there, Alliance Housing Bank, in 1998, the legal framework was not that much in place and strong enough to deal with repossessions. But over the years things have changed. Now if even an Omani defaults on his payments, you can seek recourse in the law and successfully evict a customer from a property. Recently in Dubai, Barclays similarly tested the legal process and took a defaulting customer to court and successfully repossessed the property.
Are you looking in anticipation to the new mortgage law in Saudi Arabia?
We are all waiting with abated breath for the adoption of the Saudi mortgage law. It will have an important knock-on effect on the other GCC countries. We hear that the law is a robust one and encompasses many of the regulatory aspects, which is frankly urgently required. The fact of the matter is that the law is still not passed after almost three years of deliberations.
