Real Estate financing structure needs modifications : Markaz Study


“Markaz” in its recently released research note has examined the current structure of real estate financing and commented on their pitfalls while also suggesting alternatives. The authors of the report opine quoting data that real estate constitutes a significant percentage of the balance sheets of GCC corporate (6.5%), and also as an investment asset class (4% of total invested wealth) and is too important to be left to fend its financing needs on its own. The future activity estimates suggests a level of activity, which, if needed to be carried out efficiently, requires an appropriate financing system.

Challenges in the current lending structure: The authors argue that under the current lending structure, the sector is deprived of credit when it needs it the most during a downturn. This, is mainly due to the pervasiveness of bank lending which exposes itself to the sector’s fortunes by lending the entire value chain. GCC banks source funds from residents’ deposits and external funding which need not share the same trend as lending needs. During a downturn, banks have to chase for deposits as external financing gets withdrawn hampering their ability to provide credit. Banks also suffer from the classic borrowing short and lending long problem in their balance sheets as close to 90% of the deposits matures in less than an year, on an average.

Apart from bank lending, the current credit structure lacks mass savings organization like pension funds which has a longer term liabilities structure. Sovereign Wealth Funds (SWFs) tends to invest more externally and hence their investment potential are not fully explored. Government intervention becomes unavoidable when a drought in lending occurs because of the ownership structure or because of the huge size of the projects. Bond markets are partially exposed and limited institutional financing and volatile external equity in GCC real estate by wealthy expats are the other associated problems of the current structure.

Suggesting alternatives : As a solution to the above issues, the authors suggest a system where the longer term financing needs are met by institutions which can afford the longer tenure and limit banks to shorter term and working capital financing. The project life span of master developers averages c. 10 years and the financing needs should be flexible enough to ride over cyclical downturns. The longer term investors like SWFs, pension funds etc, shall be invited to invest in a longer term financing arrangement either through bond markets or specialized project financing institutions limiting banks to working financing. For developers, the average project life span is 2.3 years and hence banks can continue to finance this section of the value chain. Investors too can be financed by banks if a credit bureau is formed to facilitate banks’ judgment of the risks involved in the loan. Heightened regulatory supervision should also be in place to control bank lending for speculative purposes.

For end user financing, the authors study the structures in the peer emerging market countries and conclude that the structure moves away from a predominantly bank financed one to full blown securitized structure with or without recourse. The factors that drives towards securitization are the extent of mortgage penetration, lendable surplus with banks and reform orientation and crisis mitigation.

Alternatives for the GCC countries: While mortgage penetration is low (5.1% of GDP) in case of Saudi Arabia (KSA), the banks’ credit to deposit ratio is on the rise and mortgage lending is stalled. This suggests that refinancing is inevitable and the much awaited mortgage law should pave way for that along with increased mortgage availability. Mortgage penetration and lending need is expected to grow in UAE given the future plans in Abu Dhabi. Banks’ credit to deposit ratio is high , and the need to overcome the current crisis necessitates a government backed refinancing program which can be converted to a full-fledged bond market financing. Kuwait’s longer term development plans are not clear and a credit overseeing authority would preempt legislative measures to control overextension of credit. Qatar’s financing needs can be met with a systematic government refinancing, as opposed to the current crisis based refinancing and Bahrain should resort to external finance as it would be exceptional for its banks to grow enough to provide the required credit.


Kuwait Financial Centre S.A.K. "Markaz", with total assets under management of over KD 900 million (USD 3.1 Billion) as of June 30, 2009, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. "Markaz" was listed on the Kuwait Stock Exchange (KSE) in 1997.