How does SRC work toward the objective of unlocking the Saudi housing finance market?
SRC is one element in a more global ecosystem put in place under the umbrella of the Ministry of Housing. The whole plan of developing home ownership, housing, and access to home ownership is relying on three pillars. The first is supply, which is about ensuring we build enough affordable houses. The second is broadening the scope of who has access to home ownership, which is where the Real Estate Development Fund (REDF) plays a key role. We need to design accessible and affordable financial products. The third element is that there are homes coming to the market at an affordable price, and there are elements or products that make them affordable to more people; however, more has to be done to channel liquidity towards originators. Channeling liquidity means that there is a story to tell and to make sure that our products and our packaging are attractive to investors. Providing the liquidity is where SRC comes into play. We are now getting some traction because of the recent deal with Deutsche Gulf and Bidaya, and we are currently finalizing negotiations to sign the third transaction coming up with another mortgage finance company. Our approach is to provide a global answer to what the mortgage finance companies and the banks need to do or to see how we can help them to originate more. We interact with the originators to expand the eligibility criteria, and we promote standardization and transparency while we support the mortgage companies and banks and channel liquidity. It is nice to entice people to originate more loans and to grow the volume with a broader range of borrowers; however, at the end of the day we need also to make sure that we can bring the funding to these originators and that is what SRC is all about.
How will SRC acquire and package the finance portfolios to make these attractive for domestic and international investors?
This process drives on the expertise that we have within the company and that look at what we can do, what we shall do and what we need to avoid doing in order to make sure that we stay away from the difficulties that some markets have met in the past. We want to avoid what happened in the US in 2008 with the subprime. We combine therefore what we know could be done and what should not be done with how the market works here and then how we can sensibly push the boundaries. Secondly, we work on a reverse inquiry basis. SRC has two components in its mission: growth and stability. Growth means that we ensure there is enough funding to propel the mortgage market in the country, and we can only do that by not only relying on the domestic but also on international investors. By the same token it will also shape the “stability" element. We need to keep an eye on what the standards are, and what the narrative is that we will present to investors. With this reverse inquiry base approach, we are reverting to the originators and trying to shape the loans, criteria, reporting, information, and standards to the level that could be expected by third parties. Our intermediary role is partly capitalizing on what the market is, how it is functioning today, and the elements that could be improved and factoring what we know about the expectations of international investors. It is a two-way process whereby we explain and we anticipate to investors how the market works while raising the bar and the criteria so we can meet the expectations of the investors. This is about making sure that as we go we can attract liquidity, and we can fund all these loans, mortgages and acquisitions. It is not a pure game of distribution, but it is really about the real economy and real assets with a careful approach of the risk.
Are you targeting specific areas or funds and what are your expectations for the demand to grow?
We want to make sure we have the right product in terms of origination. The right product does not mean necessarily being overly conservative or on the contrary, overly liberal. Our aim is to grow the Saudi market sustainably, which means we should offer more loans to a broader range of the population, with the right assessment, right product, and the right coverage. Starting from there and the consideration for the assets, we cannot imagine jumping from a domestic market, which is almost absent on the international map, and say that tomorrow we will issue on the international market. We need to create credibility and recognition first, starting with domestic investors. After that, we go to countries in the region that have a close experience of the Saudi market, and then we will venture further afield. Still, we are aiming for a short timeframe to reach out internationally.
What ambitions have you set for the coming years?
We have three ambitions for 2018; the first one is to keep signing agreements and transactions, on-boarding new partners, and whilst doing that, to grow the volume and diversify the borrowing base. The second is to achieve our first capital market transactions, which could be a private placement to start with, a sukuk issuance likely. We should start putting our footprint and name on the map of investors by the end of 2018. Being on the radar screen sensibly will make a difference volume-wise. The third element is about creating a proper long-term fixed-rate products that the market does not have on the lending side at present. This means that we start creating or building up a long-term fixed rate curve the benefit of which will be channeled to the borrower which borrow at one point on a longer term and fixed-rate basis. Currently, most people on the Saudi market are floating or quasi-floating which put us apart from most market we want to “replicate"and that have a proper fixed rate offer. For borrowers, who typically receive a linear salary, it is preferable that the central bank or macro economic parameters have no influence on the amount of the monthly installment. The raise of the interest rate and their variability is an issue. We want to make sure that in terms of product, we bring something that can help stabilize the market and the position of the borrowers at a competitive price. Hence, the third objective for 2018 is to start to plant the seeds of what will become a benchmark curve on mortgages in the country for fixed rates long term.