SRC Closes SAR4bn Sukuk Issuance in March to Acquire More Islamic Mortgages from the Market to Release Liquidity to Finance Kingdom’s Housing Stock and Ownership Demand and Objectives

The Sukuk market in Saudi Arabia continued its buoyancy in First Quarter 2021 with proactive regular participation by sovereign issuers such as the National Debt Management Centre of the Ministry of Finance, quasi-sovereigns, multilaterals based in the Kingdom such as the Islamic Development Bank (IsDB) Group and the spate of corporate issuers.

In March 2021, one of the stand-out issuances was the successful completion of the SAR4 billion (US$1.967 billion) two-tranche long-term Sukuk issued by The Saudi Real Estate Refinance Company (SRC), a frequent issuer of Sukuk and a dedicated Sharia’a compliant mortgage finance and securitisation company. The issuance is SRC’s third offering in local currency, but the first to be guaranteed by the Saudi finance ministry. SRC Sukuk issuance plans include an international offering denominated in U.S. dollars under the right market conditions.

SRC is wholly owned by the Saudi sovereign wealth fund, the Public Investment Fund (PIF), and was established in 2017 with the objectives of supporting the national agenda of increasing home ownership amongst Saudi citizens, promoting the development of the housing finance market in the Kingdom, and by acting as a catalyst for accessible and affordable home financing solutions.

The Sukuk was issued under the company’s newly launched SAR10 billion Saudi-Riyal Sukuk Programme under which SRC will issue sovereign-guaranteed Sukuk targeting local investors. The SAR4 billion Sukuk comprised two tranches offered in 7-year and 10-year tenors. The issuances were distributed through a private placement to qualified Saudi-based institutional investors attracting an orderbook in excess of SAR 8 billion which represents an oversubscription of 2.15 times.

The success of this transaction, said SRC, underscored investor confidence in the strength of the Saudi housing market which witnessed an increase in home ownership from 45% in 2017 to 62% in 2020.

“The transaction reflects the continued growth of SRC’s central role in creating a liquid market for wholesale housing finance in the Kingdom and supports the national ambition to increase home ownership for Saudi citizens,” Debashis Dey, Partner at international law firm, White & Case who advised SRC on the transaction.
HSBC Saudi Arabia acted as the Sole Arranger on the establishment of the Sukuk Programme and as a Sole Lead Coordinator, Sukukholders’ Agent and Payment Administrator on the issuances under the Programme. Aljazira Capital, HSBC Saudi Arabia, and Saudi Fransi Bank acted as Joint Lead Managers and Bookrunners on the issuances under the Programme.

The Sukuk offering attracted strong support from the institutional market with over 30% of the issuance subscribed by a mix of asset managers, pension fund, government funds, and insurance companies.

According to Majed Al Hogail, Saudi Minister of Housing and Chairman of SRC, “the successful Sukuk issuance demonstrates confidence among the investor community and trust in a robust housing market in the Kingdom and more broadly a resilient Saudi economy. The favourable cost of funding for SRC ultimately translates to an ecosystem where mortgages are more affordable and accessible to our citizens. The Sukuk programme brings us one step closer to achieving the strategic objectives of the housing programme under Vision 2030.”

The aim of SRC primarily is also to develop a robust secondary Sharia’a compliant mortgage market, which in recent years has gained traction in Malaysia, the most advanced market led by Cagamas, the Malaysian Housing Finance Corporation; in Saudi Arabia, and more recently in Bahrain, Pakistan and even the UK, where Sukuk has been issued to securitise Islamic mortgages.

“The completion of issuances by SRC under the new Sukuk programme,” explained Fabrice Susini, CEO of SRC, “marks an important step towards the development of a robust secondary mortgage market and the wider housing sector in the Kingdom.

“Our role in sustaining a healthy housing market is further validated by the strong investor interest in our issuance which helps achieve our funding objectives. The latest sovereign-guaranteed offering, underpinned by favourable cost of funding and terms, will further provide liquidity to the Saudi housing market that helps our citizens climb the housing ladder. This issuance will also contribute to the realisation of the PIF’s strategy, a key driver in promoting the growth of the Saudi economy and diversifying sources of income by launching new sectors, including a secondary market for real estate financing.”

Mortgage finance is a relative latecomer in the Saudi consumer financing mix, partly because of the long time it took to introduce a comprehensive mortgage finance law.

But the market has flourished over the last few years thanks to the major drivers of the rise in population; the target set in Saudi Vision 2030 for 70% home ownership in the Kingdom by 2030; the young demography of the Kingdom; the changing dynamics of the socio-labour market where it is now not unusual for both husband and wide to work; and the projected demand for housing units as the extended family structure recedes.

The demand for Islamic mortgages especially based on the Murabaha contract dominates the market. Islamic home finance providers include SRC, Amlak International, Bidaya, Saudi Home Loans, Deutsche Gulf Finance, Dar Al Tamleek and Dar Al Arkan (both a construction company which also offers mortgages).

Demand for residential units in Jeddah, like elsewhere especially in metropolitan Saudi Arabia, is sizeable and growing for the foreseeable future. Due to the rise in population and declining household size, the overall supply of housing units in Jeddah and in other metropolitan areas has been inadequate compared to increasing demand. The overall housing demand in the Kingdom, according to several studies including one by the International Finance Corporation (IFC) of the World Bank Group, indicated a demand of over 1 million units over the next few years, with Jeddah alone needing 21,000 units a year.

According to the Saudi Central Bank (SAMA), at the end of 2019, the number of ready-made housing units under the Developmental Housing Program amounted to 5,341. The Riyadh region accounted for the largest share of 40.3 percent, followed by Al-Jawf region with 10.7 percent and the Asir region with 10.3 percent of the total ready-made housing units.

The total number of ready-made housing units under real-estate development projects amounted to 106,000 with a total value of SAR62.6 billion. In addition, the total number of developed residential land lots reached 64,600.

According to SRC’s Fabrice Susini, the size of the Saudi mortgage market stood at approximately SAR240 billion at end Q1 2020 and is expected to reach SAR800 billion by 2028.

Share this post