A joint venture between Deutsche Bank (DB) and a group of investors will originate home financing investment products that are Shariah compliant to prospective and current homeowners in Saudi Arabia. The move may be interpreted as a trend of European banks, now on the road to recovery, returning to Middle East expansion plans. Saudi Arabia is nearing completion of new financial and regulatory framework for mortgage finance, as current standards are restrictive and date back to the 1970s. The oil-rich Middle Eastern country is currently faced with a backlog of 450,000 applications from first-time buyers for interest free credit who are filing under the restrictive Real Estate Development Fund. Additional legislative steps, such as the establishment of the Tadawul sukuk market (Islamic bonds) in Saudi Arabia, are improving the prospects of sukuk becoming an attractive issuance structure, especially for local and cross-border investors, according to a report this month from Moody’s Investors Service. “The new law, once introduced, is expected to drive growth in the local mortgage market, which still lags behind regional and international markets relative to its potential and domestic market needs,” writes Faisal Hijazi, business development manager and Islamic finance analyst for Moody’s. “Newly established mortgage and finance companies would also be able to facilitate their future lending business, while preserving a form of comfortable security over extended credit.” The venture’s operations will comply with the Islamic principles that prohibit usury and other interest-based investment products. The Shariah principles also dictate that investors must have a stake in the collateral of a debt, which is generally accomplished by selling a portion of ownership of the home to the investors. In some cases, for example, certain nuances are added. Deutsche Gulf Finance has an initial capitalization of approximately $110m and will open its operations by providing home financing for properties located in Saudi Arabia, with plans to expand its operations into Bahrain, Qatar and Kuwait. It is 40% owned by Deutsche Bank’s Riyadh branch, in eastern Saudi Arabia, and 60% by the Saudi Arabia-based investor group, led by Fahad Abdullah Abdulaziz Al Rajhi. Al Rajhi’s family founded the Al-Rajhi Bank, one of the world’s largest Islamic banks, with holdings totaling more than $45.5trn. The Al Rajhi family is one of wealthiest non-royal families in Saudi Arabia. “We are excited to partner with Deutsche Bank and benefit from its global experience in housing finance. Deutsche Gulf Finance will benchmark itself against international best practices and looks forward to contributing to the growth of home ownership in Saudi Arabia,” Al Rajhi said. For years before the crisis, European investment banks steadily increased their presence in the Middle East. Lately the area has not drawn as much attention, and construction on large projects ground to a halt with a squeeze on the capital markets. Moving into the Middle East market represents a large cost, as banks must partner with a true Islamic financial service providers in order to get licenses to operate. But progress, did not stop completely. State-funded projects, like the massive King Abdullah Economic City, along the Red Sea, will create 260,000 new apartments for middle-income workers by 2025. According to Deutsche Bank Research, the total outstanding home finance provided by the private sector in Saudi Arabia aggregates to less than 1% of the country’s gross domestic product (GDP), compared with more than 50% in most developed countries, and approximately 6% in Kuwait and 7% in the United Arab Emirates (UAE). Deutsche Bank also projects Saudi Arabia will need 1.2m additional housing units by 2015. In addition, new mortgage legislation in the kingdom that’s designed to regulate housing finance standards for low- to moderate- income individuals could spark a second housing boom in Saudi Arabia. Based on market assumptions, Deutsche Bank estimates the law could cause incremental demand of approximately 55,000 additional units per year. According to Doug Naidus, Deutsche Bank managing director and global head of residential mortgage-backed securities (RMBS) lending and trading, Saudi Arabia is a key country in Deutsche Bank’s emerging markets strategy. “Islamic home finance continues to be an important part of Deutsche Bank’s global mortgage platform,” Naidus said. “Deutsche Bank’s global expertise coupled with the Al Rajhi family’s local prominence and experience make this an ideal and complementary business relationship.” In August 2009, The Muslim Community Cooperative – Australia (MCCA) launched a real estate investment fund that is Shariah compliant. Write to Austin Kilgore. Additional reporting by Jacob Gaffney. The authors hold no relevant investments.
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