Real Estate Financing

Real Estate Financing

In recent years, the Kingdom of Saudi Arabia has made several attempts to provide affordable real estate financing opportunities, particularly in the residential sector. The introduction of the Real Estate Mortgage Law in 2012 had been anticipated to create a paradigm shift in residential financing.

Prior to the Mortgage Law, local banks took an outright transfer of title to the real estate or to the nominee named by the banks for the duration of the financing, and the transfer of title structure involved the borrower transferring legal title to a special purpose company, set up by the bank providing the financing. The Mortgage Law paved the way for a traditional mortgage structure, whereby the title to the property would remain with the borrower and the bank would obtain a registered mortgage.

However, issues continued in the actual application of that law, particularly at the point of registration of the sale at the notary public, and in 2017, the Saudi Arabian Monetary Authority (“SAMA”) issued a circular directing banks and finance companies to perfect their real estate security under the Mortgage Law. In particular, the SAMA circular urged banks and finance companies to:

• comply with the notarisation of real estate mortgages and to stop the process of transferring title to property rather than mortgaging the real estate;
• remedy the status of properties that are currently registered in their name within a three-year period, and inform their clients accordingly; and
• inform SAMA about the cases in which the notary public refrains from registering a mortgage.

Some of the key features of the Mortgage Law are as follows:

• once a mortgage over property is registered, the secured debt can be recovered from the sale of the property in priority to other creditors;
• allows the creation of second-ranking mortgages;
• the mortgage should be created in respect of a specific debt or future or contingent debt, provided that the amount of the secured debt or maximum limit of the debt is specified in the
  mortgage agreement;
• the owner of the property (mortgagor) continues to receive the rentals and other proceeds generated from the property; and
  The mortgagor and mortgagee may agree in the mortgage agreement that the receivables from the mortgage property will be used to pay in accordance with the amortisation schedule of the debt and to service any other fees, charges, and profits.