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Market Review and Outlook

Source: NCB Capital

New Real Estate Regulation and Demand will Underpin the Next Housing Boom

For establishing long-term supply-demand equilibrium in the housing market, Saudi Arabia is required to build around 158k new housing units with an estimated investment need of SR79 bn each year between 2010 and 2020. The conventional funding sources are the Real Estate Development Fund (REDF), commercial banks' consumer loans for real estate and individual's own savings. In the last three years, REDF's disbursements of new housing loans averaged SR4.2 bn annually, while those from the commercial bank averaged around SR600 mn a year. Funding from the traditional sources were nearly 6% of the aggregate cost of building new housing facilities and the remaining 94% were mobilized from personal savings. The substantial gap between funding needs and the available resources points towards the existence of a huge potential market for mortgage financing in the Kingdom. SAMA is in the process of drafting regulations for mortgage financing in the light of Council of Ministers Resolution No. 73; whereby a developer will be required to register with authorities, and deposit all development finance and off-plan sales receivable into an escrow account. The implementation of regulations will create secure mortgage businesses for Saudi banks and act as a catalyst to boost confidence of investors.

A Production-Led Recovery

The US trade deficit increased to USD27bn in Jun from a revised USD26bn in May. Imports which had been declining consecutively since Jul08 increased by 2.6% M/M in Jun to total USD153 bn. The increase was largely due to higher oil prices as opposed to strengthening domestic demand. In fact household appetite for goods remains weak, indicative by the accelerated decline (USD1.7 bn) of imported consumer goods in Jun. On the other hand, imported industrial supplies increased by USD3.9 bn. This is largely a reflection of company efforts to restock their almost depleted inventories. Given that 1Q09 saw a record slash in inventories, which persisted through to 2Q09, it is expected that the following quarters will mark a pick up in firms’ inventory base, lending some support to US import demand. Overall the figures imply that the recovery in the US economy will be production- led. However given that consumer demand is still anemic, as households remain financially crippled by the crisis, the increase in production will not be matched equally on the demand side. This implies that the US economy will recover in an asynchronous manner, which will keep growth sluggish throughout 2H09.

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