1. Introduction

Residential real estate finance markets are in a nascent stage in the Gulf Cooperative Council (GCC) countries. Given their mortgage to GDP ratios, Kuwait, Qatar and the United Arab Emirates (UAE) are considered the most advanced markets. With an average of 9.1%, the size of GCC mortgage markets is equivalent to most mortgage markets of other more mature emerging economies. Only Malaysia, which is considered one of the most developed Islamic finance markets, has a higher mortgage loan to GDP ratio (36% in 2006).

The limited importance of the markets is due to a shortage in housing stock, particularly affordable low and middle income housing, given land supply constraints, and weak market infrastructure (e.g. few house price indices, limited enforcement rights of lenders, etc.). Additionally, capital markets only provide a marginal contribution to the extension of housing finance in the region.

The region will face an increased demand for housing underpinned by growing populations and declining household sizes. Population growth is estimated to be twice the global average and the countries have a young overall age profile. 28.5% of the population is between 0 and 14 years old (in Japan, this percentage amounts to 13.3%). Young people regularly face difficulties in accessing housing as their incomes are not sufficient to afford a mortgage. Even in mature markets like the UAE, a monthly household income of about USD 5,500 is required to be granted a mortgage. About 45% of households earn less than USD 4,100. The increased availability of adequate and affordable housing finance products is therefore of major importance to these countries.

Given the rising importance of Islamic finance worldwide and in the GCC countries, the development of Shariah-compliant securitization is likely to play an important role in channelling long-term funds into housing. Additionally, sound and transparent securitization structures are poised to stimulate demand for the GCC sukuks in general as real estate is an important component of Islamic Banking and Finance (IBF). The real estate bubble in Dubai which burst in 2008/2009 showed especially the vulnerability of Islamic finance debtlike fixed income instruments and the need to improve the regulatory and institutional framework to ensure the sound expansion of a promising market instrument. It seems that Shariah compliant products have not been any more effective than conventional financial products in shielding lenders from real estate meltdowns.