Business | Banking
Banks could face real estate heat
The increasing share of real estate assets on the loan books of UAE banks, along with rising inflation, could pose medium-term risks to their performance and asset quality, according to banking analysts.
- By Babu Das Augustine, Banking Editor
- Published: 00:04 May 28, 2008
- Image Credit:
Dubai: The increasing share of real estate assets on the loan books of UAE banks, along with rising inflation, could pose medium-term risks to their performance and asset quality, according to banking analysts.
Rising oil prices, along with a desire to invest closer home, have spurred economic growth in the region, resulting in huge investments in real estate.
A shortage of real estate supply and a low interest rate environment is feeding the vicious cycle of asset price increases.
The banks' growing exposure to inflated real estate assets is considered a medium term threat to their overall asset quality.
"We view the biggest risk for the UAE banking sector is inflation. The recent surge in inflation has pushed real interest rates into negative territory, fuelling asset price increases and reducing disposable incomes. In the future, inflation headwinds could pressure net interest margins, increase operating costs and potentially impact asset quality," said Deepak Tolani and Prerna Sharma, analysts with Al Mal Capital.
According to Al Mal, UAE banks have substantial exposure to the real estate sector as measured by outstanding loans. Across a coverage universe of five leading banks, construction and real estate loans represent 7.3 per cent to 31.4 per cent of the outstanding loan book.
The unprecedented growth in real estate prices has encouraged the practice of using personal loans to purchase off-plan properties for a small down-payment and ride the wave of the price appreciation powered by leveraged returns.
This exposure is hard to separate from the personal loans numbers reported from the banks and could be an additional exposure to the real estate sector.
Real estate loans have registered significant growth during the last few years.
According to a recent report by The National Investor (TNI), the overall disbursement to the mortgage sector increased from Dh10.6 billion in 2004 to Dh31 billion in 2006. The latest data shows that mortgage loans portfolio was more than Dh50.1 billion in 2007. During the period 2004-07, lending to the mortgage sector is estimated to have grown at a compounded annual growth rates of 72.2 per cent.
The growth in the mortgage portfolios of UAE banks during the last three years has been very strong. However, mortgage lending as a percentage of GDP remains low.
With potentially loosened regulation and rising population trends, UAE banks are positioning themselves to make the retail sector a bigger ratio of their net income.
Nascent sectors
To take advantage of the nascent growth in the sector (auto, credit card, mortgage and personal loans) and buoyed by higher margins, banks are extending themselves further to the consumer via branch openings and by extending terms and credit to their customers, the TNI report said.
Overall, analysts expect the UAE's banking sector to enjoy robust top and bottomline growth.
Banks that have established multiple and diversified income and funding sources should emerge healthier and also be able to capture market share from their less diversified rivals.
Do you think banks are lending too much to the real estate sector? Will even a slight withdrawal have a big impact on the market? How? Tell us at letter2editor@gulfnews.com or fill in the form below to send your comments.
Your comments
Although the Banks have already put some kind of restriction in lending to real estate, expected slight change in the current scenario is going to hit massively to the market and the after effect to the economy will be unpredictable
Sherin
Dubai,UAE
Posted: May 28, 2008, 12:21
Banks are lending up to 95% of the new inflated property price !
What will happen to banks when the property market make a big correction in 2010. Most of the borrowers are expatriates, some of them might choose to leave the country and cut their losses short. Bank can be left with huge invetory of houses to sell quickly. This can depress the market further. Most houses are sold today for 300% of its value in 2004...what will happen if the price drops 30% ???
US is suffering now because the housing market was apreciating too quickly at 12% annually.
Given that Banks, Real estate and Construction makes up 70% of the stock market valuation, such correction could have a wider effect.
Farid
Dubai,UAE
Posted: May 28, 2008, 09:30
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