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Banks risk severe correction due to big realty exposure
When a western banker was carrying out due diligence on a UAE bank this year, his conversation with the chief risk officer was somewhat unsettling.
- By Simeon Kerr and Andrew England, Financial Times
- Published: 23:42 September 19, 2008
- Construction continues at the Dubai Marina. Analysts have been warning of a potential downside correction in the UAE property market in the next two years as supply catches up with demand and some banks bearing the brunt of the fall.
- Image Credit: Gulf News Archive
London: When a western banker was carrying out due diligence on a UAE bank this year, his conversation with the chief risk officer was somewhat unsettling.
"This market isn't going down - it's a one-way trade. Real estate and equity here is a once-in-a-century opportunity," the risk officer told the team of financiers from one of the world's more conservative banks.
Such an uncharacteristically bullish tenor prompted the banker to quip that the bank should promote the risk officer to head of sales.
The exuberant real estate markets of Dubai, and now Abu Dhabi, have replaced oil as the driver behind the boomtown mentalities in the business hub and capital of the UAE these days.
But the rapid speed with which an investment-grade asset such as Lehman Brothers can be destroyed has highlighted the uncertainties in global finance.
And bankers in the Gulf, previously thought of as isolated from global econ-omic turmoil, are discovering how insulated the region really is as foreign money flies out, sending weakening markets into freefall and prompting a mini-credit crunch in the UAE's interbank market. That has turned eyes back on to the banking sector and is reviving fears that the region's banks are overexposed to the country's overheating property sector.
A long summer, followed by Ramadan, is leaving many real estate watchers in the dark about the sector's health. Talk of a slowing market is compounded with better rental terms at some of the city's developments. And property stocks have taken a particular beating over the summer.
The UAE Central Bank, officials say, is keeping even closer tabs on banks' exposure to real estate.
The central bank requires banks to limit property exposure to 20 per cent of customer deposits, but with the construction industry not included in that category, the rules provide leeway to raise exposure further.
Recession-proof
"Given the repercussions of the shocking global economic and finance situation, the prime question is: are the Gulf banks recession-proof?" says Mardig Haladjian, general manager of Moody's, the ratings agency, in Cyprus.
Analysts have been warning of a potential downside correction during the next two years as supply catches up with demand, especially in the oversupplied apartment segment.
Anecdotal evidence among real estate brokers indicates that it could come sooner because the market for large plots in some developments has seized up. Landlords are starting to ease payment terms and even drop prices.
But a clearer view on the outlook for Dubai's real estate market will not emerge until the Cityscape conference in Dubai early next month, which often sets the tone for market activity in real estate.
"There has to be a correction, which should be welcomed," says Philipp Lotter, a corporate debt analyst with Moody's in Dubai. "And the correction could be imminent."
Few analysts predict a real estate collapse, given the continuing flow of expatriates into the emirate and the government's ability to steer the market towards a soft landing.
"Remember, the two largest Dubai developers have large government ownership," says Yousuf Khan, an analyst who covers Gulf banks for Fitch Ratings in Dubai. "If there are pressures on the property market then they could try to manage supply."
And five years of surging liquidity have given most UAE banks sturdy balance sheets.
A harder-than-expected landing, however, could put several lenders in trouble.
"We do feel that some banks have over-extended themselves in some areas for too long, such as lending almost 100 per cent of the value to purchase property," says Haladjian.
Those with higher exposure to real estate and construction will expose themselves to a severe fin-ancial correction in an economic downturn, he says, and monoline lenders are particularly at risk.
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