Dubai: In its 2014 Article IV consultation concluding statement, the International Monetary Fund urged the UAE government’s continued focus on addressing potential risks stemming from the real estate market.
While acknowledging that the situation in the real estate market is different from 2008 in that price increases partly still reflect a recovery from the post-crisis trough and demand today is significantly less bank-financed, the IMF said by some measures, nominal residential real estate prices in Dubai have already reached their 2008 peak levels.
“The fast pace of price increases could trigger an intensification of potentially destabilising speculative demand and thus warrants close monitoring,” the IMF statement said.
The IMF has urged government and other regulatory bodies in the country to further strengthening measures to discourage speculation to mitigate the risk of a boom and bust cycle.
The increase in Dubai’s real estate registration fee from 2 to 4 per cent last October, along with regulatory measures to assure orderly market conditions for new real estate development is seen as welcome step along with the new maximum loan-to-value ratios for mortgage lending and debt-service-to-income limits help provide banks with a buffer against undue exposures.
The IMF’s Article IV Concluding Statement has suggested setting higher fees for reselling properties within a relatively short time and further tightening of loans to value ratios if price increases in the real estate market remain very large and if growth in real estate lending continues to increase.
The IMF has also called for strengthening the coordinating mechanisms for prioritising and sequencing major GRE projects. “A continued focus on avoiding new large-scale risk-taking by highly indebted GREs will help address their still vulnerable financial position. New megaprojects should continue to be executed in a gradual manner in line with expected demand,” the IMF report said.
A continued focus on maintaining the health of the banking system will support financial stability. The recent pickup in private credit growth amid ample liquidity in the banking system warrants close monitoring. Should credit growth accelerate significantly, tightening macroprudential regulations, such as tightening the advances-to-stable-resources ratio, capital adequacy ratio, risk weights for lending, or raising reserve requirements on time deposits, could be appropriate to pre-empt potentially excessive risk-taking.
The recently introduced loan concentration limits for GREs and local governments are expected to contain risks to banks’ balance sheets in the context of the newly planned megaprojects. In light of the high degree of interconnectedness between bank board members, who are also members of the boards of GREs and private sector enterprises, the IMF has sought close adherence to best practices in corporate governance and risk management in the banking sector.