Business | Property
Curbs on banking licences will strain mortgage sector
The UAE Central Bank's decision to reject Islamic mortgage lender Amlak's application for a banking licence is expected to slow down the growth of UAE's nascent mortgage sector, according to industry analysts.
- Staff Report
- Published: 00:00 April 3, 2007
Dubai: The UAE Central Bank's decision to reject Islamic mortgage lender Amlak's application for a banking licence is expected to slow down the growth of UAE's nascent mortgage sector, according to industry analysts.
In the context of the Central Bank's decision to reject Amlak's application, industry analysts expect a similar outcome in the case of Tamweel's application for a licence.
While the property market in the UAE is still highly speculative, long-term buyers now play a more important role in the market. Given the large property market pipeline in the UAE, analysts believe that demand for housing loans will not be a constraint on the balance sheet growth of mortgage providers over the short-term.
However, with Tamweel and Amlak accounting for the bulk of housing credit supply, any constraint on their ability to lend will affect growth in housing credit in the short-term, according to EFG-Hermes, a leading regional investment bank.
In the absence of banking licence, these two companies are forced to raise funds through alternative sources including asset-backed securities, capital markets, inter-bank borrowing, real estate funds and corporate deposits, as well as rights issues. All these forms of funding are costly and difficult to obtain. Therefore, the main constraint on housing finance sector growth going forwards will the ability of housing finance companies to raise sufficient funds at reasonable prices.
Mortgage lending represented less than two per cent of UAE's GDP in 2005, as compared to Moody's estimates that place the ratio at 15-30 per cent (of GDP) on an average across emerging markets, and 50 per cent in developed markets. Given the slow growth of the mortgage industry in the UAE, it is likely to constrain the property sector demand in the short to medium term.
"The domestic mortgage finance industry remains severely under-developed relative to the overall economic backdrop. The value of outstanding mortgage loans in 2005 reached Dh4 billion in 2005, whereas we estimate that the figure is upwards of Dh11-12 billion in 2006," said Mohammad Kamal, a research analyst with Deutsche Bank in a recent report.
Amlak and Tamweel together account for about 55 per cent of the total mortgage market in the UAE, while the remaining 45 per cent of the market is catered to by a number of commercial banks (currently 12), with Abu Dhabi Commercial bank, RAK Bank, and HSBC leading the pack.
Historically, Tamweel and Amlak have had to resort to equity funding to finance asset growth resulting in low returns on equity and over-capitalisation. Due to the unsustainability of continued reliance on equity financing and its very high cost, Tamweel and Amlak started to diversify their funding base in 2005 by announcing the issuance of asset-backed securities and growing investment deposits.
"In the short run, we believe that Tamweel and Amlak's ability to raise funds at a reasonable cost will determine balance sheet growth. We therefore believe that the two companies will continue to resort to more sustainable forms of funding including," said the report.
Retailing: Funding blocked
A critical issue which acts as an obstacle for balance sheet growth at Amlak and Tamweel is that while sukuk issues, real estate funds and investment deposits are cheaper and more efficient sources of funding, analyst do not expect them to be sustainable.
"We believe that the answer to the funding challenges for Amlak and Tamweel are banking licences which would allow the two companies to tap into cheaper retail deposits. With the central bank rejecting Amlak's banking licence application, it will be challenging times ahead for these to companies as they directly compete with commercial banks that have cheaper and more sustainable source of funding," said an analyst.
Share this article
Gulf News classifieds
Popular in Business
Business Editor's choice
-
India's economic growth rockets
Smashes expectations, adding pressure to raise interest rates
-
No regrets as shoppers cut holiday gift lists
Many Americans are not buying for co-workers and extended family this year
-
Emirates expects profits to cross $1b
Official confident Dubai World will tackle challenge
-
Banking
Mortgages: there's light at the end of the tunnel
UAE buyers are securing home loans again
