Dubai: Chances of a run up in bad debts related to mortgage exposures seem highly unlikely in the UAE banking sector, according to a new report from GCP-Reidin. That reduces any prospect of a 2009-type situation building up and playing havoc with the banking sector.
The recent business busts have largely been confined to the small business, trading and retail sectors. There have been to date no visible signs of a debt burden piling up in the real estate sector, either at the retail level or with developers. (In fact, developers — the big ones in particular — have been determinedly cutting down on their debt load as well as their cost structures.) “The propensity for bad loans in the real estate sector during this cycle has been significantly lower [compared with 2009],” Sameer Lakhani, Managing Director at Global Capital Partners, said. “This suggests from a risk-adjusted perspective, banks will be more inclined to expand their credit portfolios to real estate. We are likely to see this accelerate in the run up to the Expo 2020.”
According to GCP-Reidin data based on UAE Central Bank numbers, mortgage transactions continued to rise “steadily” in the year to date compared with H1-15. If in Q1-15, there were 1,300 mortgage-lined transactions registered with the Dubai Land Department, in Q1-16 it shot up to 1,620 such deals. (For Q4-15, the tally was 1,476 deals.) Overall banking exposure to real estate and construction by end of Q1-16 was Dh242 billion. (It was Dh210 billion in 2014, when the upturn in the UAE construction and real estate development sector was at its peak. So, even through the market correction in the last year and more, fund flow into real estate was still happening.)
And there is yet more room to grow. “In the US, credit to the real estate sector has risen the most to over a third of overall lending in 2016,” said Lakhani. “In the UAE, the figure is half that, at 17 per cent, suggesting ample room for further lending. We expect this to be played out over the next decade.”
Cash rather than debt is still king in UAE realty
Dubai has a dominant role for investors who prefer cash over debt to pay for their next property asset. The biggest change over the next decade could well be the transition from cash-based to one where mortgages would have an equally important role.
“As home-ownership begins to contribute a larger portion of the buying pattern, we opine that home loans will account for a larger portion of debt, mimicking that of the US,” states the GCP-Reidin report. “This anticipated expansion of debt into the real estate sector implies not only the liquidity that will be made available but also for an increase in asset values from current levels.”