As property prices in Dubai continue to plummet and defaults in retail loans increase, many banks are retrenching the size of their loan books. Meanwhile, mortgages remain pricey due to the relatively high interest rates in the United Arab Emirates.
According to UAE Central Bank figures, the emirates’ 52 banks (24 domestic institutions and 28 foreign) provided approximately $23.14 billion in mortgage loans during 2007 and most of 2008. DUBAIFocus, an information hub by REIDIN.com in partnership with Dubai’s Real Estate Regulatory Authority (RERA) and the Dubai Land Department, said that compared to the last year, mortgage lending in Dubai fell 77 percent in the second quarter of 2009 from $9.58 billion to $2.17 billion.
DUBAIFocus reported that the value of issued mortgages in Dubai exceeded $2.17 billion during the second quarter. In the first three months of this year, mortgages reached $1.9 billion — an increase of 14 percent from the first quarter to the second. DUBAIFocus reported that 39 registered banks in the UAE filed 1,365 mortgages in Dubai alone during the second quarter of 2009.
Abu Dhabi Commercial Bank (ADCB), the UAE’s fifth largest bank by market capitalization, issued mortgages worth $506.67 million in the second quarter through 91 transactions, said DUBAIFocus. Dubai Islamic Bank (DIB) extended $497.55 million worth of mortgages from 151 transactions in the same three- month period.
In August, Ahmet Kayhan, CEO of REIDIN.com, told Business Intelligence Middle East that the correction in the Dubai property sector is altering the mortgage scene.
“At present, the UAE is witnessing a downward correction in loan-to-value ratios as the market dynamics continue to shift, thereby making the Dubai property market more accommodating to buyers and end-users,” Kayhan said.
“With more banks offering competitive lending ratios… it is no surprise that Dubai’s mortgage market has amounted to such staggering value despite the slowdown,” he added, noting a positive trend in the mortgage market.
“Mortgages originated between mid-2007 and 2008 are expected to be in negative equity”
A road still rocky
Due to improved liquidity conditions in recent months, the narrowing gap of loan-to-deposit ratios in the UAE banking sector have allowed banks to start reconsidering issuing loans, but with extreme caution. In a special comment issued in September, Moody’s Investors Service noted the obstacles Dubai banks face with mortgages.
“Mortgages remain a challenge, especially the vintages from 2007 and beyond. The property market has declined to [second quarter of] 2007 levels during the crisis, and we estimate a further decline to [fourth quarter of] 2006 levels.” At this point, Moody’s says average property prices have gone down by 40 to 50 percent in Dubai, and by 25 to 35 percent in Abu Dhabi. “That said, mortgages originated between mid-2007 and 2008 are expected to be in negative equity and naturally prone to default.”
Moody’s went on to say that it expects default rates to reach “around 20 percent for those mortgages, as [loans-to-value] have increased due to competition over the past two years (above 80 percent). However, for the whole mortgage pool, we expect a [probability of default] of around 12 percent and a [loss given default] of 50 percent.”
Overall, Moody’s believes that mortgages make up 5 to 7 percent of the combined loan book of banks. However, the cost of mortgages are still inflated, “and banks’ mortgage pricing remains aggressive, charging interest on their internally defined ‘cost of funds’ plus margin approach.”
The two largest mortgage lenders in the UAE, Amlak and Tamweel, have substantially trimmed down their lending since the fourth quarter of last year. Moody’s noted that the two lenders “are subject to a yet-to-be-specified government bail-out plan. For [the aforementioned] reasons… property prices will stabilize at an attractive and affordable level.” Moody’s also expects “a general deterioration in commercial and retail loans” in the near future.
Stress-testing assumptions for Dubai
Individual credit recommendations
Loans go small-time
On a personal level, obtaining loans from local banks in the UAE is not that difficult, but the issue is the size of the loan. Charles Neil, CEO of Landmark Advisory, a division of Landmark Properties in Dubai, said that it is easier to obtain a mortgage for an apartment in Dubai versus a villa that can cost up to $1.1 million.
“You have to put in 30, maybe 40 percent of the value of the villa. So [the banks] are making it hard. You are seeing mortgages for the small amounts, but for the big amounts, no,” he said.
Neil explained that with Amlak and Tamweel out of the lending game, retail banks are playing a much bigger role.
“Amlak and Tamweel stopped lending altogether because they don’t have the money to lend. They are not in the market. So, [lending] is left to the commercial banks. Some have been a bit more active, [such as] the Islamic banks. But the problem is interest rates.”
In order for the property and lending market to pick up, analysts are lobbying for a lower Emirates Interbank Offered Rate (EIBOR). Yet, since its peak of 4.8 percent in November of last year, the EIBOR has recently tumbled to around 2 percent.
“The mortgage market revival is important for the property market to bounce back. Better and cheaper mortgages is surely key here,” a senior economist for MENA global markets at Standard Chartered Bank in Dubai told The National newspaper last month.
Raj Madha, director of equity research at EFG-Hermes in Dubai, believes that EIBOR and mortgage rates are related concepts.
“The mortgage rates will fall once perceived risk falls; and the perceived risk will fall when the property prices are on an increasing trend and once we know that the economy is stable in Dubai. I think it goes the other way around — once you know there is stability and growth in Dubai, you’ll see property trends going in the right direction,” said Madha.
Right now, “the main area [of concern] is unsecured lending, and then mortgages are likely to become an issue later on, just because people with mortgages take longer before they start defaulting. They look for more resources they can take out before they start defaulting… But we’re still expecting some problems on the mortgage side.”
As for Dubai banks’ lending behavior since the financial crisis, Madha noted a significant cutback.
“I would say that, really across the board, there’s been a retrenchment, but then selectively the banks are increasing lending at the moment,” he said.
Abu Dhabi leads the way
Banks in Dubai have witnessed significantly less growth, especially when compared to their brethren in Abu Dhabi.
“The National Bank of Abu Dhabi grew very strongly in the second quarter… some of the other Abu Dhabi banks are also beginning to register some growth, like Abu Dhabi Commercial Bank, Abu Dhabi Investment Bank, First Gulf Bank — all positive,” added Madha. This growth is largely due to the Abu Dhabi government’s Tier 1 capital injection into its top banks earlier this year, which sustained the liquidity conditions of these banks.
But Dubai banks haven’t had an easy ride, noted Madha. “In Dubai, we’ve seen significantly less growth. Typically, Dubai Islamic Bank is cutting back on its main product — which is lending to the real estate sector. Emirates NBD and Commercial Bank of Dubai have been a little bit more cautious about turning the taps on again,” he said.
On September 1, the Central Bank of the UAE (CBUAE) declared its plans to lower the interest rate on the liquidity support facilities given to the banks by the government. This move was aimed at reigniting bank lending throughout the Emirates.
Still, despite the CBUAE’s efforts, most banks have remained reluctant to boost lending. This is not surprising, as banks in Dubai should lend cautiously due to the high probability of customer default.
A recent report assembled by Investment Boutique and presented by Better Homes said mortgages will continue to face difficulties in the UAE, noting that: “Although activity has picked up in recent weeks, mortgage financing will continue to be tight as local banks still need to find cost-effective sources of funding to cover their current asset-to-liability gaps and to foster more lending.”
