Are Banks Prepared For Another Dubai Property Bubble?

Dubai’s property market is showing signs of overheating, but banks seem better insulated this time around, say experts.



Dubai’s booming property market has once again come under scrutiny, thanks to a swift increase in prices, a rapidly growing international investor base and a steady stream of off-plan project launches by developers.

Residential real estate prices in Dubai soared 27.7 per cent year-on-year in January to March, according to property consultants Knight Frank, with prices close to pre-crisis levels in some areas.

In a recent report, the International Monetary Fund (IMF) cautioned authorities in the UAE to stem speculative demand before it damages the market and causes another property crash.

The fund admitted that an increase in the real estate registration fee from two to four per cent last October and other regulatory measures have helped the market.

But it argued: “Imposing additional fees and restrictions on reselling off- plan properties, as currently under consideration, would further discourage speculative demand. In addition, setting higher fees for reselling properties within a relatively short time would be useful.”

The report follows a similar note of caution issued by the Central Bank of UAE in its annual financial stability report. “Current average rental yields in Dubai and Abu Dhabi are approximately 70 and 130 basis points below historical averages, which could indicate growing imbalances – (an) overheating real estate market.”

“Monitoring developments in the UAE real estate markets and the banks’ exposure to it remains a core financial stability priority.”

As was the case in the last crisis, UAE’s banking system is highly exposed to the real estate sector, rating agency Standard & Poor’s (S&P) said in a recent report. Loans to the sector represented about 30 per cent of total loans and 122 per cent of total equity at year-end 2013.

However, UAE banks’ exposure to the property sector is similar to other GCC countries, according to Timucin Engin, director, Ratings Analytical Financial Institutions at S&P.

Also, current levels are still below the peak in 2008, when total exposure to the sector was almost 150 per cent of banks’ equity.

S&P said there was only modest growth in the exposure of banks to real estate, compared to the spike in real estate transaction volumes.

According to the Land Department, the value of real estate deals in Dubai rose 38 per cent in the first quarter of 2014 to reach Dhs61 billion ($16.6 billion).

The International Monetary Fund attributed the UAE’s recently introduced loan-to-value ratios for mortgage lending and debt-service-to-income limits for helping banks buffer themselves against undue exposures.

“Looking ahead, the central bank could consider further tightening these rules if price increases in the real estate market remain very large and if growth in real estate lending continues to increase,” the IMF said.

In its report, S&P said several factors could cause Dubai’s property sector to slide back into a correction, including issues linked to large government-related developers, foreign investors, and US monetary policy.

However, S&P credit analyst Mohamed Damak stated that a correction was unlikely in the next 12 months.

“Excluding unforeseen shocks, Standard & Poor’s Ratings Services believes a big drop in prices is unlikely in the short term, and that’s good news for the country’s banks, which have large loan exposures to the real estate sector.

“This sector is vital to the UAE’s economy, and a correction that provokes a rise in unemployment could involve serious aftershocks for banks, like those during the last real estate crisis,” he said.