Banks are better protected against over-exposure to real estate

Dubai: Amid the sharp recovery in the real estate sector, with about 60 per cent rise in prices over the past couple of years in Dubai, the exposure of UAE banks to the sector has been moderate, according to credit rating agency Standard & Poor’s.

“What is different so far in this price run-up is that there has been only modest growth in the exposure of banks, compared to the spike in real estate transaction volumes. This suggests that the local banking system’s contribution to financing real estate transactions is currently low,” said Timucin Engin, Associate Director, Financial Services Ratings and Standard & Poor’s.

Despite the slow growth in real estate-related lending, the UAE’s banking system remains highly exposed to the real estate sector. Loans to the sector represented about 30 per cent of total loans and 122 per cent of total equity at year-end 2013. That’s still below the peak in 2008, when total exposure to the sector was almost 150 per cent of banks’ equity. This simply means that in case of a correction in real estate prices, more than one-quarter of the UAE banking system’s loan portfolio is exposed to risk.

In addition, the real estate sector constitutes one of the pillars of the economy of Dubai and more generally of the UAE, contributing about 20 per cent of GDP in 2013. The spillover effects of a potential correction on other sectors and on the job market could find its way back to the banking system.

S & P analysts do not expect a sharp correction in the short term, while they see the banks have been cautious in their real estate lending during the last two years. The new regulations on lending have also limited banks’ exposure.

The new caps on mortgage lending are likely to help prevent the worst excesses. The Central Bank of UAE established the regulatory caps on LTV [loans to value] ratios in last year in addition to the Dubai land department doubling the property registration fees from 2 per cent of the value to 4 per cent.

Despite the current slow loan growth to real estate sector, S & P expects to see some acceleration in 2015.

“We foresee an acceleration of real estate lending as developers launch new projects, and more local and expatriate customers seek to enter the mortgage market. Tighter rules on new mortgage loans, capping loan-to-value (LTV) ratios, are likely to buffer banks. But if they aggressively expand their exposure to the real estate sector, risks will continue to build,” said Engin.




Source: Babu Das Augustine, Deputy Business Editor,


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