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Growth in the real estate market is perhaps one of the best indicators of financial stability in the UAE economy.
Here, there is an interrelationship between real estate prices and bank lending since loans are the main source of real estate financing. The impact varies in line with the dynamics of the real estáte market. Due to the impact of property prices on bank profits, growth in the real estate sector contributes to the stability of the country’s financial system.
A leading global ratings agency recently predicted that this exposure in the UAE would increase in the coming years with the banking sector’s performance in their participation in the development of the real estate sector. The report comes after examining the growth witnessed during the past two years in the real estate market, which now shows signs of stabilization.
The banking sector’s credit risk exposure to real estate lending depends, to a great extent, on whether mortgage loans are utilized to finance residential or commercial properties. Lending to the residential property segment is generally considered to be safer than lending to the commercial property segment.
Higher demands for properties influence the economy in several ways, so that any increase in real estate prices will have a positive impact on expectations of the returns on investment.
However, the UAE banking sector is vigilant when it comes to its participation in the realty sector, thanks to the lessons learned from the credit binge that precipitated the 2009 global financial crunch.
Considering recent concerns on moving towards pre-crisis peaks in property prices in the market, sufficient measures are being implemented constantly to avoid the repetition of a major crisis.
A spate of measures including the doubling of transaction fees; mortgage cap for lending to both nationals and expatriates; and guidelines limiting the amount that banks can lend to government-linked companies have been introduced by the UAE Central Bank in an attempt to curb speculation and prevent the market from overheating. We are quite sure that the UAE banking sector is now in a stronger position now to withstand external tremors, compared to the scenario during the economic crisis period.
The UAE banking system has generally indicated considerable improvement in profitability over the past few months, and the outlook for banks during the current year remains favorable as more than a quarter of banks’ loan books relate to the property market. This is due to the increased confidence in the real estate market, following the announcement of a slew of infra-development projects that are coming on track ahead of the World Expo 2020 to be hosted in Dubai. Supported by the growth and recovery in the real estate sector, the home financing market has been witnessing significant tractions in the past couple of months.
The local economy is currently on a strong growth trajectory, witnessing sizeable activities with improved business sentiments across different sectors, mainly in real estate, followed by banking and finance, tourism and hospitality, retail, healthcare and information technology. Further acceleration in property loan growth is expected in the year 2015, albeit banks are protected better against overexposure to real estate fluctuations.
It is estimated that the World Expo will add about USD 23 billion to Dubai’s economy from 2015 to 2021. And we hope that the UAE economy, significantly backed by the real estate sector at more sustainable levels, will demonstrate excellent growth results for a good number of years.
Source: Yash Shah, Property Sales & Leasing Manager, SPF Realty, Special to Freehold