The Deutsche Bank report on the UAE banking sector published this week highlighted the $9.4 billion in loans still outstanding from the recent stock market crash. These loans have yet to turn bad and so no write-offs have been made as the borrowers are mainly super high net worth clients. But what if realty crashed?
To outside observers familiar mainly with Western real estate markets it is tempting to see the Dubai real estate market as a house of cards. They would imagine that a realty correction in Dubai would be accompanied by a credit crisis at the UAE banks.
But this assessment is probably wrong in the context of the UAE whose banking sector is not as exposed to real estate as some might think. For the mortgage industry is still in its infancy and constitutes a tiny proportion of bank lending, while in many mature property markets it is the major portion of the loan book.
Where the UAE banks are exposed is in providing working capital to contractors and some developers, and to a lesser extent in the personal loan market where such loans may have been used for property deposits.
Threat or opportunity?
Now that is not to say that the widely predicted Dubai real estate correction will not impact on the banks, but it could actually prove more of a business opportunity for them than a threat to the quality of their loan books.
For as property prices dip to more affordable levels then the demand for mortgages will likely rise very strongly. Could it be that this new source of lending – and banks around the world make a substantial portion of their profits from this source – proves to be actually more important than bad debts from the property correction?
Maybe this is why the banks can afford to be cool about possible bad debts from the recent stock market crash, although analysts say that there is no need for provisions as the borrowers are presently still paying interest on these loans and so they are not bad debts.
In short, the banks can see a bigger picture in the UAE. For them a rapidly maturing property market, initially focused on Dubai and now moving ahead in Abu Dhabi, is great news.
Mortgage boom next?
For in order for the huge volumes of property now being completed in Dubai today, and Abu Dhabi in the near future, to be absorbed by end-users there will have to be a huge expansion of the local mortgage lending market.
This is why the banks are pressing the local authorities to clarify the law where necessary to allow them to bring in the most modern and cheapest mortgage products. At the moment mortgages in Dubai are expensive at 8.5 to nine per cent, compared with the six per cent, 30-year fixed rate in the US market.
Dubai lenders say that is due to the rates obtainable for securitized local mortgage debt which reflects the lack of security of a loan against local property.
Correct that security defect and you open the doors to a flood of new mortgage business for the banks and low cost borrowing for the Dubai middle classes who aspire to be property owners. It will happen!