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UAE banks assess exposure to property sector
Source: BI-ME and Bloomberg , Author: BI-ME staff
Posted: Mon December 29, 2008 12:00 am

UAE. Banks in the United Arab Emirates face the prospect of increasing loan defaults as the country’s property boom loses steam amid the global credit crisis.

Small and medium-sized real-estate developers are being hurt as home sales fall, making it harder for them to repay loans. Banks are also cutting lending, which is weighing on property values, bringing the fourfold increase in residential real-estate prices over the last five years to an end.

“Given the scale of banking sector exposure to property developers and contractors, a problem for the property sector is substantially a problem for the banks,” Raj Madha, a director responsible for equity research at EFG-Hermes Holding, said in a report.

Moody’s Investors Service on 16 December cut the outlook on four UAE banks, Dubai Islamic Bank, Dubai Bank, Abu Dhabi Commercial Bank and First Gulf Bank, citing “mounting liquidity pressures and growing downward pressures on asset prices.” Standard & Poor’s cut its outlook on Dubai’s two biggest banks, Emirates NBD and Dubai Islamic, on 23 December, because of the impact of the credit crunch.

“The risk here comes from the medium-sized opportunistic developers who will have a funding problem at some point,” John Tofarides, an analyst at Moody’s said in a phone interview from Dubai. UAE banks’ “exposure to mortgages is not significant and not comparable to the US,” he added.

Economic growth in the UAE, the second-biggest Arab economy, will slow to 2.7% in 2009 and 3.5% in 2010, led by a slump in its real estate and banking industries, Standard Chartered said in a research paper last week. The UAE economy probably grew 7% this year, the International Monetary Fund estimates.

Mortgage lending makes up an average 9% of the overall loan book at the UAE's top 11 banks that Moody’s rates, Tofarides said. The overall exposure to the real estate industry, including mortgages, loans to property developers and contractors, averages 16%. UAE banks’ exposure to the real estate sector can’t exceed 20% of their deposits, according to current regulations, although that doesn’t apply to Islamic banks.

Dubai house prices will start to fall in the fourth quarter, ending a housing boom that pushed prices up 43% in the first three months of the year, Colliers International said on 3 December. The price of villas in Dubai tumbled 19% in October from September, HSBC Holdings said recently.

Construction and real estate account for almost 50% of Dubai’s GDP, according to S&P, which said there may be a “sharp correction in this market.”

Non-performing loans at UAE banks average 1.5% of overall lending and may rise “manifold” if the decline in property prices is severe and remains depressed for a prolonged period, Tofarides at Moody’s said.

Some property companies in the region are cutting staff as they look for ways to reduce costs amid the credit crunch.

Nakheel, the Dubai-owned developer of three palm-shaped islands in the Persian Gulf, said a month ago it is cutting its workforce by 15%. Emaar, the Middle East’s largest real-estate developer, said shortly after that it was reviewing recruitment policies. Damac Holding, a closely held property developer based in Dubai, said it had eliminated 2.5% of its workforce, although it denied rumours of a takeover bid by holding companies of the Ruler of Dubai, HH Sheikh Mohammed.

 

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