Exposure of banks to property market on course to rise, says S&P

Property prices in the UAE have shot up in the past two years, with prices in Dubai rising by about 60 per cent over the past couple of years in Dubai.

More than a quarter of banks’ loan books relate to the property market, a level that is likely to creep up in the coming years as more projects are launched, Standard & Poor’s estimates.

The ratings agency has been examining the level of banks’ exposure to the property market as it assesses the potential impact on lenders of any correction in property prices.

“The key thing for us that will determine banks’ performance in the next two years is their participation in the real estate story,” said Timucin Engin, director of financial institution ratings at S&P. “Despite the very significant real estate increases over the last two years, we haven’t seen necessarily a significant amount of credit growth. Banks have been a bit more conservative than they were in the past.”

Property prices in the UAE have shot up in the past two years, with prices in Dubai rising by about 60 per cent over the past couple of years in Dubai, according Reidin.com. Prices in Abu Dhabi have accelerated by a lesser amount. In the past couple of months, data has signalled the rate of growth may be stabilising.

To date, banks have played a smaller part in the rebound than in the previous property boom prior to 2008, with a large bulk of the funding coming from cash-rich investors and developers.

S&P said the banking system remained “highly exposed” to the property sector, although some indicators showed their risks had been pared down. Loans to the property sector represented about 122 per cent of banks’ total equity at the end of last year, down from the peak in 2008 when they represented 150 per cent of their total equity.

Mortgages were also less than 10 per cent of bank transactions last year, S&P added, referring to Central Bank data.

Lenders have gradually been emerging from a recovery phase after their lending books were bruised when the property market soured during 2009, leaving individuals and companies unable to repay loans.

Lending activity has also been curtailed by new government regulations. The Central Bank last year issued mortgage caps for nationals and expatriates, as well as guidelines limiting the amount banks lend to government-linked companies to no more than 25 per cent of their equity, or more than 100 per cent of their capital. Many government-linked companies are big investors in the property market.

Still, S&P expects banks’ activity to creep up in the coming years.

“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,” S&P analysts wrote in the report.

Dubai in November won the right to host the World Expo 2020, a project likely to trigger a spate of developments in property and other infrastructure. Deutsche Bank has estimated that Dubai will require Dh158 billion to upgrade its infrastructure ahead of the event.

S&P said it forecast a “significant amount coming to market in Dubai, but less so in Abu Dhabi.”

tarnold@thenational.ae

Follow us on Twitter @Ind_Insights

Published: May 21, 2014 04:00 AM

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