Dubai's financial hub is studying a plan to kick-start mortgage lending in the emirate through the sale of bonds.
The Dubai International Financial Centre (DIFC) has laid the groundwork for a new UAE mortgage-backed bond market, which investors hope could revitalise the battered property market.
The DIFC Authority, in conjunction with Absalon Project, a joint venture between VP Securities and Soros Fund Management, is studying how private residential mortgages could be funded by bond issuances.
The plan is to create a large and liquid mortgage bond market, jolting the UAE's property sector back to life after a prolonged slump, while avoiding the problems related to mortgage-backed securities in the US sub-prime sector.
Dubai's property boom ended as the global financial crisis took hold, and property investors have struggled ever since.
One of the most high-profile casualties was the Ritz-Carlton Dubai at the DIFC, sold last year for Dh1.1 billion (US$299.4 million) by Union Properties as the developer tried to reduce its debts.
"The major issue that needs to be addressed is the lack of housing finance," said Dr Nasser Saidi, the chief economist of the DIFC Authority.
"Given the continuing deleveraging in the banking sector, the development of an active mortgage market through mortgage securitisation would provide liquidity relief to commercial banks while providing long-term investment opportunities to institutional investors."
The plan is based on the mortgage bond market in Denmark, which has been praised as being more stable than most other markets.
The bonds, which will be issued by lenders when a customer requests a mortgage, can be invested by institutions and retail buyers. Because the bond prices tend to move in the same direction as house prices, borrowers do not usually end up with negative equity in their homes.
Mortgage bonds account for a large proportion of Denmark's debt markets, with the €320bn (Dh1.64 trillion) market about four times the size of the government bond market last September, according to Nykredit, Denmark's largest mortgage provider.
Mortgages account for about 3 per cent of the total value of the $930bn of Gulf property projects, just under half of which are located in the UAE, according to data from Standard Chartered.
Dr Saidi also recommended the establishment of an Emirates Mortgage Guarantee Corporation, providing insurance coverage up to 30 per cent of the total mortgage value.
Mark Watts, the head of fixed income at National Bank of Abu Dhabi, said the proposed system would be well received by local markets.
"The Danish system is a lot easier to understand from an investors' perspective and operates more along the lines of conventional bonds," Mr Watts said.
However, Wagn Erik Nogaard, the vice president of VP Securities, which is working on the project with the DIFC Authority, said reform of the UAE's bankruptcy laws would be essential if the mortgage bond model was to succeed.
Rabih Tabbara, counsel at Kilpatrick Townsend legal consultancy, said that although the proposals would help the UAE's mortgage market, revamping its bankruptcy laws to allow banks to take security of underlying property assets would have a much greater effect. "That'll be what sparks new interest," he said.
"Many people are afraid to invest here … they have to sign all of these cheques in case something goes wrong."
ghunter@thenational.ae
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
Round 3: February 7-9, Dubai Autodrome – Dubai
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia
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