DIFC looks to Danish model with mortgage bond scheme

The DIFC lays the groundwork for the sale of mortgage-backed bonds for the UAE, hoping to revitalise the country's property market while seeking to avoid the excesses that plagued the US subprime mortgage sector.

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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.

"Some of the drawbacks in the US mortgage market will be avoided by the Danish model. This will ultimately be more attractive to UAE investors."

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."