The chief executive of Abu Dhabi Islamic Bank, the biggest Sharia-compliant lender in the emirate, has joined a chorus of warnings that rising real estate and equity values may make the UAE a less competitive business destination.
Tirad Al Mahmoud said that low interest rates had helped to boost economic growth but that the cost of doing business in the UAE may become unattractive if valuations overheat. While not all asset valuations have reached irrational exuberance, there are troubling signs in some pockets of the real estate and stock markets, he said.
His comments echo those of Hamad Buamim, the head of Dubai's chamber of commerce and a board member of the UAE Central Bank, who expressed concern in January that a further rise in real estate may erode the emirate's competitiveness.
"Low interest rates is good news for us because the revival of the stock market and the real estate market is in part supported by a low interest rate environment," Mr Al Mahmoud said in an interview with The National. "I think the growth in rental rates, at 60 per cent, at 70 per cent in some pockets, though isolated, I think that's not a healthy trend.
"I think we need to see the cost of doing business in the UAE remain competitive. It is a significant driver of inflation. If real estate rents continue to rise at these levels, then the cost of doing business in this country starts to lose competitiveness."
The UAE economy made a stunning recovery in 2013, growing by more than 4 per cent, following years of lacklustre performance after Dubai’s debt crisis in 2009. Low interest rates, government spending on infrastructure and Dubai’s clinching of Expo 2020 all helped to boost real estate and stock market valuations last year. And this year the fallout in emerging markets assets amid the tapering of US Federal Reserve monetary stimulus and deteriorating current account deficits has made the cash-rich UAE a safe haven for investors of that asset class because of the dirham’s peg to the US dollar and above average economic growth.
Dubai's main benchmark index more than doubled in value last year and has gained 29 per cent this year, making it the best performing equity index worldwide, according to Bloomberg. Meanwhile, Abu Dhabi's main stock measure is up 11 per cent.
The property agent JLL estimates that Dubai home prices increased 22 per cent last year and could reach 2008 peak levels this year. Mr Al Mahmoud said the stocks of some industries, however, such as banking, were not overvalued because they had risen from a low base amid a decline in non-performing loans.
“The banking sector was severely undervalued before and I think it’s now reaching it’s true and fair level of valuation,” Mr Al Mahmoud said. “I don’t think there is irrational exuberance in the way banking shares have rallied. I think that was a comeback to more reasonable valuation levels and if the earnings of those banks continue to grow, so will the valuations.”
For his part in preventing the bursting of a bubble, Mr Al Mahmoud said ADIB was focusing on giving mortgages to end users rather than speculators, and the bank can easily screen who are the genuine consumers and who are the flippers. He said the UAE, which has taken measures such as raising property transaction fees in Dubai, would do well to also consider a real estate rental board to regulate prices. Abu Dhabi actually discontinued rent caps in November.
“This is a country that has reached a high level of advancement and the UAE should be compared to advanced markets,” said Mr Al Mahmoud. “It’s not a typical emerging market, it’s a fairly advanced market. In advanced markets you typically have rental boards to deal with prices.
If you are living in a district where the vacancy rate is 30 per cent and your landlord comes and says your rent has gone up by 40 per cent then we need to make sure rental boards have perspective on that. That’s something the country would benefit from.”
ADIB is not alone voicing concern about asset valuations. BlackRock, the world’s biggest asset manager, warned last month that stock valuations in the UAE showed signs of “speculative excess” while the insurance company AXA Gulf said in the same month that it was re-evaluating its holdings in the UAE stock market to see if earnings justified current prices of the equities it holds.
“High valuations are not a bad thing,” said Mr Al Mahmoud. “The issue here is combining low interest rates with speculative trading of assets to inflate their value. If these two combined work together you have a bubble bursting.”
mkassem@thenational.ae
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