The United Arab Emirates is preparing itself for a new wave of affluence in the booming real estate sector, particularly in Dubai and Abu Dhabi. The new projects that have been announced lately aim to invest in the country’s huge oil revenues and use the influx of people and capital lured in by the U.A.E.’s current stability. It is currently viewed as a “safe haven” in a region that has experienced the spread of Arab Spring revolutions in several countries in the past two years.
Amid this spreading affluence, the U.A.E. Central Bank is imposing new limitations on the policies of mortgage loans to show the interest of the country’s legislative and regulatory bodies in this new real estate boom. Yet, local and international banks are still worried about loan policies related to real estate development projects in the country, at a time when many of these banks remain afraid to lend money for such projects.
A report issued last month by AlixPartners about the Gulf banking sector stated that several regional banks have been adversely affected by financing faltering real estate projects in the past. There are also concerns about the quality of the proposed assets and indebtedness as a result of the latest boom in the real estate markets.
Despite both the obvious downsides and possible risks, we believe that investment in the new wave of real estate development is still possible in order to boost the high level of competition achieved by the U.A.E. in the global finance, tourism and hospitality sectors. On the other hand, contrary to the prosperity and then recession that prevailed between 2005 and 2009, banks should adopt a more open approach vis-à-vis mortgage loan policy. What is driving them is their interest in increasing asset value, including building projects that are still underway. This is due to the fact that that these assets are extracted from the main capital value of the bank and the characteristics of revenue production.
We think that adopting an effective approach to manage property indebtedness necessitates several steps, including:
1. Developing a comprehensive property database which includes all of the main information related to the type of investment and its commercial use, in addition to other information related to the financed buildings, their condition, location and nature. Consequently, we would have a comprehensive and effective database that facilitates the pertinent financial assessment operations.
2. Developing the main industrial performance indicators in an effective way, such as a system of “early warning signals.” The latter allows loan managers in banks to predict the likely problems, including commercial problems, before they happen, in order to deal with them effectively and translate them into financial reality.
3. Implementing a comprehensive control chart that helps banks to build a more diverse and balanced credit portfolio, regarding the proposed property initiatives and their pricing according to a more effective approach, based on taking risk into consideration.
4. Defining a group of comprehensive, complementary and periodic solutions, whether financial or industrial, to help resolve all issues faced by banks, in time, before they aggravate and become more complicated.
As observers and followers of the property situation in the U.A.E. market and the region, and regardless of the proposed initiatives related to “effective management of property loans” that banks can take independently, we call for the establishment of a banking system that includes common and expanding property data and for the setting of a control chart for risk management.
We believe that such a system would serve as a general balancing factor for property risk management. Our proposition would also contribute to maintaining the stability of the real estate sector and revealing the nature of the value of future assets. Thus, it would lower the loan expenses for banks and finance the expenses of the real estate development projects.
There is no doubt that the advantages of building a comprehensive property database and a performance and risk indicator will improve the level of transparency and help in attracting some global lenders and capital again. Yet, the implementation of this effective proposition depends on providing a legal and regulatory framework for the valuable mortgage market in the country in the coming stage. We must admit, in the end, that the horizons of the Emirati real estate sector still pose several challenges. Despite that, it is still possible to turn these challenges into an organizational characteristic that determines the nature of the evolving strategic vision and enhances the long-term development of the region.