UAE house loans spur sub-prime fears


UAE banks are lavishing funds in housing credits to take advantage of an unprecedented construction boom, fuelling fears of a US sub-prime-style crisis and resurrecting the spectre of a major bad loan problem that jolted many of them more than 20 years ago, according to the economists.

The country’s 22 national banks and 27 foreign units nearly doubled their real estate mortgage loans in just one year after September 2006 as investors rush for loans to benefit from a steady increase in property prices and the prospects that strong demand will keep prices high.

“Banks should be careful because you cannot expect demand to remain strong for ever,” said an economist at a major Abu Dhabi-based bank. “The bad and doubtful loan crisis that has gripped most of them is still alive in their memory as some of them are still recovering from it. I hope they have learnt a good lesson from that problem to avoid a fresh crisis similar to the US subprime crisis. I also hope the Central Bank will be monitoring the situation.”

Central Bank figures showed real estate mortgage loans extended by the country’s banks jumped by nearly 85 per cent to Dh50.1 billion at the end of September 2007 from Dh27.3bn at the end of September 2006. The bulk of the increase was during the first nine months of 2007, when they surged by around Dh19bn from Dh31bn in January.

Real estate mortgage loans to non-residents also soared to Dh742 million at the end of September 2007 from Dh409m at the end of September 2006.

The figures also showed the banks are excessively extending personal loans for trade and other purposes, with their value peaking at Dh105.3bn at the end of September last year compared to Dh80.9bn at the end of September 2006.

Such loans accounted for nearly 18 per cent of the total credits of Dh578.7bn provided by the banks by the end of September 2007.

“Banks in the UAE have benefited from the rapid economic expansion currently happening in the UAE. The total bank assets and profits increased by 43.4 per cent and 23.2 per cent respectively in 2007,” Global Investment House said.

“But there are also concerns that the UAE banks may be heavily exposed to a long-anticipated downturn in the real-estate sector. Although mortgages still account for a relatively small part of bank loan portfolios [7.8 per cent at the end of September 2007], the indirect exposure [personal loans] could be significant,” it said in a report sent to Emirates Business.

Its figures showed the UAE real estate and business services sector in nominal terms continue to rise steadily, recording a growth of 20 per cent during 2003-2007. In 2007, real estate and associated business services constituted eight per cent of the UAE’s GDP, or Dh55.8bn, a growth of 21 per cent.

It said the sector’s key drivers include growing influx of expatriates, ample liquidity, and friendly regulatory environment. And being a regional hub for investments, the UAE attracts international firms to establish offices. “Among the Gulf Co-operation Council (GCC) countries, the UAE stands out as the leading real estate market in the region with $500bn worth of announced projects expected to be delivered to investors over the next few years,” the report said.
“Despite such massive projects, pressures on rents and prices in the Abu Dhabi market are expected to continue as the supply continued to slip in 2007. Given the continued strong demand in the UAE in the medium term, a sharp price correction in the real estate market is not expected.”

Many banks in the UAE and other GCC states suffered from large losses during the 1980s as a result of the bad debt problem, which was caused by the failure of many debtors to pay back because of an ensuring period of recession.

The crisis has forced some banks to merge and prompted stronger control by regional central banks on the lending activity and other financial operations.