Amlak and Tamweel have both started to build property portfolios. In the case of Tamweel, the idea is to buy wholesale plots of land and sell them on retail in a short space of time. The lender maintains this can be financed with accruals.
“In a rising market, we believe Tamweel can get strong returns from this business, although in a flat or falling (or even slow moving) property market, this may be tougher. Consequently, in the short term we forecast significant profitability, although we expect this to evaporate over medium term,” said EFG report.
Amlak has said it will cut its extraneous businesses and then diversify. It will shed its vehicle financing business and share financing operation and diversify along two axes: the property sector and personal finance sector. In the first category are projects such as commercial mortgages, and those further away, such as property brokerage. The second category might include anything and everything from credit cards to educational loans, EFG said.
Geographically, intentions are similar, with companies not willing to rule out the possibility of investing almost anywhere across North Africa or the Subcontinent. Egypt and Saudi Arabia are existing common markets for both. Amlak is considering investments in Jordan, Bahrain and Qatar. Meanwhile, Tamweel has highlighted India and Turkey.
The primary risk that seems to be of concern to the mortgage market is that of a property price decline leading to high default rates. “On this risk, we are relatively sanguine,” EFG’s analysts said. “While there is a significant amount of property supply coming to the market, we believe in a high-immigration environment, particularly when assisted by a positive demographic impact from the high growth rate of the National population, unless there is a significant interest rate (or cost of ownership) shock, prices are unlikely to be impacted over the medium term. Even if there is a property price adjustment, we believe the risk of a significant NPL [non-performing loan] or provisioning problem is small.”
Property loans are generally over-collateralised, the report said, and either linked to salary accounts or supported by post-dated cheques. “Consequently, unless those in negative equity decided also to skip the country, the risk is low. This as far as we can tell would not be a serious problem, unless property prices affected sentiment so strongly that transaction volumes were affected.”
Of greater concern to EFG’s analysts is the possibility of banks becoming more competitive in this field. “Some banks such as Emirates NBD and Abu Dhabi Commercial Bank have become more aggressive, while others have eased off. Nevertheless, we believe that as a whole competition from the banks will be on a rising trend. Although we have factored this into our forecasts by way of pressure on front book spreads, it is possible that the pressure on spreads will be significantly greater than we have forecast,” the report said.
With 2007 being a year of strategy creation, 2008 will be about implementation. Geographically, Amlak has already opened an Egyptian operation and a 22.5 per cent owned Saudi Arabian joint venture, but has also indicated aspirations in Morocco, Turkey, Syria and Pakistan. GCC and other Levant economies have also been mentioned. Amlak has indicated it would expect majority of its business to come from abroad.
“In 2008, we expect to see the first steps along that road, with Egypt and Saudi beginning to show material value. Financially though, the challenge is to demonstrate the business plan works, by raising returns on equity towards the 20 per cent level. We believe it will make progress towards this target as spreads increase, and as securitisation lowers,” said EFG.
In terms of geographical diversification, EFG’s analysts expect Tamweel to show returns from the investments in Saudi Arabia and Egypt and progress on launching further markets.
Amlak and Tamweel move into property sector