The mortgage penetration rate in the UAE remains at about two per cent of gross domestic product, or GDP, representing an overall market size of Dh16 billion, analysts said. This has the potential of rising more than 900 per cent to Dh161bn over the next five years, Cairo-based EFG-Hermes said in its UAE Research Yearbook 2008.
“Mortgages will be driven by property transactions, which in the short term will be driven by property supply and further out by population dynamics. Over the next five years, we estimate a population increase of 1.4 million people, implying property transactions of Dh683bn. Assuming 21 per cent of this is financed (30 per cent of properties mortgaged with an average loan-to-value ratio of 70 per cent), this indicates a market size of Dh161bn, up from an estimated existing market size of only Dh16bn,” the EFG report released last week said.
The UAE’s two pure-play mortgage lenders, Amlak Finance and Tamweel, estimate their own market shares at more than 30 per cent each. “We believe the banks may be more aggressive in this segment going forward than they have been in the past. Consequently, we believe this will reduce the market share of Tamweel and Amlak going forward, but ultimately this would also put pressure on spreads,” the report said.
The biggest challenge in 2008 for Amlak and Tamweel will be to obtain liquidity that does not upset asset-liability management, implying the lenders need term deposits with as great a tenure as possible, EFG said.
The key challenge will be for Tamweel to continue its securitisation programme and for Amlak to embark on its first securitisation as soon as the credit markets settle down. Both Amlak and Tamweel see securitisation as a major source of funding in the future, but with asset-backed securities falling into disfavour in the short term, this is going to make issues of this kind more difficult and/or expensive, EFG said.
Corporate sukuk issuance is also likely to return, and “we believe they are both likely to tap the sukuk market for liquidity next year. Overall, we estimate both companies will be able to raise about Dh2bn from credit markets and a further Dh2bn from investment deposits each.”
Amlak Chairman Nasser Al Shaikh told Emirates Business last week that it plans to raise as much as Dh6bn in 2008. The funds will also be used to finance regional growth plans that include entering three more countries in the first half of next year.
Amlak and Tamweel started this year expecting a banking licence. This would have given the lenders access to retail deposits that are cheaper than other forms of fund-raising. With the banking licence issue in limbo, the housing finance companies have set themselves the primary task of reformulating their funding strategies.
“In previous years, the housing finance sector has been funded principally by equity, although loans from principal shareholders have also been a significant driving force,” EFG’s analysts wrote in the report.
Amlak has offered a corporate sukuk while Tamweel has completed a securitisation issue. “This, however, is not really scalable. With capital adequacy ratios around 37 per cent, it was clear that a decent return on equity was going to be difficult.
“Furthermore, this funding from senior shareholders had been manageable while the companies were small, but more difficult as the companies grew. This is where the retail deposits were supposed to come in: retail deposits provide a scalable cheap source of funding,” the report said.
In the short term, the fallback plan was corporate investment deposits. “These are loans from public pension schemes, quasi-state bodies and large corporate enterprises, from whom the potential funding pool is large. Also by being flexible on tenure, and paying up, the housing finance companies have suggested they are able to attract a near unlimited pool of liquidity.
“The trick though is to obtain liquidity that does not upset asset liability management, and for that, the housing finance companies need term deposits with as great a tenure as possible. The result, at least for Tamweel, is it is critically dependent on a small pool of investors, who are happy to make six-month or one-year deposits for relatively small premiums to interbank rates. Clearly, pension funds, with their own long-term liabilities, are the ideal candidates.”
The second scalable option is that of securitisation. Tamweel was the first to respond. Its second round of securitisation this year was for cash-collateralised, residential mortgage-backed securities within a formalised issuance programme. The timing was good, coming as it did immediately before credit markets began to experience problems. Tamweel was able to place the issue at 30 basis points over the London interbank offered rate, or Libor. About 85 per cent of the Dh710 million issue was rated “AA”, EFG said, with even the blended yield for the top three tranches that it sold on (AA, BBB+ and BB-) amounting to no worse than 51 basis points.
One further source of funding has been from escrow accounts, which have been developed as intermediary accounts between purchasers of property and property developers. While both companies now have obtained permission to open escrow accounts, raising actual balances on these will need to wait until 2008.
“While the sums being paid into escrow accounts are large, we believe the balances on this business will be reduced by competitive erosion as both buyer and seller fail to benefit from these balances. We estimated Amlak and Tamweel are well positioned to accumulate balances, but even assuming a substantial market share, we estimate at the peak this will only amount to about Dh1.5bn each,” EFG wrote.
There is also the possibility there will be some resolution on the banking licence issue. Alternatively, EFG’s analysts believe there is a possibility one or the other housing finance company will look to acquire a licence either through acquisition of a bank or a stand-alone banking licence. Tamweel has pointed out the possibility there will be a regulatory change, which obviates the need for a banking licence and allows mortgage lenders to raise public deposits.
“We do not forecast any of these happening, but nonetheless, these would, in principle, surely provide upside for our fair value estimates,” said EFG.