Mortgage penetration will reach 15% of GDP - Emirates24|7

Mortgage penetration will reach 15% of GDP

 

Mortgage penetration will almost double to reach 15 per cent of the gross domestic product (GDP) of the UAE by 2010 from its current contribution of eight per cent, according to a new report.


“Our forecasts suggest that this could be as high as 15 per cent by 2010, based on demographic changes, expectations of property delivery and mortgage take-up. We quantify this at around Dh60 billion incremental lending for UAE banks in the next three years, representing a meaningful opportunity for growth,” Goldman Sachs said in a report.

Mortgage and housing finance has only been a small part of UAE banks’ participation in the real estate sector.

Tamweel and Amlak, two large Islamic mortgage finance companies, control around half of the market.

The UAE’s mortgage market will leap from Dh20bn by the end of this year to Dh64bn over the next three years, with more than 60 per cent of home financing to be Shariah compliant.

According to Dr Sabahuddin Azmi, a professor at the Sharjah-based Emirates Institute for Banking and Financial Studies, Amlak Finance and Tamweel, both Shariah-compliant, dominate the UAE housing finance market, holding 35 per cent and 25 per cent share respectively, while the rest of the market is shared by other banks and finance houses.

In December, investment bank EFG-Hermes said in its UAE Research Yearbook 2008 that mortgage penetration rate in the UAE remains at about two per cent of GDP, representing an overall market size of Dh16bn.

This has the potential to increase more than 900 per cent to Dh161bn over the next five years.

Meanwhile, the UAE interbank rates (Eibor) has fallen from 4.94 per cent in November 2007 to 2.78 per cent till date.

Mortgage rates, which are usually three month Eibor plus 300 basis points, have fallen approximately 216 basis points, from 7.94 per cent to 5.78 per cent over the same period.

The real estate sector in UAE has been experiencing a boom since property reforms were enacted and the economy began to feel the effect of higher oil prices. This, of course, raises the risk of oversupply in coming years.

“We believe that growth and returns are more sustainable than the market appears to believe judging by the current discount to net-asset value assigned to developers. It is true that growth in construction and real estate is at an all-time high, but it is less clear that this is excessive, given rapidly rising demand. Rents are rising, as an indication of real end-user demand rather than off-plan sales, and vacancy rates are low in both residential and commercial segments.”

Banks are also likely to continue benefiting from the real estate boom directly, as most of them have real estate subsidiaries, own significant investments in land and properties, Goldman Sachs said in the report.
 
 
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