Wednesday, Aug 06, 2008

Abu Dhabi: The UAE banks' exposure to the real estate market via loans to developers isn't very high at the moment and these are mostly backed by strong collateral, economists and market experts told Gulf News on Tuesday.

So they say it's difficult to imagine how the country's banks could be affected by a credit crunch similar to the US subprime mortgage crisis in the near term.

The experts were reacting to media reports on Tuesday that quoted the Abu Dhabi Chamber of Commerce and Industry (ADCCI) as saying that UAE banks should be more careful in lending to the construction sector due to fears it could be affected by a credit crunch similar to the US subprime crisis.

The experts said that the UAE real estate market is still developing and cited the example of Abu Dhabi where new residential and commercial projects are announced almost every other day and the property market is undersupplied amid a surfeit of potential new buyers.

Sellers' market

For many years to come, they said, given the current supply-demand gap in the emirate, it's going to be a sellers market, in which case the banks need not fear bad loans if the loans are secured with proper collateral.

"Unlike the banks in the US, the UAE banks don't take high risks when giving loans. The loans are sanctioned only after obtaining strong collateral," said Mohammad Al Asoomi, a Dubai-based economist.

He said the US banks were giving loans to the real estate developers without enough security and at very high risk, which was the main cause of the subprime mortgage crisis.

"The exposure of the UAE banks via loans to the real estate sector is currently well below 20 per cent of their total lending. At the moment, I don't see any dangerous situation developing, but the banks should be cautious nonetheless, after what we have seen happening in the US," Al Asoomi said.

"An emerging market like the UAE with fast economic growth should be relying on strong fundamentals. Here, the banks are securing the loans with proper collateral to avoid unnecessary risks which may lead to higher volatility," said Jalil Mekouar, executive vice president for Jones Lang LaSalle, a real estate, hospitality and investment advisory firm.

The UAE Central BankUAE Central Bank has set a maximum limit of 20 per cent for real estate loans and credits for the banks.

The ADCCI, according to the reports, said that the "banks and other institutions should exercise utmost care and derive lessons from what happened in the US, where major financial institutions reeled under heavy losses."

ADCCI said banks faced challenges in their lending activities, which include an expected rise in funding for projects, lack of proper legislation to regulate mortgages and a possible decline or slow down in the real estate sector.

ADCCI also forecast that real estate credits, which are normally long-term loans, could reach Dh150 billion in Abu Dhabi in five years, adding that the current and planned construction projects are valued at more than Dh1.3 trillion.

By Himendra Mohan Kumar

© Gulf News 2008. All rights reserved.