02 June 2007

Currently, the UAE housing finance market is relatively small, but rapidly-growing, with a total size of Dh11.5 billion, up from Dh2.9 billion in 2004. The market is dominated by AmlakAmlak and TamweelTamweel, which currently account for 35 per cent and 25 per cent of the market respectively, the remaining 40 per cent being accounted for by a number of banks providing housing finance products (EFG-Hermes report, December 2006).

The property market in the UAE continues to grow, with an estimate, in Dubai alone, of 69,000 units to be delivered in 2007 and some 139,000 units in 2008, assuming no delays, according to EFG-Hermes.

This puts pressure on the housing finance market. Real estate developers and financing companies do not have access to retail deposits, the traditional low-cost source of funding of lending institutions. They resort to alternative sources of funding to alleviate funding constraints, such as bond or Islamic Sukuk issues, investment deposits and real estate funds.

Securitisation can and should play a bigger role in the whole region and in the booming UAE real estate market. In addition to the benefits of MBS mentioned earlier, securitisation would provide a major new source of funding for lending institution facing increasingly tight funding needs.

Exposure

It would also allow banks and lending institutions concerned with exposure to the real estate market to unload exposure from their balance sheets and transfer it to investors or institution that have the appetite for that risk.

Moreover, since securitisation allows the unbundling of the activities such as the funding or lending role from the loan origination and servicing, many banks that have refrained from entering the property market due to their high risk aversion would be willing to generate mortgages and immediately unwind them from their balance sheets by either securitising the pools (if the pool size is large enough) or by selling to institutions that can do so.

Doing so will increase competition in the market; more loans will be originated. Mortgage spreads would decrease, and would contribute to the increase of the overall economics activities. The time to act is now.

The DIFCDIFC has been active in 2006 in creating the instruments and conditions to support the development of funding for the real estate market and the emergence of a mortgage market (see sidebar).

Yet, while the DIFCDIFC's legislation and market institutions will support the emergence of a mortgage market, a number of additional mortgage market building structural steps are required.

The establishment of a government-owned or government-sponsored entity or entities can jump-start the securitisation process. These entities can play the role of buying the mortgages, pooling them, and then issuing the MBSs, such is the case with Fannie Mae. Or they can adopt the model of Ginnie Mae, by providing lending institutions the insurance facilities and packaging of the pools of mortgages.

Except from the set-up phase, such institutions have proven to be profitable, efficient, and required little if no direct financial assistance from the government. And, as is illustrated in the US case, they can be privatised.

Securitisation is an essential financial transformation process that needs to be adopted not just to create a mortgage market, but also to help finance infrastructure in the region. Infrastructure and privatisation projects can be financed through the issuance of securities backed by the cash flow from users' fees or project receivables, and hence infrastructure projects become self-financing.

- The author is chief economist, Dubai International Financial CentreDubai International Financial Centre.

Solutions: What is the DIFCDIFC doing to help?

The DIFCDIFC has issued a Collective Investment Law (CIL) - DIFCDIFC Law no. 1 of 2006, which permits both the domicile of funds in DIFCDIFC and or distribution of existing foreign funds (both public and private funds). The flexible legislation permits a variety of recognised investment vehicles. The CIL permits the operation of various types of funds including, but not limited to: property funds, Islamic funds, hedge funds, private equity funds, and fund of funds.

In turn, the DFSA issued legislation to regulate the managed funds industry within the DIFCDIFC that is compliant with the IOSCO Principles for Collective Investment Schemes. The regulation of fund operators rather than funds leaves room for product innovation and minimises the regulatory burden, and permits appropriate delegation and outsourcing.

Similarly, the DIFC Investment Trust Law- DIFCDIFC Law No. 5 of 2006, introduced legislation permitting the setting up of collective investment funds in the form of an investment trust.

In particular, for the first time in the UAE and the Mena region, rules to permit the operation of real estate investment trusts (REITs) within the DIFCDIFC have also been introduced.

REITs have become the most favoured method for attracting public ownership in property investments. They provide a convenient form for listed and tradable property ownership with transparent pricing and liquidity.

Under these rules, it will be possible to issue and trade REITs for the first time in our region, utilising the facilities of the DIFX. It will add a significant new dimension to the UAE's property market.

Importantly the DIFCDIFC Collective Investment and Investment Trust legislation also supports the development of Sharia-compliant finance. DIFCDIFC has set clear procedures for authorising Sharia-compliant institutions, and aims to be the global market for Sharia-compliant finance.

The DIFC Authority (DIFCA) has set up an Islamic Finance Advisory Council (IFAC). DIFCA, DFSA and DIFX have streamlined the listing of Sharia-compliant financial instruments. The aim is to provide the main regional platform for a secondary market in sukuk and Sharia-compliant funds.

Already, the DIFCDIFC has become the largest global sukuk market. It will be supporting the build-up of a government sukuk market to finance infrastructure and to mainstream sukuk as a public finance instrument, as well as the set-up of a Sharia-based mortgage market to support housing finance in the UAE and the region.

By Nasser Saidi

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