Dubai: Mortgaging Solutions

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The government of the United Arab Emirates (UAE) has stepped in to shore up Dubai's troubled mortgage sector, announcing the merger of its two largest home loan lenders and the forming of a new lending giant.

On November 22, the UAE Finance MinistryFinance Ministry issued a statement saying Dubai-based Islamic mortgage firms Amlak FinanceAmlak Finance and TamweelTamweel would be merged under the state-owned Real Estate BankReal Estate Bank, which in turn would be combined with the Emirates Industrial BankEmirates Industrial Bank, the new body to trade as the Emirates Development BankEmirates Development Bank.

"The merger is considered a landmark development for the financial market in the UAE," the ministry's statement said. "It will create a new entity that will serve as a cornerstone of the real estate finance market which has great fundamentals."

The UAE federal government is expected to provide additional funding to the new bank to ensure the continued flow of mortgages to customers in Dubai.

"The details are being worked out but the new entity will be supported by capital and funding," Mohamed Alabbar, a member of Dubai's Executive Council and chairman of Emaar Properties, which currently holds a 45% stake in AmlakAmlak, told a press conference on November 24. "We will see more consolidation, especially with third-party developers, who may be facing some lending difficulties," he added.

In addition, being transformed into a licensed bank will allow the two lenders to take deposits and access emergency federal funds. Trading in both AmlakAmlak and TamweelTamweel shares was suspended by the Dubai stock exchange on November 23, pending further details on the merger plan.

Among the facts yet to be revealed is what will happen to shareholders of the two companies. In its statement, the Finance MinistryFinance Ministry said it would supervise the merger to ensure a fair valuation and protect shareholders' interests.

Though news of the federal intervention came as somewhat of a surprise, AmlakAmlak and TamweelTamweel were already in the process of joining forces, having announced at the beginning of October they had begun talks to broker a merger. However, this marriage was expected to take some time, with AmlakAmlak's Chief Executive Officer, Arif Al Harmi, saying at the beginning of November that any request to the central bank to ratify the deal was months away and that the merger would not be finalised before the end of the first quarter in 2009.

Recent events, in particular a dramatic drop in the share prices of both companies, with AmlakAmlak shares falling around 80% and TamweelTamweel 85%, appear to have promoted federal intervention. Currently, their combined market value is estimated at around $681m, two thirds of what it was when initial merger talks began on October 4.

As recently as November 20, Wasim Saifi, TamweelTamweel's chief executive officer, was reported as saying by Reuters news agency, that the firm was continuing to issue new mortgages and had no plans to suspend loan activity.

The day before, AmlakAmlak had announced it was temporarily halting granting new home loans, with Al Harmi telling news agency Bloomberg that the company was reviewing its existing credit policy "to ensure optimum servicing of existing and prospective accounts".

The radical restructuring of AmlakAmlak and TamweelTamweel, combined with the provision of government support, is likely to overcome the lack of funding, liquidity and solvency both companies were facing, according to Raj Madha, a banking analyst at EFG-HermesEFG-Hermes.

"A merger between the two would have made no difference to those problems but an integration with Real Estate BankReal Estate Bank effectively addresses all three of those issues, Madha told Reuters on November 24. Mohieddine Kronfol, the managing director of asset management at Algebra Capital, agreed, saying it was essential that AmlakAmlak and TamweelTamweel obtain new sources of funding, having seen their credit lines dry up. "As mortgage companies, their business models relied on wholesale funding, interbank borrowing and syndicated loans. All those channels of funding have been compromised by the credit crunch," Kronfol told the local press on November 24.

With access to state funds, the new national home finance provider could begin offering more attractive home loans, he said.

The move by the federal government also drew praise in the local media, with the Gulf News saying the merger would strengthen the mortgage sector and offer greater support to the near-stagnant real estate market.

"By placing the merger under the Real Estate BankReal Estate Bank both the local and federal governments have found a common ground and good synergy in not only overcoming the present situation but also helping to create a strong brand and bond," the paper said on November 24.

The bailing out of AmlakAmlak and TamweelTamweel also marks a policy shift at the federal level, one that is of major importance for Dubai. Though Mohamed Alabbar said on November 24 that the Dubai government was able to service its $80bn debt, the more interventionist stance by the central government of the UAE will serve as a guarantee that Dubai's economy will not be allowed to falter.

© Oxford Business Group 2008