Dec 16 2008 |
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Mortgage sector will have to do a balancing act
The mortgage lending sector will face the challenge of balancing the opposing interests of ensuring adequate access to capital for the new entity - formed with the four-way merger between Amlak and Tamweel , and federal entities Emirates Industrial Bank and Real Estate Bank - and trying to avoid having it crowd out the private sector banks entirely through its ability to finance more cheaply than a non-guaranteed entity, said a report.Should the merged entities have access to low cost funding, this will allow it to continue to compete in the mortgage market, said the UAE yearbook research report by EFG-Hermes.
"While operationally we believe this is likely to be a success, we are less sanguine about existing shareholders. Since the companies cannot continue without a state guarantee, it is possible that the federal takeover could be on a highly punitive basis, it said.
The twin priorities, however, of the government are likely to be stabilisation of the property finance market and stabilisation of the Sukuk market.
From both points of view, speed is of the essence, and it is therefore unlikely that the government would want to risk a protracted disagreement with capital holders by not making a reasonable offer.
"Amid so much uncertainty, one thing we can be reasonably confident is that while Amlak and Tamweel may make it to the beginning of the year, they are unlikely to make it to the end," said the report.
According to the EFG-Hermes report, the year 2008 started strongly, with the market awash with liquidity and financial institutions eager to lend money to growth industries such as the housing finance sector.
Loans grew rapidly during the first six months, peaking at 27 per cent quarter on quarter (Q-o-Q) and marking a 115 per cent year-on-year growth in 2008.
However, this liquidity boom was largely driven by speculation on the dollar, and as the realisation dawned that the currency peg could not be broken, this liquidity boom began to leave the market.
Those companies, like the housing finance companies that had inadvertently become hooked on easy credit quickly, ran in to trouble.
The housing finance companies, with their very high levels of wholesale funding, were going to find things tough.
It was not, however, just the absence and cost of deposit funding that hurt the housing finance companies, but also the state of the capital markets.
Tamweel was better placed, having migrated much of its funding base from deposits to capital market funding over the previous 18 months, but both companies had been anticipating funding much of future expansion with capital market funding.
In the absence of this, the companies have little recourse for financing future growth, meeting existing commitments and rolling over existing debt. With the funding model for the housing finance broken over two short September weekends, the companies entered emergency mode.
Results at the end of third quarter of 2008 were on target, but by the time they were released it was clear an alternative model would have to be found, and that this alternative model needed to incorporate either federal funding or a federal guarantee, said the report.
Rakaa Properties' Chief Executive Officer Abdul Rahman Al Tassan said in a press release that confusion among investors has led them to be reluctant to engage in any type of investment. This has had a negative effect on money markets due to a lack of cash flow, which has led to increased demand for housing loans. Further all the new policies and restrictions are making real estate development rather complicated.
The UAE Government has pumped a liquidity of Dh70 billion into the market in the form of long-term trusts to support the banking sector.
Dh50bn was distributed, while the remaining Dh20bn is yet to be allocated to the appropriate sectors. This support process by the government has had a remarkable influence on the return of confidence in the investment process in general, and in the property market in particular, said Abdul.
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