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WSJ: UAE Banks Dip Back Into Real Estate

Wednesday, Feb 08, 2012

(From THE WALL STREET JOURNAL)

By TAHANI KARRAR-LEWSLEY

DUBAI-Banks in the United Arab Emirates are tiptoeing back into real-estate lending.

As the region's economy improves and some sections of the real-estate market show signs of stability and growth, banks are cautiously beginning to lend again. But they are imposing more stringent conditions than before.

"The general market sentiment on real estate is more positive now than it was 12 months ago," said John Chang, head of retail banking at Dubai-based lender Noor Islamic Bank. "Bank liquidity is growing as the interbank lending rate is coming down, and in general banks now have higher capital-adequacy ratios than those required by the central bank."

Mr. Chang added that as more signs point toward a slow recovery in the U.A. E. economy, banks are "beginning to feel more confident about real estate."

Real gross domestic product growth in the U.A.E. is expected to remain positive in 2012, averaging 4%, according to data from IHS Global Insight.

Ayman Adel Kamal, managing director at Dubai-based investment bank Alpen Capital, said lenders are applying tighter conditions to new loans, as many banks remain overexposed to the property sector.

"Banks will only lend to top companies with solid business plans and will ask for more-stringent conditions, such as demonstrating cash flows with strong margins," Mr. Kamal said.

He added that interest rates on real-estate loans are now much higher and loan lengths are shorter than in the boom years that preceded the financial crisis. "No bank needs to take chances these days," Mr. Kamal said.

During the real-estate boom, many U.A.E. banks saw an opportunity to reap high rates of return on real-estate investments and gained exemptions from the United Arab Emirates Central Bank's 20% cap on loan exposure to real estate, said real-estate industry analysts.

But in 2009 and 2010, as the global economic downturn intensified and property prices in Dubai and Abu Dhabi dropped by over 60%, U.A.E. banks worked hard to reduce their real-estate exposure and cut back on new loans. Noor Bank in August 2009 reduced developer Trident International Holdings' overdraft facility, a move that Trident says ultimately led to the suspension of its Pentominium Tower project.

One senior executive at a well-known U.A.E.-based developer said that despite the company's high profile and strong track record, banks are now offering less money relative to the value of assets. He said banks generally are asking developers to pay back the loans quicker and in larger installments, adding that banks are demanding the developer demonstrate more-predictable cash flows to cover the debt service.

"Debt-service covenants are more stringent than before," the development company executive said.

An example of the new stringent terms is Emaar Properties' 3.6 billion U.A.E. dirham ($980 million) financing facility arranged in December with a number of banks.

The facility aims to convert Emaar's debt-maturity profile to a longer term and to reduce the company's overall financing costs. Conditions included a 50% repayment in a lump sum after five years and the remainder amortized over eight years. Pricing was set at 3.5 percentage points above the benchmark dollar Libor and secured by The Dubai Mall.

That contrasts with 2008, when Emaar enjoyed access to a number of unsecured loans, some charging interest as low as 0.6 percentage point above Libor.

"Banks are being more cautious now because they don't want to impact their balance sheets, as the bulk of their financial problems in past couple of years has come from their real-estate investments," said Sebastien Henin, portfolio manager at Abu Dhabi-based investment firm National Investor.

Nakheel's 4.8 billion dirham sukuk, or Islamic bond, is another example. The developer of man-made island communities The Palm and The World issued the first 3.8 billion dirham portion of the bond to creditors at a 10% coupon in August 2011. The company said in January that it will issue the second portion at the same rate. Meanwhile, Majid Al Futtaim, a privately owned property, hospitality and retail group, priced its $400 million sukuk with a coupon of 5.86% per year on certificates maturing in 2017.

Eli Chahin, a director at international corporate advisory firm Alix Partners, said that only local banks still seem to be attracted to the underlying fundamentals of real estate as an asset class in the U.A.E. He added that even then, they will only lend to certain segments of the market, such as government-sponsored projects or completed assets that have demonstrated servicing ability.

Nearly all loans now have a corporate guarantee from the developer, and its parent company where applicable, and are cross-collateralized with the borrower's other, unencumbered real-estate assets, according to real-estate industry analysts. This significantly reduces the default risk on loans because the bank has access to more assets, they said.

-Asa Fitch contributed to this article.

Copyright (c) 2012 Dow Jones & Co.

(END) Dow Jones Newswires

08-02-12 1203GMT