Ratings agency Moody's has said that it expects loan losses at banks in the United Arab Emirates to increase over the next 12-18 months as a result of a weakening construction and real estate market.
The agency said in a note on Tuesday that lending to real estate firms increased to 20 percent of total lending at the end of 2018, up from 16 percent at the end of 2015, and added that these sectors have, in the past, "contributed materially to banks' problem loans".
The agency's note cited ReidIn data which said that prices in the Dubai and Abu Dhabi residential markets have declined by 23 percent and 18 percent respectively since 2018. Assistant vice-president Lahlou Meksaoui said in a briefing to journalists on Tuesday morning that the "domestic real estate market outlook is weak".
"In the residential sector, we expect prices to continue falling as demand slows and new supply is added," Meksaoui said. “Job creation, which is one of the key drivers of housing demand in the UAE will still remain quite weak.”
He said that although the UAE population has shown signs of growth recently, much of this is a result of low-income workers being employed ahead of the Dubai Expo 2020 event - many of whom "will be priced out" of the local housing market.
Meksaoui described measures introduced by the government to stimulate demand, such as the issue of new 10-year visas for certain categories of professionals or investors, or moves to freeze certain government or private sector fees, as “positive”.
"However, we think that they will have a limited impact in the near term. The criteria for the visas remain high," he said. "Other measures are offset by the introduction of the 5 percent VAT (value-added tax) in 2018."
He said that he expects the decline in the UAE's real estate market to "continue for the next 12-18 months”.
Two factors that could stimulate real estate demand in the UAE are a relaxation on the requirement of a 25 percent deposit from buyers, and an improvement in oil prices, Meksaoui said, as in 2018 one-third of real estate transactions involved a GCC investor.
Yet despite the weak conditions faced by developers, Moody’s said in another note that the outlook for five real estate companies in the country rated by the agency (Aldar Investment Properties, Aldar Properties, Emaar Malls, Emaar Properties and Jebel Ali Free Zone)remained stable.
Meksaoui said that all five firms benefited from their scale, strong market positions and access to land.
“They all have conservative financial policies and good liquidity,” he said.
Speaking at the Global Financial Forum in Dubai on Monday, emerging markets investor Mark Mobius, partner of fund manager Mobius Capital Partners, said that one way that the UAE could stimulate its real estate market would be to relax its visa regime.
"Property is a problem - overbuilding," he told journalists on the sidelines of the event.
"How do you solve that? Do you allow people a longer presence here? Do you give them citizenship or some permanent residency? Then you'll see an influx of people because there's no shortage of people who want to live here. Where else in the world can you come with no taxes - no personal taxes," he said.
"This is very, very attractive to so many people but if somebody buys a property here, they want to make sure that they can stay."
(Reporting by Michael Fahy; Editing by Gerard Aoun).
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