UAE warned over banks' real estate exposure

EXPOSURE WARNING: Morgan Stanley said the UAE central bank may have to reconsider allowing lenders to set up real estate subsidiaries. (Getty Images)

Morgan Stanley on Wednesday cautioned UAE lenders over their exposure to the real estate sector and said the central bank may have to reconsider allowing lenders to set up real estate subsidiaries.

As the real estate market in the UAE matures over the next two years "it may be necessary to evaluate the extent of the banks’ exposure to this sector", the US bank said in a report on the UAE economy.

"The supervisory authorities may need to rethink the current rules governing the exposure of banks to the real estate sector," it also said.

Morgan Stanley said the central bank may have to reconsider "the merits of the March 2007 Central Bank resolution that allowed UAE banks to establish real estate subsidiaries", and establish "clear guidelines for the classification of loans exposed to the real estate sector".

Morgan Stanley said this might be necessary because of the difficulty in assessing banks’ claims on quasi-public companies that are heavily involved in the real estate market "given the lack of transparency on the magnitude of this exposure".

However, it stressed the potential risks to banks from a mild correction in the real estate sector should not be overstated.

Morgan Stanley said much of the concern in the market about the affect of a correction in the real estate sector could be put to rest "through the provision of more timely, consistent and comprehensive data on the monetary and banking sector".

"...the need for greater market transparency on the part of market participants and regulators cannot be overemphasised at a time of considerable uncertainty in global financial markets," it said.

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READERS' COMMENTS

Al Reem Island prices
Posted by Parag, Abu Dhabi, UAE on Sunday 19 October 2008 at 15:06 UAE time


My Collegues friend had been to Reem Island recently may be two weeks back from today (19.10.2008) and the price conveyed to him was around AED 1.25mn. He went yesterday and the price for same 1 BHK was around AED 800k.

Seems as if prices have started reducing. Also, advertisement for letting out properties has increased compared to the number two months back. Seems, rents have almost stopped increasing and quantum of let-out units also has increased.

This all looks like a clear sign of slight correction in the realty sector. God knows what is the reality and what are the facts

Surprising
Posted by Suresh, UAE on Sunday 12 October 2008 at 23:29 UAE time


What i am more surprised about is that everyone knows there are a lot of speculators out there who are artificially propping up the market and no body wants to do anything about it. We have seen how bad things can get when the music stops, and yet the govt. is content with keeping its eyes closed to the ground realities!!

Ignorance is a Bless?
Posted by Trojan on Friday 10 October 2008 at 13:27 UAE time


I never seize to be amazed by the arrogance and gullibility of some people. To brush aside Morgan Stanley's warning, which incidentally was not even mentioned in the local print media (i.e. Al Khaleej), based on the false impression that they caused the mess is reflective of the ignorance of the history and dynamics of the world economy that led us to where we are today. Morgan Stanley and other banks did not create the problem; they took advantage of an imbalance that ultimately exposed the unhealthiness of this situation. The consensus among economists is that what created this whole mess was the US Federal Reserve's monetary policy, which starting in 2001/2002 brought down interest rates to historic lows and held them there for far too long. These low interest rates created excess liquidity that fed throughout the globalized financial system, creating asset price bubbles in everything from gold to food to oil and most relevant to us, real estate. This real estate bubble spread all over the world, not just in the US, the UK and the GCC. Therefore, Dubai's boom in real estate did not really take off until about '02/'03 in the aftermath of the US Fed Reserve's slashing of interest rates. Without going into too much detail, what finally triggered the credit crunch are the mortgage securities that US banks issued to home buyers in the US, which were then securitized and sold to investors all over the world who drooled over the higher interest rates these securities offered compared to the low interest rates offered by US bonds (which were probably at negative real rates). Thus the US Fed's low interest rates stimulated demand for these mortgage securities (now famously known as CDO's, or Collateralized Debt Obligations), thus prompting mortgage companies and banks to issue ever more mortgage loans to people who had no chance of ever being able to pay off their debt. And guess where most of that demand came from? You guessed it right, China and Middle East, which were flush with cash; in the case of the Middle East from the oil price bubble.

And now we have the central banks in the UAE and the GCC telling us that all is ok and we won't be affected by the credit crunch, using the state-controlled media to feed us bogus information. Indeed, this week the central bank in the UAE claimed that local banks' exposure to the real estate sector is "only 10%" of their asset base - a claim that came a day after Morgan Stanley's report and was clearly aimed at it. Not only that, Al Khaleej had the audacity to claim that Morgan Stanley's report painted a "rosey" picture of the UAE economy and its banks, never mentioning the report's warning.

Sadly, people around here don't bother to read diverse sources or think critically for themselves. But tragically, they continue to be arrogant and dismissive of the storm gathering wind around us, as is evident in some of the comments posted here, foolishly thinking that the region won't suffer from the very same policy from which it benefited. When the inevitible crash comes and the local banks fail (mental picture: a run on the bank and paniced depositors lining outside to take their money out), those who insist on remaining oblivious and dismissive will get what they deserve.

What have apples and oranges to do with it
Posted by scc on Thursday 9 October 2008 at 17:30 UAE time


One can only but admire the tangled logic of those who subscribe to the view that property is forever on the up.
"Exponential population growth, tourist influx and strong economy" are exactly the things that are directly threatened by what is going on in the world outside your enviable myopia. If they stall - what then? As for prices 100% lower than AD, then that makes them zero, in which case please direct me to the nearest sales agent.
Incidentally, an asset's lower respective value to something else that is overvalued, does not in itself make it a good buy.

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