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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