Assessing the mortgage market

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R Lakshmanan, the CEO of Islamic mortgage provider Sakana Holistic Housing Solutions, discusses the state of Bahrain's mortgage market and the future of high-end residential projects.

What is your current assessment of the mortgage market?

At least up to the first quarter of this year, there were hardly any inquires coming through, which really reflected the lack of confidence in the market. Over the last three months or so, inquiries have picked up and that's a healthy trend because, at some point, these inquiries will get converted into mortgages. If oil prices continue to stay around US $60-plus (BHD22) and there are other signs of recovery in financial markets around the world, then we can expect an increase in activity. Quite a number of developers will also be handing over projects in the coming years and there's going to be quite a bit of supply coming into the market. As that supply increases I would expect to see a significant increase in mortgage financing over the next three to five years.

Have existing customers been having trouble with repayment plans?

As much as the volumes have reduced significantly we have been ensuring that we have strong communication with our existing customers and they are making repayments on time. We have been very lucky, only a very small number of people have been having trouble with repayments.

There has been a lot of talk about the lack of mortgage finance in the market, did you ever stop lending?

We never stopped lending, but we slightly tightened our lending criteria. For example, we were financing up to 90% [of a property] before the crisis and we brought that down to 80%. We also cut our maximum financing limit to $464,000 per customer which is still a good enough sum of money for most people to buy an apartment or a villa. We also increased our rates, because the cost of funding went up. So this would be a factor in why people aren't taking mortgages at this time, but largely I think it's due to a lack of confidence, people want to protect themselves in times like this.

Did being an Islamic financial provider help lessen the impact of the downturn?

To be Sharia compliant you have to adhere to a number of rules, if you stick to that carefully then you stand a far better chance of being insulated. We use an Ijara leasing structure where we are the owners of the property and lease it back to the customer; this has helped us a lot. But I think it also has a lot to do with the business culture of an organisation. Are you trying to build a portfolio quickly with a certain amount of risk, or do you take a more prudent approach? The most important factor, whether it is a conventional or Islamic bank, is your lending criteria. You have to stick to basic lending principles. We look at the eligibility of the customer, then the security of the property and then the finance.

Have we seen the end of the speculative property investor?

I wouldn't say an end because markets go through cycles and the good times will return eventually. But it might take investors a couple of years to come back, it all depends on how badly they have been bruised. You will probably also have a new set of speculators come in. But I personally think it will take a very long time to get back to what we have seen in recent years.

When current projects reach maturity, will the market be saturated with high-end residential property?

With so many projects of a similar nature coming onto the market there will definitely be some kind of saturation. To what extent boils down to a number of factors. Liquidity is a big factor and how quickly markets recover is another. If people are making money then they will buy more property. Another critical factor for us in the GCC is the level of expatriates and a number of those projects are targeted at expatriates who may be moving out and going back to their home country.

There is going to be a decrease of expat population and those coming in are not going to be at the same income level. That's going to have an impact at the high-end properties. We've probably already seen this in the UAE where high-end properties have taken a significant beating, compared to the middle-income side of the market and I wouldn't be surprised if the same thing happens here. Bahrain is still ok, but there still is a point of resistance.

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