Amlak was the first mortgage company to benefit from the real estate boom triggered by the introduction of foreign ownership rights in Dubai in 2002. Six years on, amid a global mortgage meltdown, CEO Arif Alharmi explains to Arabian Business why the company expects revenues to rise 70% this year.
The global mortgage business has suffered from an image problem these last nine months since the word 'subprime' has entered the popular lexicon.
From New York to Bahrain, banks and building societies have been forced to issue profit warnings and include write-downs and write-offs in their annual reports as the credit crunch has unfolded.
Alharmi expects that Amlak's enlarged network of offices will allow it to help cross-border real estate investors buy and sell property outside their home market.
Almost US$380bn has disappeared from the books of the world's biggest banks from credit losses since the start of last year and more are expected to emerge over the course of this year.
It is not supposed to be a time for mortgage companies to be bullish on growth prospects, although nobody seems to have told this to Arif Alharmi, the soft-spoken CEO of UAE-based Amlak Finance, who quietly and confidently predicts that the group's revenues will increase by some 70% this year.
"It seems ambitious, but we are confident," he smiles. "The economy is doing well in terms of GDP and population growth. The real estate market here will remain healthy for the next three to five years and we expect that demand will continue to exceed supply."
While there may not be too many other local companies that have committed to achieving such significant growth targets so early in the year, Alharmi's prediction may not seem so ambitious after looking at the mortgage company's performance in the first-quarter which saw profit jump more than fivefold as net income surged to US$34m.
Rival Islamic home loan provider Tamweel has been surfing the same wave of local real estate investment, as its own first-quarter net income more than tripled to US$48m.
Both have benefited from the boom in the UAE real estate industry, which has also attracted an increasing number of mortgage players to the market as investors hungry to capitalise on the soaring price appreciation of apartments and villas have looked to tap mortgage funding.
As many as 23 mortgage companies are offering home loans at the latest count. Increased competition is encouraging Amlak to look beyond the UAE to grow revenue in 2008 in emerging real estate hot spots across the Gulf.
Amlak was created as an Islamic home financier by Emaar Properties, the largest real estate developer in the Middle East and North Africa. It has capitalised on the ongoing boom in residential construction sparked by the introduction of foreign property ownership rights in 2002.
Amlak is 45% owned by Emaar. Tamweel, its main rival in the UAE Islamic home finance industry is 21.6% owned by Istithmar World.
Dubai's booming mortgage market is expected to advance to US$44bn by 2012 from around US$5bn today according to EFG Hermes, Egypt's largest investment bank.
"Over the next five years we estimate a population increase of 1.4 million people, implying property transactions of US$187bn," says the report. The bank estimates that about 21% of this will be financed.The study concludes that the existing local mortgage market leaders, Amlak Finance and Tamweel, are both likely to lose mortgage market share to other local and international banks.
Such increased competition between providers and an anticipated slowing in the pace of development has put pressure on both Amlak and Tamweel to generate the sort of returns with which they have become familiar in recent years.
That has encouraged both to expand across the region and in the case of Amlak, has led it to target Jordan, Qatar and Bahrain in addition to the two new units started in Egypt and Saudi Arabia in the last quarter of 2007.
There is the demand and it will surpass supply over the next three to four years. Growth might be slower, but we do not expect to see any crash.
Last month Amlak signed an agreement with Syrian conglomerate Cham Holding to set up its latest overseas venture in Syria, which has also attracted recent investment in real estate from Emaar Properties.
Amlak has also entered Jordan and Qatar in partnership. In Jordan it is establishing its business in partnership with JD Capital as well as the Social Security Corporation and in Qatar it has signed an initial agreement to establish a mortgage business with local real estate developer Barwa.
To some extent, this move into new regional markets is an obvious progression for both Amlak and Tamweel as they follow the lead taken by the big UAE developers such as Emaar and Aldar.
But it is also about helping investors in one country buy property in another.
Alharmi expects that Amlak's enlarged network of offices will allow it to help cross-border real estate investors buy and sell property outside their home markets.
"The key things we are looking at is to create a regional network that will assist customers to buy property where they want. For example, if a UAE national wants to buy in Egypt or an Egyptian wants to buy here, they will get the assistance to do that from us."
But with so much increased competition in the sector and with so much uncertainty over global real estate markets, exactly why is Amlak so bullish on 2008 growth? Is the company merely seeing margin growth as a result of recent Fed rate cuts? Alharmi insists not.
"You should understand that when there is a cut in the Fed rate it does not automatically mean you will see the effect immediately because our cost of funds is based on deposits or facilities which are longer term, maybe three, six months or even a year," he says.
"That's why there's a gap. I think overall there has been a reduction in rates and I think banks will ultimately have to reduce their rates more and every organisation will have its own strategy."
Both Amlak and Tamweel had hoped to win banking licences in the UAE last year, which would have allowed them to hold retail deposits and given them much cheaper access to funds. The licenses never materialised, which was a significant setback for both as they planned to add new units around the region.
It has encouraged both companies to look to the regional debt markets to raise the extra capital needed for expansion.Amlak currently has a requirement of about US$1.6bn in 2008, while Tamweel needs to raise about US$1.9bn.
The tightening of global credit markets has meant that both companies will pay much more for their debt now than they would have a year ago, although Alharmi points out that falling interest rates has offset this impact to some extent.
Declining investor sentiment towards mortgage-backed securities has also meant that Amlak has shelved a plan to securitise around US$260m worth of mortgages.
Tamweel has also had to put similar securitisation plans on hold until there is a significant change in investor sentiment towards securitised mortgage products.
While investor appetite for securitised mortgages may have lessened somewhat in recent months as the subprime contagion has infected financial markets around the world, Alharmi remains confident that there is still sufficient liquidity in the region to ensure that Amlak is able to raise the cash it needs for expansion from local Sukuk markets.
Alharmi wants Amlak to focus on its core real estate business and so has started to withdraw from its non-core investments that in the past have generated a substantial proportion of its revenue.
"We are gradually exiting investments that are 'non-core', so the focus will be on real estate. That process of liquidating investments might take another year. We have made healthy investments however we believe our competence and expertise is in the real estate market," he says.
He also believes that Islamic finance is becoming better understood by a wider mortgage-buying public, particularly by expatriates from outside the region who may have been reluctant to deviate from conventional home loans in the past.
"One of the key challenges that Islamic finance had in the past years was 'knowledge' - even the bank staff themselves didn't have the knowledge.
"Today it has gained increased momentum as more people are exposed to it, so the level of awareness about Islamic products has increased," says Alharmi.
As Amlak and rival Tamweel accelerate their exposure to new real estate markets in the region, their reliance on the UAE market is diminishing.
Like its largest shareholder Emaar Properties, Amlak is looking to fledgling real estate markets across the region to define the next chapter of its growth story.
But while the company spreads its wings regionally, Alharmi remains steadfastly bullish on the prospects of the UAE's residential real estate market, well into the next decade.
The development focus may move from Dubai to Abu Dhabi, but the continuing influx of expatriates into the booming market will ensure that demand for mortgages will remain robust - even as the full extent of the global subprime crisis unfolds and the mortgage industry in the US and Europe contracts.
"There is the demand and it will surpass supply over the next three to four years," he says. "Growth might be slower, but we do not expect to see any crash."For all the latest UAE news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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