Two of the United Arab Emirates' largest mortgage lenders, already on track to merge, will be brought under a government-owned bank, the UAE finance ministry said on Sunday, in the first sign of federal government intervention in Dubai's troubled property sector.
Trading in both Amlak Finance and Tamweel, which have been struggling amid the global credit crunch, was suspended after the finance ministry said it would supervise their merger under the government's Real Estate Bank to ensure a fair valuation and protect shareholders.
"For Amlak and Tamweel it was always clear that some level of government support was necessary," said Raj Madha, a banking analyst at EFG-Hermes.
"There were three problems that Amlak and Tamweel were facing: funding, liquidity and solvency. A merger between the two would have made no difference to those problems but an integration with Real Estate Bank effectively addresses all three of those issues," he told newswire Reuters.
The combined market value of the firms is 2.5 billion dirhams ($681 million) - roughly one third of their worth since Oct. 4 when the two Dubai-based firms first announced merger plans.
Little-known Real Estate Bank, which comes under the finance ministry, is a government-owned entity aimed at supporting the real estate sector and provide housing for UAE nationals, according to its website.
Earlier this month, Tamweel told Reuters it was in talks with the central bank and finance ministry about their "short-term requirements facility", and long-term funding options once its merger with Amlak had gone through.
A finance ministry official said on Sunday that more details would be announced in coming weeks while an Amlak official declined to comment. Tamweel was not immediately available.
The companies will be combined as the UAE Real Estate Bank to create the largest real estate finance institution in the country, the state news agency WAM said.
Lenders and developers in the UAE have been battered by the credit crisis as market financing evaporated, property values plunged and buyers fled a market where land values have ballooned during a five-year boom.
Speculation has grown, as the financial crisis squeezes credit and hits stocks and real estate markets, that the federal government may step in to help shore up confidence in Dubai.
Becoming a licensed bank would enable the two mortgage lenders to take deposits and access emergency federal funds. Amlak, the biggest Islamic mortgage lender in the UAE, cut off new loans this month.
UAE lenders have responded to the credit crisis by shutting off consumer credit to some clients and tightening conditions for mortgages in a move that threatens to choke off a five-year economic boom.
"The governments are being flexible in determining ways that they are able to support the funding of these institutions," said Eric Swats, a partner at Rasmala Investments.
"This is not dissimilar to what the US government did when it granted Goldman Sachs and Morgan Stanley bank holding company status."
Amlak, whose shares have fallen 80 percent this year, last week said it had stopped issuing new mortgages while Tamweel, whose shares have fallen 85 percent, said it continued to operate despite deteriorating property market conditions.
Amlak, an affiliate of major Dubai developer Emaar Properties, earlier this year renewed its application to convert into a bank, which would allow it to take deposits.
Amlak chairman Nasser Al-Shaikh admitted last week that the company may need to access retail deposits in some form.
"They don't have to become banks but something similar to the savings and loans model in other countries," he said.
The two companies first said they intended to merge in October. A newspaper reported at the time that the merged entity would be a bank with a limited licence that would allow the combined unit to raise liquidity by taking deposits. (Reuters)For all the latest business 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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