Dubai property growth 'more sustainable', says Fitch

Rating agency says doubling of property transaction fees will help contain risk for UAE lenders
Dubai property growth 'more sustainable', says Fitch
By Andy Sambidge
Sat 26 Oct 2013 10:20 AM

The doubling of property transaction fees in Dubai to limit speculative buying, reinforced by planned caps for mortgage lending, could help contain property risk for UAE banks as the real estate sector recovers, Fitch Ratings has said.

Fitch also said in a statement that the banks have already built up capital buffers since the 2008 property crisis that give them some protection against asset-quality problems.

Fitch's comments come after calls by the managing director of a top Dubai developer for UAE banks to provide a non-resident mortgage, claiming they are currently "too timid" in their support of the real estate market.

Damac Properties boss Ziad El Chaar said on Wednesday that banks must return to lending to allow international buyers the opportunity to engage in property ownership in the emirate.

Fitch said the new four percent fee effective from October 6 "should help property prices recover at more sustainable levels in Dubai".

Some estimates suggest that real estate prices in prime areas in the emirate have risen by up to 30 percent in 2013 to date, after falling by over 60 percent from their 2008 peak.

"The higher fees go some way towards helping to prevent excessive speculation, particularly where a high proportion of purchases and sales are purely cash driven," Fitch said.

The rating agency added: "From a credit perspective, the UAE central bank's plans to impose maximum loan-to-value limits for residential mortgages that are being finalised would do more to prevent another build-up of asset-quality problems for banks."

Despite the improving economy, signs of a real estate recovery in Dubai and property prices generally rising across the UAE, the banks are still dealing with asset-quality problems from the 2008 crisis.

Impaired loans slightly declined to 7.5 percent on average at the end of the first half of 2013 for the largest nine UAE banks, from 7.8 percent at end-2012, and largely consist of exposure to real estate and government-related entities (GREs).

Fitch said: "It is likely that non-performing loans have peaked. The more upbeat operating environment and a return of market confidence in the UAE should prevent any further wide-scale asset-quality deterioration in the short term.

"However there are still some uncertainties for the property sector in Dubai, particularly outside prime areas. Oversupply in the real estate sector as projects are completed could lead to asset-quality issues, but we expect the medium- to long-term nature of major new projects to reduce this risk," it added.

Debt restructuring of troubled Dubai-based GREs is progressing, but further actions cannot be ruled out, so this could add to impaired loans, Fitch said in the statement.

"In the long term we believe planned regulations to restrict loan concentration to GREs would benefit banks' credit profiles. Compliance may take time for some banks with high concentrations."

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