By Daniel Stanton
Amlak has reinvented itself to cope with competition and expand into other countries.
Amlak was the pioneer of Islamic home finance in the UAE, beginning business at a time when some regulatory frameworks were lacking and it was not clear whether the industry would succeed. Despite these difficulties, the company boomed in its early years, buoyed by the growing number of expatriates moving to the Emirates, and by the large number of high-end new properties coming onto the market.
In Egypt, we think that there’s a huge opportunity.
However, Amlak found itself struggling in 2006. It faced competition from rival Islamic mortgage provider Tamweel, as well as a growing number of banks offering mortgage products. Amlak shares were among the worst-performing on the Dubai Financial Market that year.
Recently, the company has seen a revival in fortunes. Full year profits for 2007 were AED301m (US$82m), up on AED130m ($35m) for the previous year.
"As a company, we were established in the year 2000, and we established the mortgage industry in the country," says Nasser Hassan Al-Shaikh, chairman, Amlak Finance. "We had four excellent years, but come late 2005, 2006, as a company we lost focus.
"This year was a crucial year for us. We took a step back and assessed our seven-year journey, and we took a decision to refocus on the core business. This is what we're known for, and this is where our competitive advantage is." Amlak also reassessed its whole team, making sure that it had the right talent in place for the next stage of the company's development. It seems to have paid off.
"When the changes happened in late March, we gave an indication to the market that we were committed to 70% growth in our forecast for the year," says Al-Shaikh. "However, with the grace of God, we closed the year with 131% growth in profits. This sets the tone for what's coming next.
What is next for Amlak is an ambitious expansion into several other Middle East markets. It launched its own operations in Egypt in July 2007, and rolled out Amlak Saudi, a joint venture, in October.
"For the first half of this year, our operations will be coming online in three countries - Jordan, Qatar and Bahrain," says Al-Shaikh. "We try to experiment with every market and we try to adapt to the regulations in each market, so Amlak Jordan will be a publicly listed company, that will be taken public from day one.
"In Bahrain, the intention is for Amlak Bahrain to be a 100% subsidiary of Amlak UAE, just like the Egyptian scenario. In Qatar, we partnered with the leading real estate developer there, the equivalent of Emaar here, called Barwa. Our stake there is around 40%."
Amlak will adapt its operations to each market, and will customise its UAE products to meet the needs of the customer base in other countries. Egypt, in particular, has markedly different market dynamics to the UAE, since the mortgage finance market is driven more by local buyers than expatriates and properties may be of relatively lower value. Al-Shaikh, believes that there is a huge opportunity for mortgage finance in the country, following the recent introduction of new regulations for the sector.
"In Egypt, we think that there's a huge opportunity, with the population there at around 17 million," he says.
"More people are exiting from the low income category and becoming middle class, so they can afford to buy their homes, or to buy better homes if they own existing ones. When you look at the shortage of housing in Egypt, the gap is about 350,000 units and the number is escalating. There's a huge opportunity, an untapped market.
Al-Shaikh is not deterred by the thought of setting up operations in countries that are still developing laws to govern property ownership and mortgage laws, such as Saudi Arabia. When Amlak became the first mortgage provider in the UAE in 2000, it was very much a case of working hand in hand with the regulators to develop the industry.
"That gave us a huge competitive advantage in the UAE because that gives you the luxury of setting the rules of the game," explains Al-Shaikh. "You set the rules of the game in a way that accommodates the way you do business, and you set it for other players when other players come online later. We try to do the same in other countries.
"In Egypt, for example, the regulation was passed a couple of years ago - however, we're very close to the regulators so sometimes we would have open dialogue with them and they would check things with us before rolling them out. In one of the countries that I will not name, we drafted the whole mortgage law for them and the property ownership law, and that was based on our experience here and on best practice.
"Being the first player in any market always gives you a great advantage. However, as a business you have to adapt for every market.
He says that Amlak will only enter a new market if it feels the country's regulator is serious about reforming the housing sector. Al-Shaikh adds that the UAE has been leading the region in terms of developing its regulatory environment, and has recently introduced several laws to support and encourage the mortgage finance industry.
One of the most important regulations that we saw in the year 2007 was the introduction of the escrow law," he says. ‘That was introduced as a protection mechanism for the buyers of these units who are buying units off plan. For us as a mortgage provider, we had to monitor the process of projects ourselves. That can be a nightmare.
However, with the introduction of escrow accounts and so on, many financial institutions will be monitoring the progress of various projects, so that gives us peace of mind.
We are ready to securitise assets worth $260m.
Amlak issued an AED500m ($136m) sukuk in 2004, underwritten by HSBC Amanah, and later rolled out a real estate fund. It will be looking to raise further funds this year to fuel its expansion.
"We're looking at many options, including securitisation," says Al-Shaikh. "We went through the exercise, however because of the market conditions we took a conscious decision to hold.
"We are ready to securitise assets worth $260m, we're just waiting for the right time. The whole exercise has been done. The minute we see a window of opportunity in international capital markets we will start with our roadshow.
He adds: "We are looking at other sukuk structures, whether it's covered bonds or convertible bonds, and we're looking at rolling out real estate funds.
"If we look at the Jordanian scenario, we're taking the company public, so we're raising equity in that given market, but I think in total, our intention is to raise around AED6 billion (US$1.6 bn), whether in the UAE or in other markets where we work, by the end of this year. I think that will be the bare minimum for us to fund our business."
As Amlak makes the move from a national mortgage provider to a regional one, it has implemented global standards within its organisation to make the business more competitive and efficient.
"What makes us different is that we do not look at our competition here for learning, we always look abroad, we look at international best practice," says Al-Shaikh. "We looked at mature markets like the US and Europe just to understand what are the innovations in the mortgage industry. One of the things we did over the past six months was a complete overhaul of our operations in Amlak. We went through an aggressive business process reengineering exercise."
One of the results was Amlak's one-hour approval process. The system was tested for three months after completion to compare its results with the previous evaluation system. Since the UAE still does not have a credit bureau, the onus is on mortgage providers like Amlak to ensure they are correctly assessing the credit-worthiness of customers. Al-Shaikh believes that the sub-prime mortgage crisis in the US has shown the importance of having strong credit controls in place.
Amlak has also worked with its Shariah board to develop standardised contracts - with minor adjustments to accommodate the requirements of different countries - which has contributed to a quicker application process. However, it will continue to try to reduce the approval time. "One hour is still too long," says Al-Shaikh.
Improvements like this are helping Amlak to maintain a competitive edge, which is becoming increasingly important as new mortgage providers have entered its home market. There are now 22 other mortgage providers in the UAE, and there are bound to be more on the way.
Even Amlak's relationship with the UAE's largest real estate developer, Emaar, which owns around 48% of the company's shares, does not give it a monopoly on its new builds. Amlak acts as exclusive mortgage provider on some of Emaar's new developments, but only for a limited period, usually a month or less.
"Competition is there, but I'm a true believer that competition is there for the industry itself," says Al-Shaikh. "Providers who are not able to compete do not deserve to be in the marketplace to start with. The mortgage market is huge enough to absorb this number of players.
Everyone wants to enter a booming market, and with property prices sent ever higher by a demand that is not yet met by supply, the UAE is an extremely attractive proposition - but some have questioned whether the property market is a bubble waiting to burst. "I think the property development boom that we have witnessed here over the past seven years is based on fundamentals," says Al-Shaikh.
"The government is serious, it's rolling out projects attracting more people to come in, so when I look at Dubai and Abu Dhabi, I'm not really worried. In the next three years we'll still have a healthy property market. Maybe in three years if we keep up with the same numbers and nothing increases, I think the market will have to stabilise.
Whether or not the UAE property boom continues for years to come, Amlak's activities in other markets with different dynamics and at different stages of development should help it to continue growing its profits. If it can remain flexible and adapt to changing market demands across the Middle East, this could be the key to its future success.
The population of Egypt is 80 million and not 17 million.