Back-door nationalisation. A sign of distress in the banking sector. A prop to spur further lending for home buyers. These are just some of the varied reactions to the news that the country's two largest home finance providers will merge under the umbrella of a federal bank. Analysts are also saying that this is the first major government intervention to prevent the worsening property economy from sliding further as a result of the global credit crisis - and a welcome move at that.
"The whole landscape is changing," said Chris Dommett, the chief executive at the regional office of mortgage advisory John Charcol. "This makes a lot of sense right now. It shows the emirates are thinking on a countrywide level." Amlak Finance and Tamweel, two companies with roughly Dh25 billion (US$6.8bn) in assets between them, will merge and become part of Real Estate Bank, a relatively unknown entity with offices in Abu Dhabi and Dubai, wholly owned by the Ministry of Finance and Industry, the state news agency WAM reported on Saturday.
The result would be a new home finance provider that would "serve as the cornerstone of the mortgage market", said one government official, according to WAM. However, one senior international Dubai-based banker said it was still not clear whether the two institutions' main problems had been addressed. "In theory, it is a good idea. But how do you turn two institutions that are in a mess into one combined entity that works well? You just end up with one giant mess.
Both Amlak and Tamweel need to merge with a major bank because what they lack is funds, and banks have that from their depositors. However, hardly anybody had heard of the Real Estate Bank until now. Is it well capitalised? Nobody seems to know." Some observers credit the authorities with trying to do something, even if the outcome may still be uncertain. The move comes as the credit pressures on property developers and home finance companies have become especially acute.
Amlak announced last week it would stop issuing new home loans as it reviewed its credit policy. Prices have begun softening across the country and once vibrant salesrooms for new towers are patronised by only a trickle of would-be buyers. This has led to a first round of layoffs at property developers and delays of projects that have yet to begin construction. While speculators have been busy trying to get out of the market because price growth has slowed, many regular end-users are still out to buy a home. But without access to affordable loans, they too have been frozen out of the market.
"The business model of Amlak and Tamweel has collapsed," said Mohieddine Kronfol, the managing director of asset management at Algebra Capital. "As mortgage companies, their business models relied on wholesale funding, interbank borrowing and syndicated loans. All those channels of funding have been compromised by the credit crunch." Mr Kronfol said the new national home finance provider could begin offering more attractive home loans because it would probably have access to government funds. The new entity might also have the ability to collect deposits, allowing it another way to keep financing going during down cycles. Amlak and Tamweel are not licensed to collect deposits.
The announcement will push the relatively unknown Real Estate Bank into the spotlight as a leading financial institution in the property industry. The bank was set up in 1981 and made operational in 1999 to provide loans to Emiratis and government-controlled companies. According to its website, it has only 7,000 customers and was started with Dh2bn in capital. Amlak and Tamweel, meanwhile, have combined assets of Dh25bn and tens of thousands of customers. Combined, they promise to be the largest property finance firm in the Middle East. The problem is neither of them have any money to lend to home buyers.
Mahmood al Mahmood, the chief executive of Al Qudra Holding, hinted last week that Real Estate Bank could take an even larger role in the property economy by also lending to distressed property developers. "We have had this entity for years, but it has not taken a large role," Mr Mahmood said. "Today, we have an urgent need for it... There are discussions to bring it on track to take part in financing some of the mortgage companies and real estate developers. It would extend facilities whenever needed."
Still, the announcement appeared to raise as many questions as it answered. No details were given about the structure of the new-look Real Estate Bank or what would happen to Amlak and Tamweel during the merger. Raj Madha, an analyst at EFG Hermes, said the announcement was "extremely positive" for improving the operations of the two companies, but "the main question is what will happen to shareholders". Like many such mergers, the devil will be in the detail.
Eric Milne, the head of banking and finance for the region at Simmons and Simmons Dubai, said "there isn't much precedent" for this type of merger. He suspected the merger would need majority shareholder approval. The two main possibilities for shareholders is that they will either be bought out by the Government and the shares will be delisted from the stock exchange, or the shares will be converted into shares in the new company. Either way, the Government is likely to take a controlling interest.
The companies involved provided no further details of the merger. Wasif Saifi, the chief executive of Tamweel, said the company "had been given the details" of the merger under Real Estate Bank and "are just looking at all the aspects of it". The merger marks the beginning of what is likely to be a series of consolidations in the property industry, analysts said. "We are still on the cusp of a downturn in the UAE," said John McGaw, the chief executive of the regional office of Killik & Co. "This merger will create a stronger entity. It's something that needed to be done."
His optimism will be greeted with relief by government officials, but last night home buyers were demanding the answer to one question: when will the home finance market resume? "This is the one million dollar question," said the governor of the Central Bank, Sultan Nasser al Suwaidi, said over the weekend. @Email:firstname.lastname@example.org email@example.com