The Dubai International Financial Centre has laid the groundwork for establishing a new UAE mortgage bond market, based on Denmark's property market, which investors say could revitalise the Emirates' real estate sector.
The DIFC, in conjunction with Absalon Project, a joint venture between Denmark's VP Securities and Soros Fund Management, is launching a feasibility study for private residential mortgages funded by the issuance of standardised bonds.
The DIFC hopes that the proposals will create a large and liquid mortgage bond market in the UAE, jolting the country's property sector back into life after a prolonged slump, while avoiding the excesses related to mortgage-backed securities in the US subprime mortgage sector.
Dr Nasser Saidi, chief economist of the DIFC Authority, said: "The major issue that needs to be addressed is the lack of housing finance.
"Given the continuing deleveraging in the banking sector, the development of an active mortgage market through mortgage securitisation would provide liquidity relief to commercial banks while providing long-term investment opportunities to institutional investors."
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Under the Danish model no investor has ever had a loss due to mortgage default, despite several financial crises, Dr Saidi added.
Mortgage bonds account for a large proportion of Denmark's debt markets, with the €320 billion market roughly four times the size of the government bond market in September 2010, according to Nykredit, Denmark's largest mortgage provider.
Mortgage markets in the Gulf are much smaller, according to data from Standard Chartered. Mortgages account for around 3 per cent of the total value of the $930bn of property projects, just under half of which are located in the UAE.
The project would be rolled out in Dubai first, before broadened to the rest of the UAE, according to Wagn Erik Nøgaard, vice president of VP Securities.
Only a few changes are required to make the model Sharia-compliant, he added.
Dr Saidi also recommended the establishment of an Emirates Mortgage Guarantee Corporation, providing insurance coverage up to 30 per cent of the total mortgage value.
Bond investors said the proposed system would be well-received by local markets, leading to fresh liquidity in the real estate sector.
Mark Watts, head of fixed income at National Bank of Abu Dhabi, said:
"If that market evolves in the UAE, it would certainly be welcomed by investors because it will provide us with different credit exposures and avenues to deploy cash in the fixed income market.
"The Danish system is a lot easier to understand from an investors' perspective and operates more along the lines of conventional bonds," Mr Watts said.
"Some of the drawbacks in the US mortgage market will be avoided by the Danish model. This will ultimately be more attractive to UAE investors," he added.
