Banks are increasing exposure to the UAE’s booming real estate industry and betting that, five years after property values slumped and non-performing loans soared, this time it will be different.
Lending to the construction segment climbed 40 per cent to Dh181 billion last year, according to the latest central bank data, the most since 2008, when loans jumped 81 per cent. Emaar Malls Group, a unit of Emaar Properties, raised US$1.5 billion in Islamic financing last month, the company said on Sunday.
Banks’ non-performing loans grew to between 10 and 12 per cent after the 2008 credit crisis as property prices crashed by more than half. Real-estate values in Dubai increased at the fastest pace in the world last year, while bank lending growth accelerated to the quickest in five years.
“You can see in terms of business practices that things aren’t as hairy as they were in 2008,” said Raj Madha, an independent regional banking analyst in Dubai. Back then “people were selling buildings, then looking for ways to build those buildings. We haven’t seen that come back yet”, he said.
Borrowing costs have tumbled, with the yield on Emaar’s Islamic bond due in 2019 falling 99 basis points this year to 3.46 per cent on Friday. That compares with a 56 basis-point drop to 4.04 per cent for Middle East bonds, according to JP Morgan Chase indexes.
Real-estate prices in Dubai increased 35 per cent last year, the biggest jump globally, according to Knight Frank. The Central Bank has imposed mortgage caps and lending limits in a bid to help protect banks from a repeat of the property crash, when values declined as much as 65 per cent from their peak.
The emirate and its entities borrowed more than $110bn to become a commercial and tourism hub before 2008, with developers relying on bank lending and advance sales of unbuilt properties to propel the world’s fastest-growing real-estate market.
“Anytime you have a dramatic increase, there’s always a question about the quality of that lending,” Mr Madha said.
Some of the increase in construction-related loans last year recorded in the government figures was because of a reclassification of exposures, according to a Standard & Poor’s report last month. Still, S&P expects the growth in lending to continue because real-estate developers are starting big new projects, the report said.
Dubai will spend more than $8bn on roads, a railway extension and new buildings as it prepares to host the Expo 2020 global trade fair. Abu Dhabi is building a new port, attractions including Louvre and Guggenheim museums, and expanding its airport as it tries to diversify its economy away from oil.
Banks are a lot more cautious after the crash “so they won’t be aggressively lending, at least at this stage”, said Chiradeep Ghosh, a Bahrain-based senior analyst at Securities & Investment. “As long as real-estate prices remain steady, it shouldn’t translate into non-performing loans.”
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