End to property trough 'in sight'

The purchase of distressed loans and other assets backed by property would unlock capital, says Morgan Stanley.


DUBAI, UNITED ARAB EMIRATES Ð May 26: Labourer working on one of the under construction building at International City in Dubai.  (Pawan Singh / The National) 

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International investors will start snapping up distressed UAE property-backed assets by the end of this year, according to the regional chief of Morgan Stanley. The purchase of distressed loans and other assets backed by property would unlock capital that could be deployed on infrastructure projects and help banks boost lending, said Georges Makhoul, who heads the Middle Eastern and North African operations of Morgan Stanley.

"Once you see distressed funds coming to the market and picking up whole portfolios from developers and banks then you know we are on the mend," he said. "That is the way bubbles clear themselves. I am waiting to see that." Property prices have fallen sharply in the UAE this year, with the biggest declines in Dubai. Banks in the Emirates could lose as much Dh24 billion (US$6.54bn) or almost half of their Dh60bn overall exposure to mortgages, research by Credit Suisse suggests. Home prices in Dubai had fallen about 50 per cent from their peak and could fall another 20 per cent this year, Deutsche Bank said last week.

Assets targeted by international investors could include loans backed by property, property-associated debt and mortgages, Mr Makhoul said. "Once you can establish a price where someone is willing to take over assets, you create a market and people trade that stuff. There will be good opportunities for people to make returns on that and to clear the remnants of the burst." A debt trader based in Dubai said foreign investors had been buying distressed debt from companies in the UAE for a number of months and he expected them to expand their interest in bad property-backed debt. One of the reasons for the decline in housing prices has been the withdrawal of lenders from the market. However, the purchase of distressed loans could re-energise lending because it would provide banks with fresh funds to make up for the losses.

However, not all observers expect banks to open wide their vaults. Howard Handy, the chief economist and general manager at Samba Financial group in Riyadh, said: "I think banks will be cautious for real estate in Dubai for the foreseeable future." In recent months, some banks have relaxed some of the more stringent rules they applied to home financing. Arup Mukhopadhyay, the executive vice president and group head of retail banking at Abu Dhabi Commercial Bank, said last week that the industry would continue to apply other prudent measures in approval procedures.

Mr Makhoul said he expected the first round of distressed asset-buying in about six months, and suggested that the bubble could take three years to clear itself. "People will start buying when they realise the economy is turning and when they see how they could potentially re-sell these assets," he said. About one third of UAE banking assets are tied to the property industry. Mr Makhoul said that new mortgage lending would play a pivotal role in the revival of the property market: "There is systemic risk if the borrowers do not have a place to borrow from, then the real estate market is not going to come back."

The market for distressed assets is starting to find a price in the US. Last week Investcorp, the London- and Bahrain-listed alternative asset manager that previously owned Tiffany and Gucci, bought individual loans and senior debt backed by US commercial property. It paid about 75 to 80 cents on the dollar for the loans, which carried a face value of about $171 million. The introduction of foreign ownership rights in 2002 triggered a six-year property boom in Dubai, which attracted investors from all over the world and funded the construction of tens of thousands of villas and apartments that continued to rise in value until last autumn, when prices collapsed.

"We are in the trough of the real estate bubble," said Mr Makhoul. "But I don't think the market has bottomed out yet." Last week, UBS warned that the vacancy rate of Dubai's homes could double by the end of 2010, with one in three homes empty as the population falls and new residential property is delivered. uharnischfeger@thenational.ae mjalili@thenational.ae