The growth of real estate market is perhaps one of the strong indicators of financial stability of an economy. There is an interrelationship between the real estate prices and the bank lending; since loans are the main source of real estate finance. The impact varies in line with the dynamics of the real estate market. Due to the impact of the property prices on the profits of the banks, the growth in the real estate sector contributes to the stability of a country's financial system.
In the UAE too, the banking sector has been exposed with the booming real estate market and remained at higher levels. A leading global ratings agency recently predicted that this exposure in the UAE would increase in the coming years with the banking sector’s performance in their participation in the development of the real estate sector. The report comes after examining the potential growth witnessed during past two years in the real estate market, which now shows signs of stabilization.
The banking sector’s credit risk exposure to real estate lending depends to a great extent on whether the mortgage loans are utilized to finance residential or commercial properties. Lending for residential property segment is generally considered to be safer than lending for commercial property segment.
Higher demands for properties influence the economy in several ways, so that the increase in the real estate prices will have positive impact on expectations of the returns on investment. However, the UAE’s banking sector is vigilant when it comes to its participation in the realty sector, thanks to the lessons learned from the credit binge that precipitated the 2009 global financial crunch.
Considering the recent concerns on moving towards a pre-crisis peak property prices in the market, sufficient measures are being implemented constantly to avoid repetition of the major crisis. A spate of measures including doubling in transaction fees; mortgage cap for lending to both nationals and expatriates; and guidelines limiting the amount that banks lend to government-linked companies have been introduced by the UAE Central Bank in an attempt to curb speculation and prevent the market overheating. We are sure that the UAE banking sector is in a stronger position now to withstand external tremors, compared to the scenario during the crisis period.
The UAE’s banking system generally indicated considerable improvement in profitability over the past few quarters; and the outlook for the banks during the current year remains favourable as more than a quarter of banks’ loan books relate to the property market. This has been due to the increased confidence in the real estate market, following the announcement of a slew of infra-development projects that are coming on track ahead of the World Expo 2020 to be hosted in Dubai. Supported by the growth and recovery in the real estate sector, the home financing market has been witnessing significant tractions during past couple of quarters.
The local economy is currently on a strong growth trajectory witnessing sizeable activities with improved business sentiments across different sectors -- mainly the real estate, followed by banking and finance, tourism and hospitality, retail, healthcare and information technology. Further acceleration in property loan growth is expected in the year 2015, albeit the banks are protected better against over-exposure to real estate.
It’s estimated that the World Expo will add USD 23 billion to Dubai’s economy from 2015 to 2021. We hope that the UAE economy, significantly backed by the real estate sector at more sustainable level, will demonstrate excellent growth results for a good few years.
By Yash Shah
(Property Sales & Leasing Manager at SPF Realty)
Gulf News Freehold - Expert Eye Column (June 07, 2014)
In the UAE too, the banking sector has been exposed with the booming real estate market and remained at higher levels. A leading global ratings agency recently predicted that this exposure in the UAE would increase in the coming years with the banking sector’s performance in their participation in the development of the real estate sector. The report comes after examining the potential growth witnessed during past two years in the real estate market, which now shows signs of stabilization.
The banking sector’s credit risk exposure to real estate lending depends to a great extent on whether the mortgage loans are utilized to finance residential or commercial properties. Lending for residential property segment is generally considered to be safer than lending for commercial property segment.
Higher demands for properties influence the economy in several ways, so that the increase in the real estate prices will have positive impact on expectations of the returns on investment. However, the UAE’s banking sector is vigilant when it comes to its participation in the realty sector, thanks to the lessons learned from the credit binge that precipitated the 2009 global financial crunch.
Considering the recent concerns on moving towards a pre-crisis peak property prices in the market, sufficient measures are being implemented constantly to avoid repetition of the major crisis. A spate of measures including doubling in transaction fees; mortgage cap for lending to both nationals and expatriates; and guidelines limiting the amount that banks lend to government-linked companies have been introduced by the UAE Central Bank in an attempt to curb speculation and prevent the market overheating. We are sure that the UAE banking sector is in a stronger position now to withstand external tremors, compared to the scenario during the crisis period.
The UAE’s banking system generally indicated considerable improvement in profitability over the past few quarters; and the outlook for the banks during the current year remains favourable as more than a quarter of banks’ loan books relate to the property market. This has been due to the increased confidence in the real estate market, following the announcement of a slew of infra-development projects that are coming on track ahead of the World Expo 2020 to be hosted in Dubai. Supported by the growth and recovery in the real estate sector, the home financing market has been witnessing significant tractions during past couple of quarters.
The local economy is currently on a strong growth trajectory witnessing sizeable activities with improved business sentiments across different sectors -- mainly the real estate, followed by banking and finance, tourism and hospitality, retail, healthcare and information technology. Further acceleration in property loan growth is expected in the year 2015, albeit the banks are protected better against over-exposure to real estate.
It’s estimated that the World Expo will add USD 23 billion to Dubai’s economy from 2015 to 2021. We hope that the UAE economy, significantly backed by the real estate sector at more sustainable level, will demonstrate excellent growth results for a good few years.
By Yash Shah
(Property Sales & Leasing Manager at SPF Realty)
Gulf News Freehold - Expert Eye Column (June 07, 2014)
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