UAE banks seek more room for real estate loans



Dubai: Banks in the United Arab Emirates have asked the central bank for permission to free up more money for the real estate and construction industries as they seek to revive credit growth in the second-biggest Arab economy.

The Emirates Banks Association, which includes HSBC Holdings and National Bank of Abu Dhabi (NBAD), is recommending that the regulator exclude mortgage loans from the category of credit extended to other real estate projects, Chairman Abdul Aziz Al Ghurair said in a February 12 interview. Proposals also include raising to 20 per cent the ratio of deposits banks can lend to real estate, he said.

The push comes after banks lobbied to renegotiate curbs on mortgage lending introduced in December as they seek to spur a recovery in credit growth four years after Dubai property prices crashed amid the global financial crisis. Loans and advances rose 3.1 per cent in the year to November 2012, compared with 15 per cent in neighbouring Saudi Arabia. Interbank lending rates fell to the lowest level since Bloomberg started tracking the data in 2006.

"We want mortgage lending to be set aside from real estate because it's completely different from commercial properties and shopping centres," Al Ghurair, the billionaire chief executive officer of Dubai-based Mashreqbank, said.

Default risk
Under current rules, loans made to finance infrastructure projects to build airports, roads, bridges as well as home purchases fall under the real estate category. The rule was introduced to curb default risk after one in every six loans signed before the Dubai real estate crash wound up classified as non-performing, according to data from Moody's Investors Service.

Loans for real estate at UAE banks rose 4.8 per cent in the third-quarter to Dh251.2 billion ($68.4 billion) from a year earlier, according to the central bank's most-recent data. Deposits climbed 12.3 per cent in the year to November, the data show.

Interbank rates
In an effort to boost demand, banks have reduced the three- month Emirates Interbank Offered Rate, the measure used to price loans, almost a quarter of a percentage point last year to 1.3 per cent, according to data compiled by Bloomberg. Rates in Saudi Arabia and Qatar advanced as loan growth accelerated fueled by government spending.

The banking association is asking the central bank to exclude loans given to cash-generating or completed properties from the real-estate category, said Al Ghurair. One proposal, a copy of which was sent to Bloomberg News, suggests classifying loans based on the source of repayment instead of "the current approach, which is based purely on asset class or type."

Boosting loans to malls and tourism-related projects may help banks benefit from Dubai's economic recovery. Gross domestic product of the UAE's second-largest emirate expanded 4.1 per cent in the first half of 2012, as the hotel and restaurant industries surged 16 per cent, according to government data.

Dubai Mall
Emaar Properties, the developer of the world's tallest skyscraper in Dubai, is planning to add one million square feet (92,903 square metres) of space to the Dubai Mall, the world's largest by area, to boost recurring income.

"The proposed granular classification of real estate loans makes sense from a risk profile perspective," Asjad Yahya, an analyst at Dubai-based Shuaa Capital, said by phone. "For example lending for a plot of land carries very different risks than lending for a completed mall."

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