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UAE mortgage market remains very small: Report

Issac John / 23 December 2010

DUBAI — The mortgage market penetration in the UAE, which is just seven per cent of its Gross Domestic Product (GDP), remains very small by global standards, says a report by NCB Capital.

Stressing that an active mortgage market in the Gulf is now the need of the hour, the report said the UAE and other GCC countries lag far behind the developed countries with an average mortgage penetration of five per cent of the region’s GDP compared to 70 per cent penetration in the US and 50 per cent in the UK,  NCB, Saudi Arabia’s largest investment bank said.

Although the GCC mortgage industry has grown significantly in recent years and is currently worth an estimated $60-70 billion, it remains “extremely underdeveloped” by global standards, the report said.

“The share of real-estate mortgages in regional bank lending has grown from 13.6 per cent in 2008 to 14.8 per cent in 2009; however, this is little more than five per cent of regional GDP,’ the bank said. 

Mortgage penetration — mortgages as a per centage of GDP — in Saudi Arabia is only around 1-3 per cent while it is estimated at nearly 4.5 per cent in Bahrain and in Qatar it stood at around 14 and nine per cent.

Although mortgages in the GCC are lagging, lending to real estate emerged was an increasingly important element of bank credit in the pre-crisis years, the report said.

“An active mortgage market in the GCC is now the need of the hour…while sharp corrections in some GCC real estate markets highlight the need for greater regulation, the demographic imperatives, especially in Saudi Arabia militate for speedy reforms,” the report said.

The report showed that during 2003-08, GCC bank credit to the real estate sector increased from around $2.1 billion to $8.4 billion while real estate firms raised as much as $4.7 billion from the equity markets.

In Saudi Arabia, the share of real estate loans in the total credit fell consistently from three per cent in 2005 to two per cent in 2008 and subsequently increased to 2.4 per cent in 2009.

The value of the real estate loans has steadily increased by 19.8 per cent to SR17,860 million in 2009 from SR14,906 million from the previous year.

“While most lending is undertaken by commercial banks, the regional is also home to a growing number of specialized mortgage lenders whose role is particularly important in the UAE,” the report said.

“The global economic crisis in 2008 however put the brakes on the growth of the nascent mortgage sector. Since the beginning of the turmoil, liquidity flowed out of the regional economy as the capital markets collapsed. While the fall in demand for real estate was broad based, losses were more severe in economies such as the UAE and Kuwait due to a heavy reliance on foreign capital and regulatory shortcomings. Real estate transactions stalled across the region.

“The increasing urgency of economic diversification is boosting the need for physical infrastructure development and housing,” said NCB chief economist Dr Jarmo Kotilaine.  

“The mortgage market has a critically important role to play in the process. Not only will this improve affordability, which the Western experience has clearly demonstrated, but it will also serve as an important source of market stability and continuity,” he added.

According to him, Saudi Arabia alone is expected to see SR1.2 trillion housing finance demand in the next 10 years.

“Conservative estimates suggest a need for 150,000 new homes a year. With well over half of the population still relying on rental accommodation and over 60 per cent below 30 years of age, the pressures are likely to remain intense. Currently existing solutions have done relatively little to address the structural shortages,” he added.


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