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Real estate market crash will affect banks, say experts

DUBAI — Should the real estate bubble burst in the UAE, it will have serious implications for banks, according to industry observers.

Property prices have almost doubled in the last three years as Dubai has transformed itself into the region’s trading and tourism hub. But a surge in construction projects, especially luxury residential developments, have raised fears of a property bubble.

However, the lack of indicators and indices of real estate and property prices and detailed information about the market, makes it difficult for banks to assess the risks related to their exposure either through their lending business or through other lines of business.

Banks in the country are mostly focused on real estate market, which is currently experiencing high momentum and a structural need for financing. Banks’ total lending to the real estate is estimated at about 15 per cent, which is although not high, but enough to seriously impact them in case of severe downturn

The other area where UAE banks have direct exposure to the real estate sector is retail mortgage lending, with Islamic banks having sizable real estate inventories on their balance sheet which may swing in value.

Islamic banks are also involved in real estate trading, unlike most conventional banks, adding more risks to their balance sheets.

High liquidity inflows as a result of high oil prices and repatriation of some funds invested abroad in the aftermath of 9/11 events have renewed confidence and investment opportunities in the country, where the volume of initial public offerings is unprecedented.

They have also pushed investors to increase their exposure to real estate market and surged prices in the past three years.

According to industry estimates, the real estate market correction, which will bring prices down, is expected in the coming five years as the number of new housing units available for buyers increases.

In the short term, the growing number of people moving to Dubai and liberalisation of the property law coupled with high rental yields and continued speculation, will keep prices up, they say.