Nasser Saidi on mitigating the risks of another UAE real estate bubble
As Chief Economist for the Dubai International Finance Centre, Nasser Saidi knows a thing or two about the economy of the United Arab Emirates. In 2008, there was a sizeable crash in Dubai’s real estate market – now, as the market thunders upward again, many observers are apparently quick to forget the bubble’s unceremonious burst. Nasser has authored a piece for us on how another crash can be averted.
“The UAE may be gearing up for a property development boom. Newly announced projects aim to capitalise on high oil revenues and an influx of people and capital attracted by the country’s perceived status as a “safe haven” amid continuing regional turmoil resulting from the unrest in several Arab countries.
That the UAE Central Bank is seeking to introduce new limits on mortgage borrowings suggests the perception of a new property bubble is a key concern for regulators.
But international and local banks remain wary about lending to property developments at a time when they have to make continuing provisions against assets that were funded during the last boom.
However, despite its potential negatives and risks, we believe that a new wave of property development could be used to enhance and cement the competitive positioning already reached by the UAE in global finance and tourism and hospitality.
In contrast to the boom-bust scenario over 2005-2009, banks should welcome and adopt a more proactive approach to property lending, driven by a continuous and relentless attention to value maximisation of the assets being built – as derived from both its basic capital value and income generation characteristics.
An active approach to property credit management entails the development of a property database, to include the main information related to the type, status, location, utilisation and commercialisation of the building financed.
A thorough financial appraisal and the development of industrial key performance indicators would allow the banks’ credit managers to anticipate and forecast potential troubles ahead.
A comprehensive monitoring “dashboard” would help banks to build a more diversified and well-balanced credit portfolio of property initiatives.
Apart from active credit property management that could be undertaken by individual banks, we advocate the build-up of a banking system-wide common property data set and industrial-driven risk management dashboard.
This could be easily developed with the sponsorship and involvement of institutions including the UAE Central Bank, which is keen to monitor property exposures, the Real Estate Regulatory Agency and the main UAE banks.
This would act as a macro-prudential tool for property risk management, for the benefit of the banking system, the property sector and the UAE economy.
Our proposal would stabilise the sector and detect the formation of future asset bubbles, thus reducing the credit costs to the banks and the financing costs to the property developers.
A system-wide property database and risk/performance dashboard would improve transparency and help to attract back some of the international lending and equity capital that has proven to be elusive after the first property development boom and subsequent bust. This should be accompanied by providing the legal and regulatory framework of an active mortgage market.
The outlook for the UAE property sector remains challenging. However, the challenge could be turned into a structural advantage, given the vision of renewed strategic, long-term development in the region. We need a more systemic, analytic and industrial-based proactive approach, by the banking sector and regulators.”
If you’d like to book Nasser for a speaking opportunity, please email Alex Hickman.