UAE Central Bank plans flexible cap on real estate financing

The Central Bank of the UAE is in discussions with the country's lenders to amend rules governing the financing of real estate, flexing the cap on funding to the sector.

The banking regulator currently allows banks to lend as much as 20 per cent of their total deposits to the property sector with that cap being raised to a still undecided level, Mubarak Rashid Al Mansouri told the Middle East Banking Forum in Abu Dhabi on Sunday.

Under the proposed changes, lenders would be allowed to exceed the 20 per cent cap, but they would have to incur a capital charge, he said.

“So we came to the view that we need to be flexible,” Mr Al Mansouri said. “If a bank wants to lend higher than the [20 per cent] cap — there is a higher overarching cap they cannot [breach] even if they want — yes, they need to [have] more capital.”

Lenders in the Emirates will have to access the risk-return profile of any decision to lend beyond the cap and must decide if it is worthwhile to inject more capital, the governor said, adding that the draft of the regulation is with the UAE Banks Federation, which is discussing it among its members.

Lending to the residential real estate sector stood at Dh243.5 billion in 2018, according to the UAE Banks Federation’s recently published annual report. Total domestic credit extended by banks stood at just over Dh1.5 trillion.

The property market softened following a drop in oil prices that began in 2014 and slowed economic momentum in tandem with a global economy impacted by rising trade tensions between China and the US. Concerns about an oversupply of properties has also cooled prices in both residential and commercial segments of the real estate sector. Experts have forecast a recovery on the back of government reforms to encourage investment. These include a new immigration regime offering long-term visas for investors, Dubai’s Expo 2020, Abu Dhabi’s Dh50 billion Ghadan 21 stimulus and changes to the emirate’s freehold property law.

The Dubai government recently set up a new real estate committee to ensure a better supply balance in the emirate through greater collaboration between government-related entities and private sector companies.

“We have learnt the lessons from 2008, banks have learnt the lessons [as well] and they have been prudent in extending loans to the real estate sector,” Mr Al Mansouri said, adding that some of the offers in the market are attractive

“The risk level is reduced. You are not buying [properties] at the peak.”

The UAE economy has picked up momentum since the three-year oil price slump and the governor said the latest projection indicates the economy will expand by 2.4 per cent in 2019. The non-oil gross domestic product will rise by 1.4 per cent this year while the oil economy will grow by 5 per cent.

The lower interest rate on the back of the US Federal Reserve's decision to cut rates last week, is good for the country’s economy, which is coming out of the lower oil price environment, and the economy overall is expected to perform even better next year, he said.

The UAE banking sector, Mr Al Mansouri said, has also remained resilient, profitable and well capitalised despite global economic headwinds.

The banking sector, the biggest in the Middle East and North African region with total assets reaching Dh3 trillion as of September 2019, has seen deposits rise by 4.3 per cent year-on-year at the end of the third quarter of this year, mainly driven by resident deposits which rose 5.9 per cent year-on-year, he said.

Credit growth also remained strong, growing by 5 per cent over the same period. Return on equity was 11.5 per cent at the end of December 2018, rising to 12.8 per cent at the end of the third quarter of this year, Mr Al Mansouri noted.(From The National)