Sharp Jump in UAE Bank Lending to Construction A Concern?

Lending to construction in the United Arab Emirates is booming again, underlining a rapid return in confidence despite the heavy toll bad real estate loans took on local banks during the global financial crisis.

Banks had extended almost 181 billion dirhams ($49 billion) of credit to the construction sector last year, according to recently released central bank figures, up from AED129 billion in 2012.

The 40% year-on-year rise suggests that banks are eagerly helping finance a new wave of development that centers on Dubai, where projects including new man-made islands and a 438-hectare complex in which the emirate plans to host the 2020 World Expo have been launched in the past year.

But the uptick is also raising eyebrows.

Banks, for one thing, are now more heavily exposed to construction in terms of absolute value than they were at the height of Dubai’s previous real-estate boom in 2008, when they had about AED119 billion worth of construction loans.

When the local real estate market collapsed, more than halving prices in some parts of Dubai, analysts criticized lenders for having too many eggs in the property basket. Many companies and investors who couldn’t liquidate real estate portfolios to repay loans ended up defaulting, pushing up bad loans in the system.

By 2012, a central bank report said more than 21% of bank loans were still to real estate. Bad loans, meanwhile, remain at elevated levels.

Analysts say while a high concentration of loans to construction could be a long-term problem, it’s also clear that regulators are aware of loan-concentration issues.

One hallmark of the U.A.E. central bank’s response to the financial crisis was the institution last year of new large-exposure limits. Under the new guidelines, local banks must craft lending policies that take into account risks arising from a concentration of lending to a single sector, among other restrictions.

In another move aimed at curbing excessive property-linked leverage, the central bank placed new limits on mortgages last year. Dubai also doubled fees on real estate transactions in a bid to cool a market where residential prices rose by more than 20% last year, by some estimates.

Khawar Khan, the research manager at the consultancy Knight Frank in Dubai, said real estate had done well recently because of a return in confidence supported by renewed trade, travel and tourism activity. Dubai is likely to continue on a path of economic growth, he said, but the pace of real estate price growth seemed to be slowing – perhaps an encouraging sign both for markets and lenders.

“We are now starting to see price growth slow to a snail’s pace,” Mr. Khan said. “There have been worries over the last few months that are we in a bubble, but the introduction of the transaction fee and mortgage cap seems to be having an effect where price growth has slowed.”

Knight Frank said in a report this week that residential prices in Dubai climbed by almost 28% year-on-year in March. Price growth slowed in the first quarter, it said, but Dubai was still the best-performing market in the world over the one-year span.

This entry passed through the Full-Text RSS service — if this is your content and you’re reading it on someone else’s site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.

(via WSJ Blogs)