Banks role vital for property recovery in Dubai but they are facing default timebomb

Banks are the key to a property revival in Dubai, according to real estate and finance experts, but international ratings agency Standard & Poor’s is warning that the sharp correction in the emirate’s property sector has created new risks.

S&P cut its credit ratings on four Dubai-based banks. On Emirates Bank International PJSC, National Bank of Dubai, and Mashreqbank  it was cut by one notch to A-minus from A and the counterparty rating on Dubai Islamic Bank was cut by one notch to BBB-plus from A-minus.

‘The economic slowdown, stock market decline, and dropping real estate prices are raising significant hurdles for these Dubai-based banks. Looking forward, we expect these factors to significantly slow business growth and lead to a deterioration in asset quality and profitability,’ the agency said in a statement.

‘We expect the impact on Dubai’s overall economy to be significant, as construction and real estate account for almost 50% of Dubai’s GDP,’ S&P added.

Another concern is that banks could be facing a mortgage default crisis. It has already been reported that expats in financial trouble have been deserting the country, leaving their property behind.

This week the new Cost of Living Survey from leading global HR consulting firm Mercer showed that Dubai is the most expensive city in the GCC for expats to live in.

Dubai-based mortgage lender Amlak Finance had recently said that it has experienced more loan delinquencies in 2009 than the previous year and expects the number of defaults on mortgages to grow further this year.

Dubai passed a new mortgage law in 2008 that provides a procedure of foreclosure on the part of the lender. But the procedures for taking back possession and foreclosing on a mortgage are cumbersome and slow. ‘There is no provision under existing law for banks/financial institutions to merely take over a property and in all cases they would require a court order in order to take back possession and dispose of the property,’ explained Tom O’Grady, head of real estate a DLA Piper Middle East.

‘In these uncertain economic times, it would be surprising if there was not a rise in the level of delinquent lending in the UAE in parallel with similar experiences elsewhere in the developed world,’ he added.
Some banks are trying to re-schedule loans for those in financial difficulty. Facilities include six month deferment of payments and re-scheduling of loans.

But it is vital for the banks not to stop lending, according to Abid Junaid, Executive Director of the UAE-based developer ETA Star Properties although the need to change with the changing market conditions.

‘Although banks must have prudent lending policies and they must lend only to those who are qualified enough, they should not shy away totally from mortgages as they are an inherent part of real estate selling activities. Banks must be back in the picture and they must have aggressive loan portfolios,’ he said.

Banks should also revise the earlier practices of doling out mortgages for multiple units to the same person and need to ensure that they lend to genuine end users, he added.

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