Banks in the United Arab Emirates are increasing exposure to the country’s booming real estate industry betting that, five years after property values slumped and non-performing loans soared, this time it will be different.
Lending to the construction segment climbed 40 percent to 181 billion dirhams ($49 billion) in 2013, according to the latest central bank data, the most since 2008 when loans jumped 81 percent. Emaar Malls Group LLC, a unit of Emaar Properties PJSC, raised a $1.5 billion Islamic facility last month, according to a company statement yesterday.
Non-performing loans at U.A.E. banks grew to between 10 and 12 percent after the credit crisis as property prices crashed by more than half. Real-estate values in Dubai, home to the world’s tallest skyscraper and one of the biggest shopping malls, increased at the fastest pace in the world in 2013, while bank lending growth accelerated to the quickest in five years.
“You can see in terms of business practices that things aren’t as hairy as they were in 2008,” Raj Madha, an independent regional banking analyst, said by phone from Dubai yesterday. Back then “people were selling buildings, then looking for ways to build those buildings. We haven’t seen that come back yet,” he said.
Borrowing costs in the U.A.E. have tumbled, with the yield on Emaar’s Islamic bond due 2019 falling 103 basis points this year to 3.52 percent today at 12:29 p.m. in Dubai, according to data compiled by Bloomberg. That compares with a 56 basis-point drop to 4.04 percent for Middle East bonds, according to JPMorgan Chase & Co. indexes.
In Dubai real-estate prices increased 35 percent last year, the biggest jump globally, according to Knight Frank LLP. The central bank has imposed mortgage caps and lending limits in a bid to help protect banks from a repeat of the property crash, when values declined as much as 65 percent from their peak.
The measures may be working. Dubai home prices slowed in the first quarter, Knight Frank said.
The emirate and its entities borrowed more than $110 billion to become a commercial and tourism hub before 2008, with developers relying on bank lending and advance sales of unbuilt properties to propel the world’s fastest-growing real-estate market.
“Anytime you have a dramatic increase, there’s always a question about the quality of that lending,” Madha said.
Some of the increase in construction-related loans last year recorded in the government figures is due to a reclassification of exposures, according to a Standard & Poor’s report dated May 20. Still, S&P expects the growth in lending to continue because real estate developers are starting big new projects, the report said.
Dubai will spend more than $8 billion on roads, a railway extension and new buildings as it prepares to host the Expo 2020 global trade fair. Abu Dhabi is building a new port, attractions including Louvre and Guggenheim museums, and expanding its airport as it tries to diversify its economy away from oil.
Banks are a lot more cautious after the 2009 crash “so they won’t be aggressively lending, at least at this stage,” Chiradeep Ghosh, a Bahrain-based senior analyst at Securities & Investment Co., said by phone yesterday. “As long as real estate prices remain steady, it shouldn’t translate into non-performing loans.”