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New property rules reduce risks for UAE banks

Dubai real estate transactions hike

Four per cent transaction fee introduced to decrease speculative buying.

October 24, 2013 4:20 by

The regulatory measures introduced recently to cool the real estate market in Dubai could prove beneficial to UAE banks as the sector recovers, Fitch Ratings reveals. The recent decision to double the property transaction fees in the city, along with planned caps for mortgage lending, could help contain property risks for banks.

The new four per cent fee, introduced to curb speculative buying in the market, should help property prices recover at more sustainable levels. It could go some way towards preventing excessive conjectures, particularly where a high proportion of purchases and sales are purely cash drive.

From a credit perspective, however, it adds that the central bank’s plans to impose maximum loan-to-value limits for residential mortgages would do more to prevent another build-up of asset-quality problems.

Banks are still dealing with those issues from the 2008 crisis, despite an improving economy and real estate recovery across the UAE, according to Fitch Ratings, adding that banks are still profitable, despite asset-quality issues.

It also adds that impaired loans declined to 7.5 per cent on average at the end of the first half of 2013 for nine of the UAE’s largest banks, from 7.8 per cent in the same period last year.

“It is likely that non-performing loans have peaked. The more upbeat operating environment and return of market confidence in the UAE should prevent any further wide-scale asset-quality deterioration in the short term.”

There are still uncertainties in Dubai’s property sector, particularly outside prime areas. Fitch Ratings reveals that oversupply in the real estate segment as projects are completed could lead to asset-quality issues, but it expects the medium- to long-term nature of major new projects to reduce this risk.

The report adds: “Debt restructuring of troubled Dubai-based GREs is progressing, but further actions cannot be ruled out, so this could add to impaired loans. In the long term we believe planned regulations to restrict loan concentration to GREs would benefit banks’ credit profiles. Compliance may take time for some banks with high concentrations.”

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