UAE banks’ exposure to real estate sector declines

UAE banks have seen a reduction in real estate and construction exposure as cash buyers dominate the market.

Exposure to property sectors decreased by 30 basis points quarter-on-quarter to 19.8 percent, according to the latest UAE Banking Pulse Q2 2022 by professional services firm Alvarez & Marsal (A&M).

“We have been following this from Q1 2021 and this has largely been in the 20-21 percent range, with Q2 2022 being the lowest number,” said Asad Ahmed, A&M managing director and head of Middle East financial services.

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Ahmed added: “It is possible that the reduced economic activity during Covid has, in part, played a role as there is a lag between reduction in lending (which could in turn be a result of reduced new loans). I do not see it as a trend as such but would wait for the next two quarters.”

The A&M Pulse report looks at the performance of the country’s ten top banks. It reported a significant rebound in quarterly profits for the second quarter of the year, as a 19.5 percent rise in interest income helped spur profitability by 24 percent to AED12.6 billion.

“The regional banking sector, including that of the UAE is expected to report continued strong profitability on the back of increasing interest rates, improving credit quality and robust economic growth,” Ahmed said.

“While clearly inflation is now a global concern, we foresee a lesser impact of this in the region, against the backdrop of firm oil prices, increased consumer confidence and strong economic activity.

“Extensive public participation in the recent wave of state-linked IPOs has also been a key contributor of the positive sentiment during this quarter.”

A possible cause of the reduction in exposure to the real estate sector could be the rise in cash buyers in Dubai’s booming property sector.

By value, mortgaged buyers for villas and apartments now account for just 18 percent of the market.

Last year the figure was close to 40 percent, while in 2007 just over 50 percent of transactions were financed, according to Faisal Durrani, partner and head of Middle East research at Knight Frank.

“The rising interest rates are starting to impact mortgage transaction volumes, with more buyers choosing off-plan developer payment plans,” said Robert Thomas, head of agency at Core.

Recent increases in interest rates have raised the cost of mortgages as the UAE continues to follow rate rises announced by the US Federal Reserve.

The UAE has seen a 1.75 percent increase in interest rates in the first half of 2022.

The shift to cash payments represents a rapid turnaround from 2021 when the Dubai mortgage market experienced a record-breaking year.