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UAE banks wary of lending on Dubai property fears

Jason Benham and Daliah Merzaban Reuters
UAE banks wary of lending on Dubai property fears - Islamic - Dubai - Bank - UAE - Property - Real Estate


Islamic banks in the United Arab Emirates are wary about extending new loans, despite better liquidity, on fears a Dubai property slump could force them to take deeper writedowns for bad home loans, Mashreq Capital said.



Residential real estate prices in Dubai have collapsed since the global financial crisis brought to an end a regional economic boom, leading the former boomtown to put on hold major expansion projects and companies to lay off thousands of staff.

With the threat of mortgage defaults looming, banks in the UAE are reluctant about using the tens of billions of dollars they have received in state support to extend new loans, said Mashreq Capital Chief Executive Abdul Kadir Hussain.

"Where we are at now, liquidity in the banking system has improved significantly ... but it is still not that easy to go out and get mortgages," Hussain told the Reuters Islamic Finance Banking and Finance Summit in Dubai on Monday.

"Banks are hesitant because they don't know how much of that money they need to keep writing these things (mortgage loans) down."

Banks in the UAE started making provisions for an expected rise in bad loans in the fourth quarter, as Dubai property prices look set to fall almost 40 percent before the end of this year, a Reuters poll showed last month.

But the level of writedowns has the potential to grow and Islamic banks may suffer as a result of the way sharia-compliant mortgage loans are structured, Hussain said.

Under Islamic mortgage rules, he said, the buyer is not required to start paying back the home loan until after the property is completed and delivered. Until then, the price risk rests with the bank.

TROUBLED ASSETS

Banks are trying to gauge whether some shelved projects in Dubai would be completed at all, and even if they are, whether the buyer is still in a position to pay the mortgage installments given the economic slowdown.

Many property sales in Dubai during a six-year building boom occurred off-plan, in other words the purchase was made while the building was still under construction.

"A lot of the large-volume projects have been delayed in terms of the delivery. You can't judge how many of those people will be here when the projects are delivered," Hussain said.


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