New Mortgage Rules to Raise Credit Risk Profiles

11/20/2013 12:30 pm EST


In an effort to control lending habits, the Central Bank has introduced a number of new mortgage rules in the UAE, writes John Everington, of The National, but will they have a lasting impact?

The Central Bank's new mortgage rules will boost the long-term credit risk profiles of UAE banks and property developers, says Standard & Poor's.

However, the credit ratings agency said in its report released Sunday, November 17, that new guidelines on mortgages issued by the Central Bank last month would not have an immediate impact on the credit ratings of banks and property developers that it covered.

The regulations, which introduced caps on home loans for the first time, would be beneficial for banks and developers in the long term, said the S&P credit analyst Timucin Engin.

“We believe the regulations will support the credit profile of the banks over the longer term by forcing them to adopt more conservative lending practices in residential real estate lending,” he said.

The regulations, introduced on October 28, cap home loans at 60 to 80% of a property's value. Mortgage lending for pre-construction properties will be capped at 50%.

The Central Bank introduced guidelines on mortgage lending last December, capping home loans at 50 to 70%. The limits were revised in response to expressions of concern from the country's banking sector.

The regulations are intended to introduce a measure of control over the UAE's real estate market, to prevent a repeat of uncontrolled lending, that contributed to the crash of the property market in 2008.

Tommy Trask, another S&P credit analyst, said a gradual and sustainable recovery of the UAE's real estate markets would be of greater benefit to the creditworthiness of banks and property developers than a short-term property boom.

“We believe the mortgage caps could help reduce market volatility and ultimately loan losses, and prevent another boom-and-bust cycle that was witnessed in the UAE property markets over the past decade,” Mr. Trask said.

However, S&P expects the caps to have a limited impact on credit growth in the country, because residential mortgages constitute less than 10% of the UAE banks' loans.

Separately, the Central Bank Governor Sultan Al Suwaidi said on Sunday, November 17, that the development of a local debt market would aid the funding needs of the country's larger companies.

“The development of a domestic debt market, in my view, is of a national priority,” Mr. Al Suwaidi said.

“Companies, particularly large private companies and (government-related entities), need an alternative to bank lending.”

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