'Realities in Realty'

24 Aug, 2002

The recent announcements and splash in the newspapers of offerings on Sheikh Zayed Road and beyond, collectively represent a paradigm shift in terms of property ownership in the Arabian Gulf. For the first time, in a robust and sustained manner, capital flows from GCC and expatriate investors are being wooed assiduously. The response to this has naturally, been overwhelmingly enthusiastic. The timing, besides could not have been better. The regional money that became 'shy' of the ominous war-warnings in Washington D.C. and in the western capitals, is finding its way back to the regional money markets.

Dubai's real estate projects are in line with its "laissez-faire" policies! The city-state has espoused an open economy vigorously for many years with encouragement for "cosmopolitan internationalism"; well before 'globalisation' was coined and became fashionable. At the same time, Dubai's authorities are acutely sensitive to its strategic interests and to the sensibilities of its people. Property ownership is zealously safeguarded the world over and even dubbed as the last bastion of protectionism! Concerns about diluting land ownership in favour of foreigners, therefore, touch a raw nerve / chord in many "bhumiputras" and "locals". A welcome trend seen in Dubai is to innovate ways by which a certain geographical area (say beyond Jumeirah) is earmarked and ownership rules liberalised within that ambit. This trend is not new; in fact, it goes back to the various free zones in Dubai that allow you to own a 100% of the business; including the capital invested and all the residual rights attached to it in leasehold property, improvements etc. This interesting phenomenon clearly gives rise to anxieties and worries in some that they may not articulate in the open. When however, a 'gold rush' syndrome develops in the property market, it is time to examine the issues dispassionately.

For instance, in the U.S., there is currently a raging debate as to whether a real estate bubble is developing; as evidenced by the steep escalation in property prices in certain segments. In the U.K., in the 1970s, the banks suffered enormously when the real estate sector got overheated. The same was the case in South Mumbai in India, with the highest recorded prices in Asia; when certain reclaimed land in Nariman Point shot up in prices for a few years and was followed by an almost 25% correction. Similar was the case in Singapore in 1983, when property prices rose and reached a crescendo; only to collapse thereafter. Tragically, all these impacted upon not just the speculators, but also those that invested their life savings but chose the time when the prices had peaked. Indeed, real estate is cited as the single biggest cause for the Asean crises in the late 1990s. In the absence of a bond market to cushion and absorb the pressures, the fall-out from the real estate 'explosion' could not be diffused or contained and had a global contagion effect.

In the circumstances, the authorities in this region are, no doubt, conscious of such potential runaway risks. There is generally no method in the madness in the markets when they get into an 'auto drive'. Until recently, there was considerable owner-equity in properties in the UAE; given that to many high net worth individuals, this was almost akin to money under the pillows. Many nationals invest in properties prudently; without resorting to heavy borrowings. The banks also exercise due care and attention. The better banks have caps on their commercial and residential real estate exposures. Where such lending is direct to real estate projects and indirect as collateral for securing commercial credit facilities; these two are, correctly, aggregated. If overdone, this can recoil viciously and result in a double whammy; i.e. as and when there is a sharp decline in property prices.

Of late, some of the banks are becoming aggressive in a new retail and semi-retail lending foray for real estate ownership; in terms of offering upto 20 year mortgage loans. Such a mortgage finance mechanism is common-place in many parts of the world, particularly in the U.S. and in the U.K. But there is a crying need to put all this on a sound footing. Mortgage-financing entities ought to be accountable for enhanced prudential norms, so that their portfolios are assessed to ensure that they are diversified, risk-weighted and healthy. In these publicly-listed companies, such data should be made available to investors in a transparent manner.

Without wishing to sound alarmist, this length of exposure or term-lending goes beyond what the liability profiles of some commercial banks will permit; in terms of funding mismatches. Ideally, therefore, this should be earmarked against additional capital to be raised and / or specific back-to-back funding. This is where the regulatory authorities will do well to anticipate and curb such excesses; through appropriate norms and guidelines. It is easy to jump on a speeding 'gravy train' (or what is perceived as such), except that the train could come to a stop suddenly or turn out to be not a train but a mirage machine with a 'minority report' and different gravitational pull!

Another risk to be contained carefully is the potential for mismatch; especially for expatriate lending arising from three-year visa status and the implied long-term home ownership. In any future crises, this should not lead to a stampede by those wishing to exit and a wholesale transfer of risks to the lending institutions. Therefore the possible default data need to be projected 'on a Murphy's law basis' and adequately provided for in the banks' risk matrix. Furthermore, there might also be legal issues with regard to whether a mortgage of a personal dwelling house (or simply 'home'!) can, in fact, be effectively enforced. Presumably, all these issues have been addressed and appropriate legal advice obtained by the various players now in the market. Mortgage financing is a new and exciting concept and there are proven experts (expertise and experience) in the region. It should not become a case of the adage that "fools rush in; where angels fear to tread".

Such cautionary notes apart, all such property path-breaking initiatives and developments are predicated upon a courageous concept of "nothing ventured, nothing gained". They deserve to be applauded as such. As long as adequate preparations are made in advance and they are carefully regulated and piloted proactively by the authorities, as part of a bigger growth strategy, these measures should be supported and nurtured. There will always be scope for intellectual challenge and healthy scepticism to refine and modify the measures. These can be in the form of lively and positive discussions on the pitfalls and the potential to help fashion a successful and sustainable vision and strategy. Property is a strong feel-good factor for a country and the trick is to ensure that the realities in 'realty' stay their course !

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.)

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