Liquid Real Estate, Euromoney magazine, December 2008

A year ago it was claimed that Gulf economies were so uncorrelated to those of the rest of the world that they had little to fear from the credit crunch. No more: stock markets have plunged with the worst of them, and now even Dubai – which for so long has seemed to operate under different economic forces from the rest of the planet – is facing a property crash.

And in November, the United Arab Emirates (in which Dubai is one of seven emirates) witnessed that most Western of modern phenomena: the state-sponsored bank merger. Specifically, two large Dubai mortgage companies, Amlak Finance and Tamweel, were merged with a UAE government-owned bank, Real Estate Bank, which will then be put into a new, state-owned and federally funded bank called Emirates Development Bank.

These are big entities by local standards: Amlak is the largest publicly held Islamic finance company in the UAE and had AED14.2 billion in assets in the first half of 2008, while Tamweel had AED10.8 billion, according to the companies themselves. Real Estate Bank is little-known – it has just 7,000 customers – and is seen as a vehicle to house the other two assets.

A Ministry of Finance statement called the merger “a milestone development for the UAE financial sector” and said the bank would “provide a strong growth platform the real estate financing in the UAE, and will serve as the cornerstone of the mortgage market, which has significant growth potential.” But locally it is being seen as a bailout, and a clear acknowledgement of the pressures in Dubai’s property market. The week before the announcement, Amlak had suspended new loans; some new luxury accommodation is reportedly being advertised at half the levels it was previously offered at; and big construction projects are being delayed, with developer Nakheel confirming in Dubai it was slowing the dredging work on its Palm Deira project.

Just as closely watched as the merger announcement was a speech by Mohamed Alabbar, the chairman of Emaar Properties, on November 24. Alabbar is also a member of Dubai’s ruling council, and his comments on construction were strikingly direct: “We have made a decision to pull back on supply,” he said, and: “if you have to pull something, you have to pull something.”

Up the Shaikh Zayed Road in Abu Dhabi, similar measures are being taken to those in Dubai. Abu Dhabi Finance was formed in late November as a joint venture between five big UAE companies, including Abu Dhabi Commercial Bank and the Mubadala sovereign fund. The new company will offer financing to buyers of properties from three Abu Dhabi developers, and later to other UAE developers. The measure reflects the lack of liquidity at a time when new supply is heading rapidly for a swamped market.

Still, although the new measures send worrying signals, fund managers believe they are sensible. “I see that [the mergers and new company] as a positive trend,” says Harshendu Bindal, director for CEEMEA at Franklin Templeton Asset Management in Dubai. “It’s making sure liquidity is available to the market. Let’s assume prices come off and you want end users to step in and buy: unfortunately there are no mortgages available currently. Making sure that key mortgage companies are adequately capitalised and able to lend is a good sign.”

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