A year ago Gulf economies were touted as being so uncorrelated with those of the rest of the world that they had little to fear from the credit crunch. Now even Dubai – which for so long seemed to operate under different economic forces from the rest of the planet – is facing a property crash.
In November, the United Arab Emirates, of which Dubai is one of seven emirates, witnessed that most western of modern phenomena: a state-sponsored bank merger. Two Dubai mortgage companies, Amlak Finance and Tamweel, were merged with a UAE government-owned bank, Real Estate Bank. The combined entities will become a state-owned and federally funded bank called Emirates Development Bank.
By local standards, Amlak and Tamwell are giants. Amlak is the largest publicly held Islamic finance company in the UAE and had Dh14.2 billion ($3.9 billion) in assets in the first half of 2008, while Tamweel had Dh10.8 billion. 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 finance ministry statement calls the merger, "a milestone development for the UAE financial sector" and says the bank would, "provide a strong growth platform for real estate financing in the UAE, and will serve as the cornerstone of the mortgage market, which has significant growth potential".
Locally, the merger is being seen for what it is – a bail-out and a clear acknowledgement of the pressures in Dubai’s property market. The week before the announcement, Amlak suspended new loans, while developer Nakheel confirmed it was slowing the dredging work on its Palm Deira project.
Pull something
Just as closely watched as the merger announcement was a speech by Mohamed Alabbar, the chairman of Emaar Properties, on November 24. Alabbar is 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 says. "If you have to pull something, you have to pull something."
Up the Shaikh Zayed Road in Abu Dhabi, similar measures are being taken. 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 Development Company. 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.
Although the new measures send worrying signals, fund managers believe they are sensible. "I see [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 capitalized and able to lend is a good sign."