UAE central bank now free to link banks' exposure to real estate to market strength: senior banker

The United Arab Emirates' central bank now has the flexibility to set new exposure limits for banks to the real estate sector and can amend these to reflect market performance, a senior commercial banker said on Sunday A new law introduced last month abolished a cap, dating from 1980, that restricted each bank's lending to the construction and real estate sectors to a maximum of 20 percent of total deposits. No new cap has been imposed, but Abdulaziz al-Ghurair, chairman of the UAE Banks Federation, said his federation has liaised with the central bank on what should be defined as real estate, suggesting a new cap could be looming.
"Flexibility is now with the central bank and it may come back and change [the cap situation] from year to year depending on the performance of real estate," said Ghurair, on the sidelines of a conference.
"Now that [the cap] is lifted the central bank may say 10 percent, or 20 percent or 30 percent overnight." The former cap did little to protect banks from being badly burned by the rise in mortgage defaults and other bad loans during the UAE's property market crash in the wake of the global financial crisis of 2009.
Almost a decade later, banks are again feeling the impact of a sluggish property market, although not as severely, as many have cut back exposure and price declines are less steep.
Dubai and Abu Dhabi posted falls in residential prices of 6.5 percent and 6.9 percent in the second quarter from a year earlier, among the steepest declines for cities anywhere in the world, according to Knight Frank's Global Residential Cities Index.