Having started in 2008, the company managed to ride the financial crash and the subsequent collapse of the property bubble in Dubai. How was this possible?
There were two factors that allowed us to get through that period when many banks were struggling. Firstly, we are more selective than some of our competitors in choosing which developers we partner with. Secondly, we have always been careful about our lending decisions. Everybody has different risk appetites, and that is not a criticism—you need some people who are more aggressive, otherwise start-ups would never get financed. However, part of our vision is to help develop a stable and sustainable real estate sector in Abu Dhabi, and that includes helping people to buy a home. We believe that this can only be done by lending money in a responsible manner.
What legislative changes have changed the operating landscape for Abu Dhabi Finance (ADF)?
The major change in the banking industry in Abu Dhabi has been the introduction of the Credit Bureau, which has been active for most of 2015. As expected, when a Credit Bureau comes in, decline rate goes up, particularly on unsecured finance. In addition, one key element of the Central Bank mortgage regulations was the introduction of a mandated stress test—can a borrower cope with repayments if interest rates rise? Whilst ADF has always applied the stress test, it means that in an environment where rates are rising, some individuals are now not eligible for mortgages on properties they might have obtained previously. We believe this maintains stability for our business, our clients and the wider market because it significantly lowers the delinquency rate.
How will ADF's portfolio develop, as the real estate market looks to have slowed and banks become more cautious about lending mortgages?
The major trend that we have seen in our residential portfolio is that there has been a shift toward end users. When we first started, 70% of our clients were professional investors, or landlords. Now the opposite is true; 60-70% of our clients are end users, which is good because it brings stability to the market as end users tend to hold onto their property for longer. Also the market is maturing, end users and expatriates are more comfortable putting their money into a house because mortgage rates are low, and people are tired of paying large rents. Even though the number of overall transactions has come down over the last 18 months, the number of mortgage transactions has not dropped.
Looking at history of large rent hikes and the legislation that is coming in to stabilize this situation, how will that affect business for ADF?
For the last two years, rents have continued to increase; Abu Dhabi removed its rent cap and Dubai introduced one and whilst the Dubai rent cap has been moderately successful in stabilizing prices, overall rents have continued to increase in both Emirates, while mortgage rates have remained low. Even with the recent increases in interest base rates the average mortgage versus the average rent on any particular property is 20-40% cheaper, meaning now is a great time to buy. Additionally many lenders, including ADF, offer a three-year fixed-rate mortgage. I am less worried about real estate prices. We continued to lend throughout the last downturn and we will lend through the next one. As long as we lend sensibly and responsibly to good, creditworthy individuals and apply sensible credit policies we will be fine. The main concern is if interest rates move up too quickly. The government, companies, and consumers are all exposed in terms of borrowing. Consumers in the UAE in particular have borrowed heavily over the last few years, which is one of the reasons why the Credit Bureau was brought in. As a banker, I am monitoring the speed of that base rate moving up, because that can increase the stress on our client's ability to repay.