* First official warning about soaring prices
* Cites low rental yields by historical standards
* Interest rate hike remains very unlikely
* But may presage further steps at federal or local level
* Sees no build-up of risk in banking system
(Adds analysts comments, details, background)
By Martin Dokoupil
DUBAI, June 8 Low residential rental yields in
Dubai and Abu Dhabi may indicate growing imbalances and
overheating in the real estate sector, the United Arab Emirates
central bank said on Sunday, in the first official warning about
soaring property prices.
House prices in Dubai, which nearly defaulted on its debt in
2009 after a property bubble burst, soared 27.7 percent from a
year ago in January-March, leading the global rankings for a
fourth straight quarter, according to consultancy Knight Frank.
In some areas, prices are back near pre-crisis levels.
In an annual financial stability report, the central bank
said there was no build-up of vulnerabilities in the banking
system, and it did not indicate that it planned to take any
concrete action towards the real estate market.
With U.S. interest rates still ultra-low, any rate hike in
the UAE still looks very unlikely, especially given the UAE
dirham's peg to the U.S. dollar.
But the central bank's warning was striking because
authorities in the UAE almost never discuss economic risks in
public, preferring to insist that the outlook is rosy.
"Current average rental yields in Dubai and Abu Dhabi are
approximately 70 and 130 basis points below historical averages,
which could indicate growing imbalances - (an) overheating real
estate market," the central bank said.
"Monitoring developments in the UAE real estate markets and
the banks' exposure to it remains a core financial stability
priority," it added.
During the UAE's last real estate crash, property prices
plunged more than 50 percent from their peaks. They are now
rising strongly again on the back of healthy economic growth and
progress by Dubai's state-linked firms in working through their
piles of restructured debt.
The UAE's economy grew 5.2 percent in 2013, the fastest pace
since 2006, data from the national statistics office showed on
In the past year, authorities have taken some minor steps to
head off another property bubble; Dubai doubled its fees on
property transactions to 4 percent to curb "flipping", in which
investors buy and sell properties in quick succession to make
On the federal level, the central bank last year introduced
ceilings on the mortgages which banks can offer to home buyers,
although the rules were softened after intensive lobbying by the
In Dubai, officials have said they will take further steps
to cool the market if necessary, but have not said what those
might be, and they have appeared reluctant to do anything which
might slow growth. Dubai's Land Department, which regulates the
property market in the emirate, did not respond to requests for
comment on Sunday.
Analysts said it was not clear whether the central bank's
statement presaged fresh steps by authorities, federal or local.
But many said further steps would be desirable.
"We can expect further regulatory changes moving forward in
both Dubai and Abu Dhabi," said Matthew Green, head of research
at real estate consultancy CBRE in Dubai.
"If any further regulation is to come in the short term, we
would hope that they are within the off-plan market," he said,
referring to properties which are traded before housing has
actually been built on them.
"That's where the speculation is starting. That's where you
can see levels increasing quite rapidly, so that's definitely
the area to focus on."
Last month, the International Monetary Fund warned that
Dubai, whose government and state-linked companies need to repay
over $50 billion of debt by 2016, might need stronger tools to
rein in real estate speculation.
Some analysts said the mortgage ceilings imposed last year
would have little impact on speculators because they tended to
be mainly cash buyers.
Beyond the risk of excessive volatility in prices, Dubai may
be encouraged to take fresh action by the danger that high
property prices could make it less competitive against other
business hubs in the region, such as Qatar.
"There is a growing recognition among policy makers that
prices in the residential market in Dubai have accelerated too
quickly over the past year, and that this is threatening to make
Dubai a less competitive location in which to do business," said
Craig Plumb, head of research at property consultancy JLL MENA.
"The central bank has already taken a number of measures to
control the real estate market and other measures are likely to
be introduced if the market continues to grow at present rates."
However, the central bank also said on Sunday that in
contrast to the months preceding the UAE's 2008 property crisis,
the current market recovery had not seen rapid credit growth.
Banks' exposure to the sector totalled 287 billion dirhams
($78.1 billion), under 23 percent of overall loans, it said.
Real estate-related lending accelerated modestly in 2013,
with growth slightly above 10 percent and one percentage point
higher than overall loan book growth, its report said.
In a sudden acceleration, however, UAE construction loans
jumped 40.1 percent in December, the most since June 2009,
previously released central bank data showed. They shrank for 16
months in a row in 2010-2012, hammered by Dubai's debt problems.
Bank finance for the purchase of residential property
increased 12 percent in 2013 or by 12.7 billion dirhams, the
central bank said on Sunday, adding that bank lending was not a
significant driver of real estate prices.
"While this indicates that banks were increasingly
participating in financing the real estate recovery, the funds
provided by the banking sector were only enough to finance the
purchase of less than 30 percent of the residential properties
that were completed in 2013," the central bank added.
"Analyses of banking data support the hypothesis that the
current market recovery is mostly driven by equity buyers and/or
reliance on external funding sources."
The central bank said it planned to introduce new rules on
liquidity and begin consulting with banks on a new capital
regime in line with the Basel III framework in the second half
of 2014. Basel III global banking standards will be introduced
around the world over the next several years.
($1 = 3.6729 United Arab Emirates Dirhams)
(Additional reporting by Matt Smith; Editing by Andrew Torchia)