UAE Central Bank launches framework to improve oversight of real estate lending

The new regulations will take effect on December 30, with a year-long observation period for banks to improve internal policies

UAE banks’ lending to the real estate sector grew by 7.4 per cent in 2020, slower than 7.9 per cent recorded in the previous year, according to the Central Bank of the UAE. Photo: Allsopp & Allsopp

The Central Bank of the UAE has rolled out an enhanced regulatory framework to supervise banks’ exposure to the real estate sector in the country.

The new standards cover all types of on-balance-sheet loans and investments and off-balance-sheet exposure to the real estate sector, the regulator said in a statement on Monday.

Improved regulation will allow the adoption of best practice in bank real estate financing and risk management, the CBUAE said.

“The CBUAE has developed a novel, risk-based methodology to enhance monitoring and supervision of bank real estate exposures," said Khaled Balama, governor of the CBUAE. "These new standards will enhance best practice in real estate financing in the UAE and facilitate the safety and soundness of our financial system.”

Lenders in the country will continue to play a "crucial role" in financing real estate and construction sectors, which are key parts of the UAE economy, he said.

UAE banks’ lending to the real estate sector grew by 7.4 per cent in 2020, slower than 7.9 per cent recorded in the previous year, according to the Central Bank's Financial Stability Report for 2020.

Banks' overall exposure to the construction and real estate sectors reached Dh439.2 billion ($119.67bn) in 2020, with the majority lent to completed real estate projects that accounted for 72 per cent of total real estate lending, the report added.

The UAE property market, which softened owing to a three-year oil price slump that began in 2014 over oversupply concerns and the ensuing pandemic, has turned a page. The recovery is driven by people moving to larger homes with outdoor amenities amid a surge in remote working and online learning.

An accelerated vaccination programme, economic support measures and government initiatives – such as residency permits for retirees and remote workers, and the expansion of the 10-year golden visa programme – have also helped to improve market sentiment.

The new regulation will take effect from December 30 this year and will start with a one-year observation period, during which banks will be required to enhance their practices to meet the new regulations.

The Central Bank will evaluate these standards based on a supervisory review during the observation period, according to the statement.

Comprehensive standards require UAE banks to review and improve their internal policies to enhance sound underwriting, valuation and general risk management for their real estate exposures, the regulator said.

The new methodology will also introduce measurement of these exposures based on credit risk-weighted assets using the CBUAE’s capital adequacy standards.

Banks with higher risk-weighted real estate exposure in their portfolios will be subject to a more extensive supervisory review of their underwriting and risk management practices in this segment, the regulator added.

The UAE economy is forecast to grow 2.1 per cent this year, driven by pandemic-mitigation measures such as a rapid Covid-19 vaccination programme and widespread testing, according to the Central Bank's second-quarter review. The economy is expected to grow 4.2 per cent in 2022, higher than the previous forecast of 3.8 per cent.

The Central Bank is extending support measures aimed at helping lenders mitigate the effects of the Covid-19 pandemic by six months until mid-2022.

Relief measures related to banks' capital buffers, liquidity and stable funding requirements will be extended until the end of June next year for all lenders operating in the UAE, the bank said in a December 18 statement. The measures are part of the targeted economic support scheme programme that was introduced at the start of the pandemic in 2020.