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DIFC moots mortgage bond market.

Summary: DUBAI -- The Dubai International Financial Centre, or DIFC, on Thursday proposed the establishment of a mortgage bond market in line with the Danish mortgage model to revitalize the UAE real estate sector with new liquidity.

DUBAI -- The Dubai International Financial Centre, or DIFC, on Thursday proposed the establishment of a mortgage bond market in line with the Danish mortgage model to revitalize the UAE real estate sector with new liquidity.

Dr Nasser Saidi, chief economist of the DIFC Authority, said the proposed model involved funding of private residential mortgages through the issuance of standardised bonds, creating a large and liquid mortgage bond market.

The new mortgage model will reduce the risk and exposure of real estate developers and lending institutions in the UAE, where the mortgage market is still in its infancy, accounting for just five per cent of the gross domestic product, or GDP. "It will also provide additional funding to the housing finance market and give strong impetus to the financial markets as an engine of economic growth," explained Dr Saidi at the Arab Real Estate & Urban Development Conference in Dubai.

DIFC -- the financial hub between the regional emerging markets and the world -- has launched a feasibility study on this plan in conjunction with Absalon Project, a joint venture between Denmark's VP Securities and Soros Fund Management.

Stressing that sustained recovery of the real estate sector was vital for the region's growth revival, Dr Saidi said a mortgage securitisation mechanism would create a market similar to the Danish Mortgage Market and would ensure that "no investor has ever had a loss due to mortgage default, despite several financial crises."

DIFC also has mooted the establishment of an Emirates Mortgage Guarantee Corporation (EMGC) to support the recovery of the region's mortgage markets. The EMGC would provide insurance coverage to eligible institutions, banks and specialised mortgage credit providers of a maximum percentage amount of the total mortgage value. "Essentially, the mortgage insurance scheme would spread risk and stimulate market liquidity," said Dr Saidi.

He said the model could be implemented within an 18-month period once legislative gaps, which exist in the UAE, are filled. The model is compatible with both traditional mortgages and ljara mortgages. The main objective is to create as large and liquid a bond series as possible." He explained that a novel feature of the model "is the interchangeable nature of the mortgage and the bond. It allows a homeowner to retire their mortgage not only by paying it off directly, but also by buying an equivalent face amount of bonds at market price."

Since the value of homes and the associated mortgage bonds tend to move in the same direction, homeowners will not end up with negative equity in their homes. Essentially, as house prices decline, the amount that a homeowner must spend to retire their mortgage decreases because they can buy the bonds at lower prices, Dr Saidi explained. He said the real estate sector's underlying economic fundamentals and demographics are positive. "However, reform and development of housing finance are necessary for the medium and long-term recovery of the real estate sector."

The lack of housing finance is the major issue, he said. "Given the continuing deleveraging in the banking sector, the development of an active mortgage market through mortgage securitisation would provide liquidity relief to commercial banks while providing long-term investment opportunities to institutional investors."

The region's mortgage markets are miniscule in comparison to international markets where the mortgage market as a per cent of gross domestic product ranges from 93 per cent in Denmark and 78 per cent in the US, and only 13 per cent and six per cent in China and India respectively. Among the countries in the region, Bahrain tops at 15 per cent, with Qatar and Kuwait at eight per cent and six per cent respectively. UAE at five per cent is comparable to Lebanon while Saudi Arabia is closer to the bottom of the pile at only two per cent.

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Publication:Khaleej Times (Dubai, United Arab Emirates)
Geographic Code:7UNIT
Date:Mar 17, 2011
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