Credit crisis in the UAE and a plausible Solution

1
Credit crisis in the UAE and a plausible Solution
Refinancing of 20 billion short term debt caused
liquidity worry in the Dubai . UAE has the means
to refinance its debt and ride over the liquidity
crisis

• Dr. T.P.Ghosh
• Formerly Director of Studies
• Institute of Chartered Accountants of India
• Professor, Institute of Management Technology,
  Dubai

2
UAE Slowdown

• Positive linkage between high oil price and high
  property price out of funds flow from neighboring
  countries
• Property market slowdown is partly for low oil
  price which is fall out of global meltdown

Nakheel denied rumours that dredging work on Palm
Deira had stopped
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UAE slowdown
Prices to fall further

• The rapid decline of oil prices from this year's
  peak of 147.27 a barrel in July to below 50 a
  barrel this week .
• Adverse impact on the oil revenue of the UAE this
  year, whose oil sector accounted for nearly 36
  percent of its GDP in 2007 with 262.7 billion dhs
  (71.6 billion).
• Property prices fell in October 08 by 4 in
  Dubai and 5 in Abu Dhabi, for the first time
  since 2002.

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Has the liquidity inflow on the rumour of dollar
de-pegging vanished ?
Based on 52 weeks high and low
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Housing Market Uncertainty

• Buying housing asset as an investment property
  is risky at the current price level
• Realty market needs liquidity to continue real
  estate development an important pillar of the
  UAE economy.

6
US Sub-prime loss and Bailout Package

• September 07 the beginning of sub-prime
  mortgages crisis in the US
• Over-supply of housing
• Mortgage loans bundled and sold to investors
  worldwide as securities
• Mortgaged backed securities lost value as the
  housing bubble burst
• Emergency Economic Stabilization Act,2008
• The 700 billion bailout package as a way to
  stabilize the financial markets.
• German recession
• Europe's largest economy shrank 0.5 percent in
  the third quarter.

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UAE Realty Slowdown

• Borrowed funding in the UAE realty growth
• Concerned about the job loss in the vulnerable
  financial service and realty sectors
• Tough eligibility norm for credit delivery or
  temporary closure
• Imposition of The Dubai Land department 30
  cancellation charge as an exit bar a timely
  proactive measure .
• Preventive measures to invite further slowdown
  rather than curing it
• Government has to take proactive investment
  measures to arrest slowdown

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Realty SPV a Solution

• Urgent need to constitute a Realty Special
  Purpose vehicle ( SPV) for dealing in realty such
  that the developers have the alternative to
  offload the completed or under-construction
  property to the SPV.
• This SPV (a government company) is to be backed
  by government funding as its initial corpus. This
  will ease out the liquidity crisis of the of
  realty sector.
• Banks and other will be comfortable to
  participate in the pass-through securities (PTS)
  of the Realty SPV as it will be Government
  sponsored as against direct lending to
  individuals.
• Unlike the US mortgage backed securities, the PTS
  should be 5 year deep discount inflation adjusted
  bond say issued at 7 yield but adjusted to
  inflation factor on maturity.
• Expected Huge Demand As the investors lost
  confidence over equity , gold and currency
  futures , and realty is in its downturn , there
  should be overwhelming response to this product
  that will provide continuous liquidity to the
  proposed Realty SPV and thereby to the realty
  companies

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Realty SPV
Should ADIA take the lead ?
Government should provide initial capital
Government sponsored Special Purpose Vehicle To
provide liquidity to property developer Should
have the ability to hold the assets for 2-3 years
Property Developers may sell developed or
under-construction property With low return on
investments
Banks High net worth GCC individuals /
Institutions Foreign investors
PTS
Provide funding
PTS with minimum 6-7 return with inflation
adjustment could be ideal instrument
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UAE has the ability to ride the slowdown

• 5 years of high priced oil revenue
• Abu Dhabi Investment Authority (ADIA) should take
  lead role in establishing Realty SPV in the UAE
• Consolidation of existing property stock
• Moderating inflation and interest rate delaying
  introduction of VAT
• Stabilization of stock market

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Thank You
Dr. T.P.Ghosh , Ph.d., FCA , FICWA can be
contacted at tpghosh100_at_gmail.com Mobile
050-5037940