It is imperative for the regulators put in place supportive legislation as the region’s legal environment has seen little in the way of large-scale bankruptcies. Bankrupt firms can create significant uncertainties as regards to the enforceability of the security mechanisms required in asset-backed structures, according to the report entitled ‘Securitisation in the Middle East: Exploring the Untapped Potential of the Region.’
Although Moody’s is not expecting large securitisation volumes from the GCC region in the near future, the agency said long term potential for the region remained strong since home finance, real estate and bank balance sheet risk management are the key risk drivers for securitisation.
Forecasting that securitisation is to become an increasingly important part of the regional capital markets in the future, Moody’s said the ambitious growth plans of many regional corporate houses require large financing package that are too much for their banks to provide, especially in the current environment.
Larger syndicates are the current solution but local banks are relatively undiversified and are becoming increasingly exposed to risk concentration, the report said, adding that for sectors such as real estate, banks’ direct exposure is estimated in the range of 125%-130% of their equity.
Highlighting that the first half of 2008 has seen about $ 1.5tn of global securitisation issuance from mainly banks as they restructure their balance sheets, the report said securitisation may assist lenders in meeting their financial/balance sheet objectives by offering a new and potentially large source of funding, reducing asset/liability mismatches and promoting risk transfer.
On home finance, which is expected to be worth $ 600bn in the GCC region, Moody’s said the demand for housing is deep and expected to grow in the future.
With about 50% of the population under 25 years of age, birth rates ranging from 2%-4%, a falling average of 4-5 persons per household and an overall population growth of about 3.5%, it said there is a basic need for housing.
Expatriate population is also driving growth, the report said adding with demand pushing up rents to “unaffordable” levels; many are now seeking to buy, despite the relatively high cost of home financing.
The legislation on rent increase cap support existing tenants but not the immigration of new professionals that was supporting the ongoing economic boom in the region, it said.
Many of these expatriates have been residents for several years but did not have previously the option to own their residence, Moody’s said referring to freehold and long leaseholds that are now available across the region for non citizens.
It said Abu Dhabi and Qatar have shortages of housing units. “Both the public and private sectors in the GCC have been heavily focused on the supply side of the real estate equation but the demand side too needs major funding – especially in the current environment,” said Khalid Howladar, Moody’s senior vice president and author of the report.
Mortgage penetration in the Gulf region is very low at less than 4% of aggregate GCC gross domestic product on average compared to 15%-20% in most emerging markets, around 40%-50% in city states such as Hong Kong and Singapore and 60%-80% in many European countries, according to the report.
Highlighting that financing in excess of $ 1tn is needed for urban development, the report said the central banks’ stipulation on the real estate exposure of the banking industry is increasingly making it difficult to raise money needed for the execution of the governments’ urban plans.
“Given the volume of real estate loans, commercial property investment and the central bank lending limits, we would expect to see more commercial mortgage-backed securities transactions,” the report said.
However, interest/issuance has been very limited so far and the prices for a capital markets issuance remained uncompetitive compared with loan market, it said.
On the additional funding needed for consumer finance, which has recorded 26% growth a year since 2003, Moody’s said “with negative interest rates, this gap is likely to increase (as the real cost of borrowing in effectively zero due to the elevated inflation).”
