Small businesses are looking to roll high-interest post-crisis unsecured loans into commercial mortgages as banks ramp up their commercial portfolios and interest rates remain low.
The number of mortgages taken out on offices and warehouses in Dubai and Abu Dhabi has rocketed over the past year as small businesses refinance or buy their own premises, according to one Abu Dhabi lender.
Abu Dhabi Finance (ADF) reported that it dealt with a 60 per cent increase in its commercial mortgage portfolio between the first three months of 2015 and the same period last year.
The Mubadala-owned lender, which specialises in lending to small businesses and homeowners, said that the growth had come from an increase in the number of SMEs buying or refinancing commercial premises, pushing its average commercial loan size down to Dh1.8 million.
ADF said that it expected its commercial mortgage portfolio to grow in the whole of 2015 to about Dh300m, rising from about Dh150m last year. The lender is currently offering about three to five equity release commercial mortgages a week, mostly for warehouses in the Dubai free zones.
Free zone rules mean that until a property is 50 to 75 per cent complete you cannot register a mortgage on it, so the company must own it itself or obtain an unsecured loan to build it.
“Partly what we are seeing is a shift from short-term unsecured finance. What we think happened was that during the last downturn, to keep their businesses going, many SMEs had to take short-term unsecured finance at high rates,” said Chris Taylor, the ADF chief executive, speaking at Cityscape Abu Dhabi.
“The ones we are dealing with now have come through that, but they are still sitting with some legacy fairly short-term expensive debt on their balance sheets. So if they’ve got property, many are seeing an opportunity to extend that debt and turn it into a mortgage,” he said.
ADF also said that a fall in residential yields was prompting small investors to buy offices, while a more stable economic environment was encouraging business owners who had moved into their premises two or three years ago with an option to buy to exercise that option.
ADF estimated that taking out commercial mortgages works out at about 40 per cent cheaper than renting at the moment.
Suvo Sarkar, the general manager for retail banking and wealth management at Emirates NBD, said the lender is dealing with demand for mortgages for commercial offices and industrial warehouses as the number of businesses setting up in Dubai grows and rental costs increase.
“Businesses want predictable cash flows so a mortgage with a fixed rate makes a lot more sense,” said Mr Sarkar. “That’s why we’ve seen an increase in demand for commercial properties. I think specifically in the last 12 to 18 months we’ve seen an increase in demand for both office space and warehousing space.”
The bank is enhancing its range of commercial mortgage products, he said.
Interest rates for loans against commercial properties would be on a par with the overall mortgage market, rather than at the higher cost that SME borrowers typically bear.
The six-month Emirates Interbank Offered Rate (Eibor), a benchmark for lending in the UAE, is hovering close to record lows at 0.88 per cent.
Abu Dhabi Finance has also established a joint venture with the Khalifa Fund for Enterprise Development aimed at lending to small businesses in an attempt to help them reduce the heavy overheads of office rents.
The news comes at a time when the government is relying on SMEs to ramp up GDP growth amid a weaker oil price.
But although UAE banks repeatedly say that they are keen to lend to small businesses, SME owners frequently complain that individual requests for finance have been stonewalled.
ADF added that the number of applications for residential mortgages in Abu Dhabi grew 20 per cent in the first three months of 2015 compared with a year earlier. However, the company added that the number of mortgages it had signed off over that period had remained stable.
It said that it expected to grow its residential mortgage portfolio in 2015 to about Dh700m.
Source: the National
