KUWAIT, 25 May 2007 — Gulf Arab economies would be at risk should regional real estate markets crash as investors and banks continued to inject petrodollars into booming property projects, National Bank of Kuwait (NBK) said yesterday.
The rise in the number of buildings, increasing construction costs, higher interest rates and regional tensions represented a risk for Gulf real estate markets which were difficult to assess due to lack of transparency, it said.
Gulf banks were largely exposed to the real estate sector, especially Islamic lenders, Kuwait’s biggest bank by market value said in a study presented at a banking conference. “(A) bursting of a real estate bubble may test the banks’ health,” the study said. “The capacity of GCC central banks to absorb a real estate shock has not been tested yet,” it added.
But the outlook for Gulf economies was otherwise bright, said NBK, in view of high oil prices, a rise of income from non-oil exports and an inclination by investors to invest at home rather than abroad.
Construction is booming in the Gulf as investors poured petrodollars into property projects to diversify their assets away from volatile equity markets, with rents in Dubai and elsewhere soaring and some government curbing hikes.
Gulf banks are financing major projects across the region and Islamic lenders have invested heavily in real estate, often to back up issues of Islamic bonds.
Meanwhile, J.P. Morgan Securities started coverage of Middle Eastern banks with an “overweight” rating, saying their fundamentals were robust with “strong and sustainable” loan growth driving profitability. The region’s banks also benefit from ample liquidity and solid deposit bases which provide them with the resources to support the robust demand for credit, the brokerage said.