Bank debt worth $136bn was lent to the real estate sectors in the UAE and Saudi Arabia last year, it has been revealed.
Approximately $81bn (AED300bn) was lent to the UAE’s real estate and construction sector in 2017, while in Saudi Arabia, $55bn (SAR206.3bn) of bank debt was lent to the real estate sector alone, according to Financing Bricks and Mortar, a paper by JLL and Clifford Chance.
The paper cited Central Bank of the UAE and Saudi Arabian Monetary Authority (SAMA) as its sources for both figures.
According to the research paper, commercial bank lending has historically “been the major source of debt for real estate developers and investors in the Middle East”. However, alternative sources of funding, such as private lending – or non-bank debt – are likely to record regional growth in the next decade.
The report continues: “Debt is an integral part of real estate investment and development, and the Middle East is no different, albeit the quantum is lower than most developed markets.
“Although, we are beginning to see that institutional investors in the region are beginning to judiciously use debt to improve equity returns and ensure their available equity goes further.”
Due to the limited availability of private debt, most, “if not all” real estate debt in the Middle East is typically sourced from conventional banks, and “since the advent of the ‘freehold law in Dubai” in 2006, off-plan sales have also been used to source project finance in the city.
Gaurav Shivpuri, head of capital markets at JLL MENA, said: “We estimate that around 10% of the $51bn of private debt that was raised outside of the three main global markets of the US, Europe, and Asia Pacific in 2017 could have been lent to the real estate sector in the GCC.
“This would equate to around $5.2bn, which is just 3.8% of the total of $136bn of bank lending to real estate in the two major markets in the GCC – the UAE and Saudi Arabia.”
Interviews with around 30 participants in the regional private debt market found that the market is “now sufficiently mature, and the legal framework sufficiently robust, to allow for the development of more sophisticated debt instruments”, according to the report.
“Developers and investors will continue to seek debt for the construction or purchase of real estate investments,” the study continues.
“With constraints on traditional lending by the commercial banks, it is not unreasonable to assume that 10% of the total real estate debt market could come from private providers within the next five years.”