Tamweel – Safe as houses
As Tamweel’s asset base breaks the symbolic US$10bn barrier, how is the now-established mortgage-market leader supporting its growth, and what does the future of its market hold? By Mark Kolmar.
Despite Tamweel having repeatedly tapped the capital markets for funding to support its growth, as being a specialist mortgage provider not a bank, it has missed out on customer deposits as a source of revenue. This July's Dh1.1bn five-year issue marked a departure, however, as Tamweel turned from asset-backed securitisation to an asset-based guaranteed deal.
July 2007's fundraising, a US$210m asset-backed securitisation, showed the strength Tamweel had reached by securing the highest ever credit rating for a UAE institution's asset portfolio in MENA: Aa2 from Moody’s and AA from Fitch. The bonds were priced at 35bp over one-month US dollar Libor and were taken up primarily by European investors.
The new issue, however, drops the securitisation model, featuring instead guarantees from Tamweel itself, following an A3/P2 rating from Moody’s in November 2007. It was also aimed at a different pool of investors by being dirham-denominated.
The sukuk closed on July 21, priced at 225bp over three-month Eibor. Badr Al Islami (Mashreqbank's Islamic division), Standard Chartered and Dubai Islamic Bank were joint lead managers and bookrunners. Others involved were BNY Corporate Trustee Services as delegate, and Bank of New York as principal paying agent, calculation agent, replacement agent and transfer agent. Ratings were A3 from Moody's and A from Fitch.
The sukuk is structured with special-purpose entity Tamweel Sukuk Limited (TSL) as issuer and trustee, in front of Tamweel PJSC (Tamweel) as obligor, service agent, the seller of underlying assets, provider of a Sharia-compliant liquidity facility and purchase undertaker (a collection of roles that together form the guarantees backing the issue). Tamweel sells the rights, title and interest in a pool of Sharia-compliant assets – one-third ijara (leased assets), two-thirds istisna (in-construction assets) – to issuer TSL, which will hold them as trustee on behalf of the sukuk-holders.
TSL will thus receive the income from these assets, and pass it on to the sukuk-holders, in place of the interest that a conventional bond would pay. As service agent, however, Tamweel itself is committed to collect the returns from the assets sold, and will provide an optional Sharia-compliant liquidity facility to TSL, with which TSL can make up any shortfall between returns from the assets and payments due to holders. If asset yields are in excess of holder payments, the surplus will form a reserve account that can fill future payment shortfalls, or if still standing at maturity, be captured by Tamweel.
As well as this fill-in funding guarantee, as purchase undertaker Tamweel is committed to repurchase the assets from TSL if the trust is dissolved (see below). This repayment would then allow TSL to refund the holders' principal.
These agreements from Tamweel, guaranteeing coupons and principal respectively, mean that the rating agencies consider the sukuk to rank equally with all other senior unsecured obligations of Tamweel, and the ratings and outlook given are thus matched to Tamweel's.
The risk to investors, therefore, is a drop in the creditworthiness of Tamweel itself. The most likely cause of this would be reduced government support. The government is Tamweel's primary shareholder, with a combination of direct and indirect stakes totalling 38%. Istithmar (100% owned by Dubai World, in turn 100% owned by the government) has a 22% stake, Dubai Islamic Bank (30% government owned) has a 20% stake and Dubai Holdings (100% government owned) has a 10% stake.
Government support is critical, Tamweel’s stand-alone rating is Ba2/BB (Moody’s/Fitch) but built into the sukuk is a ratings trigger, which stipulates that if Tamweel's rating drops by two or more notches as a result of reduced direct/indirect government ownership, the trust is dissolved, meaning holders are fully repaid as outlined above.
Success in a growing market
Tamweel has been able to move away from securitisation this time round due to greater liquidity, coming in a period of very positive revenue and profit figures. H1 2008 saw net profit up 259% to Dh387.3m, and this rise is compared with a 2007 figure that itself was up 118% on H1 2006. At Dh387.3m, the H1 2008 figure is already 86% of total net profit for 2007. H2 2008 figures are forecast at Dh435m to Dh455m, putting predicted full-year net profit at Dh825m–Dh850m – almost double that of 2007. Revenues for 2008 are expected to reach Dh1.4bn–Dh1.5bn.
Tamweel's success has been based on the success of the region – higher oil prices have made Middle East market conditions much more attractive than when Tamweel was doing its securitised deals in previous years. This is also reflected in the sukuk being in local currency. Domestic funds are still a relatively new way for Middle Eastern firms to grow – just one or two years ago Gulf business were using euro and dollar sukuk to tap global liquidity; now the situation has reversed.
The growth of the mortgage market has seen it rise from negligible to a significant opportunity. Ten years ago, it was worth less than Dh5bn, but by the end of 2006 it was worth around Dh30bn, reaching Dh45bn by the end of last year. It is predicted to reach Dh60bn by the end of 2009. Of this market Tamweel has secured 34%, followed by Amlak with 25%. The remaining 41% is split among non-specialist financial institutions, particularly Islamic ones.
Tamweel has been able to secure such a large chunk of the rapidly growing market because of limited involvement from the commercial banks. Although the banks control around 40% of the market, this is split among at least eight – the main players are HSBC, RAK Bank, Barclays Bank, Mashreqbank, Dubai Bank, Abu Dhabi Commercial Bank, Dubai Islamic Bank and National Bank of Abu Dhabi.
One of the reasons for mainstream banks' reluctance to play a bigger role in the mortgage market is that straight mortgage deals are simply not that profitable. With spreads of 5% to 9%, pure personal lending gets banks better rates than mortgage lending, with competition based more on quality than on offering the lowest price. For this reason, specialist mortgage lenders such as Tamweel and Amlak are involved in the construction side of property assets as well as the financing, something that mainstream banks see as too much of a departure from their area of expertise to strongly pursue.
An unclear regulatory market is also discouraging. The attitude towards houses and homes in the Muslim faith and Arab culture mean that across much of MENA there is little support for lenders in the event of foreclosure. "Courts aren’t going to throw Muslim families out on to the street," one observer notes.
One bank is, of course, heavily involved in the mortgage market – Dubai Islamic Bank, with its 20% founding stake in Tamweel – but it is notable that a separate branding was chosen for its mortgage-lending activities – customers don't look to a bank for something of the social importance of housing.
As previously noted, the market is also still relatively new – a sub-Dh5bn fledgling just 10 years ago. The mainstream banks feel much more comfortable sitting back and letting companies set up specifically to do this one product go into the market first, allowing them to observe how it functions.
For the Middle Eastern banks there is also a continued aversion to the risks of long-term lending, particularly at fixed rates. Banks also lack the range of tools available to them in other markets. Fixed to floating and floating to fixed-rate hedges are hard to find as they are difficult for Islamic banks complying with Sharia's ban on riba (interest) to do.
There are also limits to how involved banks could be, even if the interest were stronger. The central bank, cautious on bank exposure to volatility in the property market, has capped property lending at 20% of deposits. While the Gulf is among the areas least affected by the credit crunch, this global result of sub-prime lending turning sour has provided a stark reminder of the inevitable cyclicality of the property market.
Despite the growth so far, the market is still small relative to more established mortgage markets. In the UAE, mortgage lending amounts to just 3%–5% of GDP, whereas in France and Germany it is around 50%, and in countries such as Denmark, the Netherlands and Iceland it is more than 100%. To reach the size of the French/German markets, relative to its own GDP the UAE mortgage market would have to grow by 17 to 20 times, putting it at Dh1,200bn.
While the UAE market is still developing, Tamweel is looking abroad for opportunities to expand. The political difficulties of entering many of its Middle Eastern neighbours restricts options, however, and in North Africa possibilities are also few: Algeria's and Libya's mortgage markets are underdeveloped, Tunisia's is too small and Morocco is too far away.
Hence, the two markets that Tamweel has identified are Saudi Arabia and Egypt – flush with money and people respectively. Tamweel announced the start of its Egyptian options on August 4 with the establishment of fully-owned subsidiary Tamweel Emirates, given an authorised capital of E£500m and paid-up capital of E£100m.
Egypt is attracting attention as being underbanked relative to its 75m population, but the high credit risk that has created this situation remains a threat to new entrants. Saudi Arabia already has a number of banks in operation, but analysts believe there is room for Tamweel's entry in the mortgage sector, although the unclear and untested legal system poses a risk.
In the UAE itself, the long-term future looks good, but there are potential risks in the short to medium term. One risk is the possible negative effect of the liquidity of the market. Investors are taking a practical approach, looking to convert cash into physical assets, but there is still too much cash chasing too few assets.
The concern is that the situation is mirroring the equities market of a few years ago, when investors chasing stocks doubled indices year-on-year before a 50% crash wiped US$100bn from exchanges. Fixed-income deposits are still not attracting money, so now it's the turn of property to be the destination of investor cash.
The advantage the property market has over the stock market is that its fundamentals are distinctly better, given a definite need for more property, and property has strategic importance to the government. Whereas the equity market was relatively unadministered, housing has significant socio-economic importance to the government.
Despite this, a correction is expected in the market, but nothing on the scale of the equities crash. Morgan Stanley, for example, predicts a 10% drop some time in the next 18 months. The likely trigger for a correction will be new property appearing on the market, which is expected to come as one large increase. While demand increase has been linear, supply increase comes in bursts, as and when government spending dictates. As one observer puts it: "Demand is dictated by investor psychology. Supply is dictated by economic policy."
Certainly, speculation has played a part in rising prices, to the extent that developers are taking steps to prevent the quick selling on of their properties. Key signs of speculation include buyers being willing to pay more for a property from developers than from private sellers on the secondary market, because to buy from the developer requires a smaller downpayment – a greater concern to the short-term speculator than the overall price – and off-plan sales taking place at the same price as sales of completed properties.
State-owned developer Nakheel has restricted buyers from selling its developments on the secondary market until they have held them for a year, and rival Emaar insists on receiving 30% of the full price before resale is allowed. Union Properties is implementing a similar rule at 20%, and adding transfer fees of up to 10%. Most, however, feel they are fighting a losing battle, and would like to see state control.
The other cause of a correction, a drop in demand, is unlikely barring an unexpected change in circumstances, the most likely being a political shock in Iran. In this respect, one cautious observer notes that Tamweel's investors and lenders can't avoid keeping one eye on matters far from the company's control – political attitudes in Washington.