Mortgages the next boom sector for the GCC banks

Real estate might be mired in recession across the Gulf States but the regional banks are preparing for a future mortgage boom when economic conditions improve and property prices drop to levels that will attract buyers.

‘GCC banks are gearing up for a mortgage boom in 18 to 24 months time as end users take up the increasing supply of new freehold property,’ said Veritas Events executive director Premal Patel, opening the second day of the new GCC Mortgage Summit in Bahrain today. ‘This is the biggest business opportunity for regional banks going forward.

‘It might be 18 months to two years before the retail mortgage boom really gets going but the banks know that they need to be planning their systems now.’

Interest rate cuts

Mungo Dunnett of Mungo Dunnett Associates UK warned that local banks risked missing out to the major international banks if they did not prepare properly: ‘It is not just a matter of offering the lowest interest rate, and actually for many banks that is a very bad way to approach the mortgage business. Where price is the only consideration then only the biggest banks will win.’

He counselled GCC banks to focus on customer retention and service to enable them to charge mortgage rates ‘up to one per cent higher than the lowest rate’. He said this was ‘a better way to compete with Standard Chartered’ which presently has the lowest mortgage rate of 6.5 per cent in Bahrain.

‘Going after this sort of mortgage refinancing is the stupidest thing a bank can do. It is much better to have a smaller mortgage business with higher profit margins than chase business through rate cutting,’ argued Dunnett.

From 3i Infotech, business head of banking, Arya Prathar explained the complex IT systems that banks should consider as a necessary part of expanding their mortgage lending business.

‘Many mortgage businesses here are start-ups and the IT systems should also help in the sales process. You need to have a simulator to show the client exactly how much a mortgage is going to cost, and integrate the whole operations side as well as putting it online.’

Insurance business

There is also a very good business for the insurance sector in providing mortgages. Solidarity General Takaful general manager Gopi Rao outlined the life insurance, property insurance and building insurance aspects to mortgages.

‘Nobody will grant a mortgage without life insurance,’ he said. ‘And 30 per cent of our customers in Bahrain borrowing more than $450,000 are surprised to find that their health does not allow their mortgage to go ahead. Lenders always require that the life of the borrower is insured because this is usually borrowing over 20 to 30 years.’

From ABAX Group, CEO Richard Arlove reminded delegates that Gulf regulators ought to be working now on a framework to stop a future mortgage boom ending in another bust: ‘We are always trying not to repeat the mistakes of the past but do so time and time again,’ he said. ‘Why not try to be different in the GCC?’

And why are the banks so certain that GCC property will boom going forward? They note that local buyers pay $1,500 per square foot in Central London while new property with modern floor plans costs around $300 a square foot locally. The potential for future price rises is obvious.