How to make the best of the Amlak-Tamweel merger

Posted on 04 February 2009 with no comments from readers

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The UAE Ministry of Economy has announced the formation of a high level committee to report by the end of the month on the best mechanism to achieve the merger of the two Dubai home loan companies Amlak Finance and Tamweel.

Without access to the financial accounts is it impossible to be precise with recommendations, but a useful starting point would be to agree on where the committee wants to end up.

Merger objective

You could argue for example: to create a new Federal Home Loan Company with substantial government funding to offer loans at highly competitive mortgage rates to residents and citizens of the UAE.

Then the devil is in the detail: will existing shareholders become shareholders in the new institution or be compensated for what is effectively a nationalization? And how low will the mortgage rate be and on what criteria will loans be offered?

Without knowing the condition of the balance sheets of the two quoted companies it is hard to advise on the first question. But there is something to be said for a fresh start as a state company with the objective of an IPO in the future – an IPO that would likely prove very popular, and more than compensate the state for the cost of creating this new entity.

Lower cost home loans

On mortgage rates the new company should set a new lower benchmark for home loan rates in the UAE, which other banks will feel compelled to match.

Home loan rates around eight per cent are currently far too high in the UAE which has its currency pegged to the US dollar. Thirty-year home loans in the USA cost five per cent, and it should be not much different in the UAE.

Bringing the cost of home ownership down through lower cost mortgages should be a national objective. It will make the UAE more competitive as a location because this will bring down the cost of living for expatriates and nationals.

Real estate confidence

At the same time this new source of finance for home ownership would have an immediate impact on confidence in the real estate sector, and help to dampen the property crash by providing new buyers.

The only problem would be how to distribute these loans. But as a federal organization loans could perhaps be limited on a per capita basis, as well as according to reasonable loan-to-value and salary conditions.

This would allow other banks to at least compete on the provision of home loans where owners wished to buy more than one property, and avoid creating a national monopoly.