UAE banks, realty resilient as Russia-Ukraine ceasefire looms
Despite the significant influx of Russian nationals and capital into the UAE since the war began in 2022, S&P analysts suggest a ceasefire would not prompt an immediate reversal of these flows.
Mohamed Damak, senior director and primary credit analyst at S&P Global, noted that ongoing political and economic uncertainties in Russia will likely encourage individuals and businesses to maintain financial footholds in the UAE. 'The UAE's business-friendly regulations, tax advantages, and stable environment remain compelling,' Damak stated in a report, which highlights the UAE's economic stability, robust liquidity buffers, and diversified non-oil growth as key pillars of resilience.
A potential ceasefire following the US-initiated ongoing talks in Saudi Arabia is unlikely to trigger immediate Russian exodus, they said. Russian buyers have been pivotal in Dubai's real estate boom, ranking among the top foreign investors since 2021. Property prices in the UAE surged by double digits annually over this period, driven by high demand and limited supply. While a ceasefire could ease geopolitical pressures, S&P emphasises that the UAE's appeal as a safe haven and investment hub will endure.
The UAE's broader economic health further insulates its financial sector. S&P projects real GDP growth at 3.4 per cent in 2024, accelerating to an average of 4.4 per cent between 2025 and 2027. This outlook hinges on a gradual easing of Opec+ oil production cuts and sustained expansion in non-oil sectors like tourism, logistics, and technology. With oil prices expected to stabilise near $70 per barrel, the nation's fiscal buffers and diversification efforts are poised to mitigate external shocks.
A critical focus of S&P's analysis is the UAE banking system's liquidity strength. While deposit inflows from Russian entities surged post-2022 — exceeding historical norms in 2023 and 2024 — the sector's liquid assets stood at three times the value of these inflows as of November 2024. 'Even if deposit outflows occur, banks have more than enough liquidity to manage without destabilising operations,' Damak explained. He added that many Russians may retain UAE accounts for asset security, limiting net withdrawals.
Though residential property markets show early signs of cooling, S&P downplays systemic risks. Direct bank lending to construction and real estate accounts for 14.4 per cent of total loans, but high demand and scarce supply — particularly in Dubai — are expected to cushion price declines. Notably, over 80 per cent of UAE real estate transactions are cash-based, reducing mortgage-related vulnerabilities.
'Population growth, investor appetite, and constrained supply underpin this market,' Damak said. 'Even if some Russian investors divest, absorption capacity remains strong.' Rated developers are similarly bolstered by healthy cash reserves, manageable debt, and solid revenue pipelines, ensuring resilience amid market fluctuations.
Over the past three years, Russia migrant inflows, among other factors, have supported real estate demand in the UAE and the overall economic activity. 'We would not anticipate a significant disruption to the residential real estate sector, even if we were to see significant property divestments by Russians, given continuous strong demand and population growth. Dubai has witnessed an annual double-digit value increase since 2021, leading to significant capital gains for real estate owners. The market remains supportive as demand is still outpacing supply, a situation that we expect will continue in the next 12-18 months,' S&P analysts noted.
They said high yields and capital gains along with asset security could be another reason for Russians to stay invested in the UAE. 'In our base case, we expect UAE GDP growth to accelerate from 2025 and as such see limited risks to banks' asset quality indicators. We also note that most real estate transactions are not financed by mortgages, which reduces banks' exposure to real estate price risks.
'We also believe rated real estate developers will remain resilient, even if their operating environment weakened, thanks to solid revenue backlogs, reduced leverage, strong cash flow generation, and good liquidity buffers. Overall, we expect the UAE banking system will continue to display strong asset quality indicators and that the UAE central bank's recent change to the provisioning rules will further increase non-performing loan coverage ratios — which were close to 100 per cent in 2024 — to levels comparable with some regional peers,' S&P analysts said.
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