SMEs hold key to UAE real estate growth

Published October 15th, 2009 - 09:57 GMT

 Increased liquidity for small and medium sized businesses will drive demand for office space as well as affordable residential property, says expert

Small Medium Enterprises (SMEs) could drive demand for both office space and affordable residential property in the UAE if they can secure bank loans to finance start ups, provide working capital and investment for expansion and growth, according to an industry expert.

“It is widely accepted that SMEs account for approximately 80% of the UAE’s economic activity, which means that collectively they employ a large number of staff, require industrial, commercial and office space and naturally employees need housing. However, they are restricted by a lack of liquidity,” said Mohammed Nimer, CEO of MAG Group Property Development.

According to the Dubai Chamber of Commerce these companies are having trouble securing credit from UAE banks. If they do, the terms are short, usually three to six months and the interest rates for unsecured loans are averaging around 15% due to their perceived high-risk category. 

According to Ruwad Establishment, there are over 260,000 trading and industrial companies in the UAE of which over 200,000, are classed as SMEs. The UAE classifies companies according to the number of employees and the level of investment and in general an SME has less than 100 employees with an investment range between AED 200,000 and AED 2 million.

“Imagine the stimulus to the housing market alone if each SME averaged just one new employee per annum, not to mention the benefits to the wider economy – airlines, hotels, restaurants, shopping and so on,” added Nimer.

A Dun & Bradstreet report estimated earlier this year that loan rejection rates were in the range of 50-70% due in part to the bank’s difficulty in gaining access to accurate financial statements and in rare cases the complex and time consuming process of recovering money or liquidating seized assets.

Other statistics of the survey provide equally grim reading. Of those polled, just 25% of small businesses used a secured loan and only 13% had used an unsecured loan, while 45% used an overdraft and 55% a letter of credit facility.

Nimer acknowledged government efforts such as the lowering of minimum investment levels to form a company. He also praised the support provided by institutions like the Mohammed Bin Rashid establishment for Young Business Leaders and the Khalifa Fund.

“However more needs to be done to unlock the potential of the SME sector, banks must relax their lending criteria, SMEs are the backbone of many developed economies and they hold the key to real ecomonic growth in the UAE,” added Nimer.

“IT is interesting to note that SMEs are responsible for 30% and 28% of the US and Japan’s exports respectively. China’s 2 million SMEs have greatly increased their exports and Toyota depends on SMEs to produce 80% of its car parts,” said Nimer.

Nimer applauded the recent initiatives to improve transparency and regulations and agreed that liquidity was not the only hurdle the real estate industry needed to clear.

“The Dubai real estate market in particular has witnessed the more unsavoury side of property development. Financial irregularities, land ownership disputes, cancelled and delayed projects and poor quality finishes,” he said.

Nimer agreed confidence needed to be restored, but added that liquidity was at the root of the problem and would continue to play a critical role.

“Owners and staff of new small businesses with aspirations as owner-occupiers will still need mortgages,” said Nimer.

Having been in business now for 30 years, the MAG Group has an enviable track record of stability and consistency and it is that sort of profile that will new investors will be looking for when the inevitable upturn arrives.

In total MAG has a property portfolio in excess of AED3 billion and was one of the first developers to create Escrow accounts for all of its projects, long before the Dubai Government introduced Law number 8.

In October last year, MAG Property Development was awarded ISO 9001 certification by risk management company Der Norske Veritas (DNV). MAG still remains one of the few developers in the region to be accredited to that standard.


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