As construction of high-rise commercial properties in Dubai continues to boom, the United Arab Emirates has now been formally introduced to true-sale CMBS, courtesy of HSBC Bank Middle East. And just as tenants are filing into office space as soon as the paint dries, demand for future CMBS is expected to grow.

UAE CMBS Vehicle No.1 Ltd. securitized $67 million worth of office space in the Dubai Technology and Media (TECOM) Free Zone, located next to Emaar Business Park, which is described as "a vibrant high-growth business community with a range of business opportunities for entrepreneurs as well as national, regional and international companies," according to one real estate agent who help rent the facility to its current 100 percent capacity.

Dubai's "Zones" are hubs of lax tax and ownership restrictions. Businesses outside the zones are more difficult for foreigners to buy into. At least 51% of any such building, for instance, must be owned by a United Arab Emirates (UAE) entity.

Moody's Investors Service awarded class A ratings to $28.1 million, or close to 42%, of Vehicle No. 1. The rating agency added that very conservative methods were employed for rating the deal. This was based on the fact that the rental market in Dubai is nascent and there are still "uncertainties regarding the further development of Dubai in terms of real estate prices and the mortgage loan market," the agency said.

Khalid Howladar, senior analyst of Moody's Middle East and Islamic structured finance, added that CMBS is a good thing for Dubai, compared with covered bonds, another funding tool gaining momentum in these parts. He expects, however, a time lag between this debut issue and future deals. "Covered bonds are appealing nonetheless as local banks are keen on size, but the legal feasibility of such structures is still unknown," Howladar said. "However, the lower financing costs available through ABS issuance are appealing to borrowers, and liquid access to real-estate assets is definitely a draw for investors."

A partner in a London law firm particularly entrenched in CMBS in the Gulf region agreed that similar deals are set to come to market as every major player has set up shop in Dubai (ASR, 5/1/06). "Investors are becoming drawn into these returns, which are greater than for CMBS in Western Europe and the United States," the partner said.

Dubai doesn't have the same emerging-market issues as Eastern Europe (undeveloped property laws) or India (enforcement problems), the source added, but the UAE is not without its problems. "Foreigners have trouble buying real estate in Dubai, much less securitizing it," he said. "And these zones' - open up the city and do away with the zones, or CMBS is heading elsewhere."

In addition to the law firm's concerns, rating agencies also have some trepidation, as the credit environment in the UAE has been benign for around 10 years, according to Moody's Howladar. But in the event of a downturn, it's uncertain how a deal will unfold. While active in developing its capital markets, Dubai does not have laws geared to securitization, making it impossible to predict what will happen if an insolvency or dispute is put before a local judge.

"As in any emerging market, other rating issues are concerned with the fact there is not the same quality or history of data," Howladar said. "For instance, Dubai has never seen a housing downturn. So in a recession, what will these properties be worth? How easy will it be to evict tenants and foreclose?"

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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