Middle East war ratchets up real estate risks for UAE banks

Real estate exposures pose a significant risk to United Arab Emirates banks as the Middle East war drags on, with the pressure likely to increase the longer the conflict lasts.

Real estate is a major lending line for UAE banks, accounting for more than a quarter of some of the country's biggest lenders' loan books, S&P Global Market Intelligence data shows. Since the war began, buildings across the Gulf have been targeted by Iranian drone and missile attacks, while some of the UAE's majority expat population have left the country.

Analysts expect a slowing of the real estate sector as a result of the war, along with a potential deterioration of asset quality and an increase in loan loss provisions.

"Given the population is 80% to 90% expats and a significant reliance on foreign investment in real estate, the UAE, and notably Dubai, is particularly exposed to the indirect effects of the current conflict," said Mohamed Damak, managing director for financial institutions ratings at S&P Global Ratings.

A key risk is the potential drop in rents, Damak said, as much of the real estate exposure is to income-generating properties where rents are used to repay the loans.

Biggest real estate exposures

Among the five largest banks in the UAE, Dubai Islamic Bank PJSC had the highest proportion of real estate loans to total loans at 25.50% as of 2025 end, Market Intelligence data shows. First Abu Dhabi Bank PJSC was next at 25.14%. Of the five, Emirates NBD Bank PJSC had the lowest proportion at 10.66%.

Dubai-based banks' reliance on international demand and greater exposure to volatile segments such as luxury and off-plan properties put them at particular risk, said Ranya Gnaba, a financial analyst at Tunisia-based AlphaMena.

A potential uptick in nonperforming loans, particularly among midsize developers and subcontractors, which are more vulnerable to payment delays and rising funding and construction costs, poses the biggest headwind, Gnaba said. A decline in collateral values, in line with softer real estate prices, could further weaken credit profiles and pressure asset quality metrics.

"On the retail side, asset quality may come under strain, particularly for variable-rate mortgage borrowers in a prolonged higher-rate environment," Gnaba said.

– Access aggregate banking industry data for the UAE.  – View loan composition data for Dubai Islamic Bank. – Access Visible Alpha estimates data for First Abu Dhabi Bank.

Lenders will tighten standards, be more selective with credit origination and be more conservative with their underwriting, given the volatile situation.

"From a risk management perspective, banks are likely to increase forward-looking provisioning,... anticipating a potential deterioration in the macroeconomic cycle," Gnaba said

Banks across the Gulf are expected to significantly increase their provisions for loans and lease losses in the next two financial years, according to Visible Alpha data. In aggregate, provisions are estimated to reach $11.59 billion in 2027, up from $7.63 billion in 2025.

A further challenge is damage to the UAE's reputation as a safe haven in the region.

"There could be more serious effects on GCC banks' financial metrics if the conflict causes longer-term reputational damage to parts of the region that have positioned themselves as havens for international businesses and individuals," Fitch Ratings said in a March 3 report.

Strong foundations, government support

UAE banks came into this conflict from a position of strength. They have achieved consistently robust earnings, while capitalization levels are strong and loan books are more diversified when compared to previous cycles, Gnaba said.

The five largest banks' Texas ratios — a metric that captures lenders' ability to absorb future loses — have significantly improved in recent years, Market Intelligence data shows.

Mashreqbank had the lowest ratio of the five at 4.85% at the end of 2025, down from 20% in 2021. Dubai Islamic Bank had the highest Texas ratio of the five biggest banks, but it still declined by more than half to 12.13% over the same period.

"While the potential impact of the war on banks is uncertain and will depend on the duration of the war, banks' good capitalization and profitability should help them absorb a significant deterioration in asset quality," Ratings' Damak said.

UAE lenders also benefit from a supportive government, which has already approved a "resilience package" to reinforce the stability of the banking sector. The package includes enhanced access to liquidity facilities in both dirhams and US dollars, temporary relief relating to liquidity and net stable funding ratios, and temporary releases of two capital buffers. Banks may also postpone classification of loans affected by the current situation and have been asked to continue providing financing.

Emirates NBD, First Abu Dhabi Bank, Abu Dhabi Commercial Bank, Mashreqbank and Dubai Islamic Bank did not respond to requests for comment at the time of publication.

Visible Alpha is a part of S&P Global Market Intelligence.