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Bankers target new mortgage cap rule in UAE

Central Bank likely to be asked to raise ceiling on cap after financial institutions were caught out

  • By Shehab Al Makahleh, Staff Reporter
  • Published: 22:47 January 3, 2013

  • Image Credit: Asghar Khan/Gulf News Archive
  • A view of Dubai Marina. According to Central Bank figures, mortgage lending has been stable in recent months.

Abu Dhabi: The new mortgage cap regulation that the UAE Central Bank issued on December 30 had caught bankers and financial institutions off guard. On the heels of that decision many major banks are now planning a counter offensive and are expected to meet on Sunday to convince the Central Bank to revise it.

One of those banking executives, who did not want to be named, told Gulf News: “We are likely to ask the Central Bank to raise the ceiling on the mortgage to 85 per cent and 75 per cent for Emiratis and expatriates respectively.”

Amer-Nouman Ashour, a chief analyst and economist at CNBC Arabia, told Gulf News that “there would be negotiated ratios that will be satisfactory to the banks and to the Central Bank, which seeks from this regulation to keep an upper hand on the real estate market and to avoid any repercussions that would arise similar to those in 2008. The bankers would make these requests to the central bank on the grounds that it is very difficult for any future debtor to pay 50 per cent of the property value.”

The Emirates Bankers’ Association has already asked the Central Bank to postpone the enforcement of the regulations and that the “government is now mulling this request”. Ashour expected that the Central Bank will chase another circular that clarifies the effective implementation date and that the Emirates Bankers’ Association will form a committee to discuss this matter with the Central Bank.

Currently banks sit on liquidity of over Dh1.16 trillion and this means they need to lend more not less. The capping of mortgages simply shrinks their markets. Mortgages make a great opportunity for banks to expand their range in lending and if the mortgage cap is high then this will lower economic growth rates, according to Ashour. Unconfirmed sources estimate that local banks sit on half a trillion dirhams of foreign deposits.

According to Central Bank figures, mortgage lending has been stable in recent months as the latest available data for August 2012 shows that real  estate loans issued by UAE banks stood at Dh162.6 billion against Dh163.2 billion at the end of 2010, which is marginally lower. What this means, Ashour explained, is that mortgages have stagnated for 18 months.

Exercising controls

The Central Bank is exercising its controls on banks and the credit supply in the market and is carrying out preventive measures to ensure that non-performing loans or NPLs do not cause the crisis of 2008 and 2009 to reappear.
Ashour added that provisions for NPLs surged in banks by more than 47 per cent from Dh44.3 billion at the end of December 2010 to Dh65.3 in October 2012. Before the new mortgage adjustments, there had been no cap on mortgages. It was left open to each bank to decide on the loan-to-value ratio.

Masood Al Awar, CEO of Tasweek Real Estate Development and Marketing, told Gulf News that investors and developers should realise that a state of euphoric markets are not in their favour in the long term and everyone suffers when markets suddenly correct sharply.

“Last year, it was year of adjustment for the property industry,” said Al Awar. “We have to understand what industry forces are at work, what the market sentiments are and what growth options are available out there.”
He added that mortgage financing has been playing a major role in keeping Abu Dhabi’s real estate market attractive and productive.

“It is thus vital for industry to understand key mortgage trends and adjust their activities accordingly,” said Al Awar.

Yousuf Al Nuaimi, CEO of Al Hosn Properties, told Gulf News: “The new law will guarantee parties’ rights with regard to mortgage transactions. This will also lead to necessary guarantees for further investments in the properties sector by establishing well-defined rules protecting the creditor, debtor and the guarantor.”

The new regulation aims to enable end-users and real estate developers to secure financing and meet local demand for housing, a UAE Central Bank official told Gulf News.

Al Nuaimi reiterated that after the boom the aim of the regulations is to avoid any future surprises similar to those that occurred when the global financial crisis hit the country, bringing the real estate curve down.

Developers can seek alternate lending norms

When the Central Bank regulations on capping mortgages are applied, real estate developers and the banks will have to devise creative financing options for property owners to overcome lending obstacles, industry insiders said.

Comparing the regulator’s caps on mortgage loans announced this week with similar caps on auto finance in 2011, experts said the real estate industry will be forced to follow the example of their counterparts in the car market and devise new lending solutions to avoid a dip in sales. “The rules stimulated the auto industry to come up with creative solutions and that’s where the real estate market should head today,” said Masood Al Awar, CEO of Tasweek, a real estate development and marketing firm. 

Measures could include developers reducing property prices, sharing the downpayment burden with owners, offering bonuses and banks offering other types of loans to assist buyers, industry players said. “When offering a product, the developer can finance it with the owner. The same as [dealerships] do it with cars. This is one model. It’s not a twisted way but it’s very creative offerings,” he said. “Developers should come up with new tools, they should learn from the auto industry. The real estate people have to rethink their profitability rather than increase prices,” Al Awar said.

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