Business | Banking

UAE’s new mortgage rules issued

Rules could prevent property market from over-heating

  • By Shehab Al Makahleh and Deena Kamel Yousef, 
Staff Reporters
  • Published: 16:27 December 31, 2012
  • Gulf News

  • Image Credit:
  • Asghar Khan/Gulf News Archives Boost for real estate The Jumeirah Beach Residence and Jumeirah Lake Towers. Picture for illustrative purpose.

New UAE Central Bank rules capping what banks can loan to investors in residential property will likely put constraints on the housing loan market. It will scale back financing and mortgages in order to prevent real estate markets from overheating again, according to Waddah Taha, chief analyst and economist at Zarouni Group.

The new banking rules cap loans extended to expat borrowers at 50 per cent while Emiratis at 70 percent of the value of real estate on the first mortgage. Then banks can only loan 60 percent on subsequent mortgages to expats and 40 percent to nationals. The UAE Central Bank’s circular doesn’t give date on when the new rules go into effect, meaning probably they’re effecitve immediately.

The new regulation aims to boost the real estate market steadily as it lowers the high risk factor that plauged the market before, Taha explained. He further remarked that the last property boom has exposed banks and the real estate companies to high financial risk. “The party that would be most affected are brokers who have speculated in the past in the real estate market.”

Taha pointed out that once the mortgage risks are lowered, there will be sufficient stability in the market as well. Central Bank figures showed that UAE banks appear to be maintaining a cautious approach towards mortgage credit with real estate loans slumping by nearly Dh1bn in the first quarter of 2012 to extend the decline from 2011.

Indeed, UAE banks have emerged as highly vulnerable to real estate downturns because they’re significantly exposed to the construction sector and the speculative real estate sector, he added. During the 2008-2009 crisis, several banks in the UAE were overly exposed to high levels of credit risk.

“Now, only serious investors and purchasers will be taking a step forward towards purchasing a house or more,” Taha added. “[They] will be committed to pay and to finance a large part from [their] own capital,” Taha said. The new rules could surely put some breaks on the property market’s fast recovery within next year, according to some industry players.

Market players have hoped for a fast recovery from reduced bank interest rates and easier lending terms to revive real estate next year but now will have to deal with new market conditions, according to Tariq Ramadan, chairman of Tharaa Holding, a real estate investment company. The property comeback expectations for next year based on 2012 activity, which saw an increase of 5 to 20 percent for residential rents in Dubai, were starting to simmer and higher price projections were already being placed on the books.

While it remains to be seen, the Central Bank regulation seems to want to dampen what could become the UAE’s second market wave of price hikes, thus stabelizing it for long term development. It would surely mitigate the risk of over-lending in the property sector. “It concentrates lending for those who have enough liquidity and a good financial position that allows them to make a higher downpayment,” Ramadan said.

Numan Ashour, chief analyst and economist at the CNBC Arabia, told the Gulf News that with the real estate markets in UAE starting to heat up, there should be some controls and monitors on lending and financing. If the idea is to create a stable market by 2023 and beyond for investors in the UAE a stable market is needed and such regulation could probably help bring it.

“Ultimately, this enhances confidence in the county and the economy,” Ashour said. And, he noted, the more stable the real estate market, the more stable the banking sector will become and the more prosperous the country’s economy.

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