A growing number of investors are now taking the mortgage route to expand their portfolios in Dubai, according to industry experts. In the third quarter, finance comparison site Compareit4me saw a 119.5 per cent increase in the number of people searching for the mortgages compared with the same period last year.
“This shows increasing confidence in the UAE real estate market, and it is a positive trend as long as banks’ financing policies are created by sound assumptions using the right stress testing,” says Philip King, Head of Retail Banking at Abu Dhabi Islamic Bank (ADIB). Stress testing is a risk management tool used by banks to determine the ability of customers to repay their loans in case of a loss of employment or drop in property and rental yields. It helps banks to better evaluate a client’s credit profile.
While some banks offer financing for multiple properties to the same customer, this policy depends on a variety of factors, including the customer’s profile, the bank’s risk appetite and the customer’s credit rating. Banks will often have the highest appetite for financing multiple properties for private banking or priority banking customers, says King.
“The criteria for a first property are based on the customer’s financial situation and there is usually much less risk involved in this area than most other investments,” says King. “Customers will often compare their mortgage and service charge payments against their current rents to assess their affordability. An investor, on the other hand, will compare their investment options regarding return on investment or yield. Also, they must look at a cash-flow analysis based on stress testing rental yields.”
For purchases by investors, it is up to the financial institutions to determine suitable financing policies and how they are applied. “They may, for instance, be under commercial real estate financing, which could require higher down payments, and which depend on length of business, adequate cash flow coverage, debt-to-income ratios and landlord experience,” says King.
The UAE Central Bank mandates the banks finance only 60 per cent of the value of a second property for expatriates and 65 per cent for UAE nationals. This is also subject to total exposure limits set by the Central Bank regarding monthly income multiples and debt-to-income ratio.
“Risk and return go hand in hand in the way profit is calculated,” says King. “Experience shows that investment properties are riskier than primary homes. Therefore, rates for second homes and beyond reflect the higher risk.
“The customers can expect to be asked to do a cash flow stress test to assess their financial resilience in case of rental income drop. If the property is for personal use, customers should ensure that they have a financial buffer that allows them to make the payments.”
Rental vs EMI
High rental yields and low interest rates make Dubai attractive for real estate investors as rental earnings often cover the loan instalments. Indian businesswoman Nita Thakkar, 51, built her assets from the rental earnings. She pays 3.5 per cent as equated monthly instalment (EMI) for two mortgaged properties – a two-bedroom apartment and a studio in Jumeirah Lakes Towers (JLT) purchased in 2012 and 2013 with a loan from Mashreq – and earns yields of more than 5 per cent.
The two-bedder was bought initially as her home, but she later moved into a bigger rental unit and leased her property. Realising that smaller properties offer higher rental earnings, she bought the studio apartment purely for investment. She’s securing a third mortgage for another studio apartment from the same bank.
“Acquiring bank finance for property purchase has been smooth for me,” says Thakkar. “I own my company and according to my turnover, when I took the first property mortgage I knew I could borrow funds for another unit. When I chose the second property, I just requested the bank to process my loan as they already had all my documents.
“I prefer to buy property through mortgage because I don’t like to put all my money in one pot. I will secure a loan from the same bank for my third property, a studio in JLT or Dubai Marina, as I can borrow up to 50 per cent of the property value.”
Part of Thakkar’s investment strategy is to stay away from off-plan and space out her investments. “I don’t like to invest in off-plan and only take properties that are ready to put on rent and start income from day one,” she says.
Simran Samtani, 46, wants to restructure the high interest rates for one-bedroom units she purchased off-plan nine years ago. One unit was only completed two years ago and the other was delivered last year. Under the terms of her loan, she would only start paying EMIs after taking possession of the property. “When I got possession, I rented out both the apartments as I had picked up these purely for investment,” says Samtani. “My rental income covers my EMI.” Samtani says she had paid Dh35,000 per property, which was valued just below Dh400,000. “On the date of possession, I paid another Dh35,000 per unit, plus some extra amount covering the increased property registration fee, which was raised from 2 per cent to 4 per cent.”
By restructuring her loan, Samtani could increase her yields. “My rental [earning] is about Dh4,000 per month and EMI is about Dh3,700. When I restructure my loan, [the rental earnings] will also cover maintenance, so by then I will be purely building an asset with mortgage facility and rental income.”
Samtani says there are plenty of good deals in the market, although she prefers to invest in studios or one-bedders, which generate higher yields than the bigger apartments. “Also, I believe ready units that can be immediately rented out are now better for one’s asset portfolio.”
Most banks in the UAE offer financing options for resident buyers purchasing multiple properties. However, non-resident buyers are often restricted to two mortgaged properties per bank, although the policy often varies from bank to bank, says Zarah Evans, Managing Partner of Exclusive Links Real Estate.
“The mortgage application process is the same for the fifth property as it is for the first,” says Evans. “The only slight difference will be a few additional documents. All banks conduct a thorough affordability check on each mortgage applicant to ensure they can make the repayments. The Central Bank also has a strict debt-to-salary ratio of 50 per cent, whereby no individual can have more than 50 per cent of the salary used on debt repayment.”
Evans explains that the banks also protect themselves by reducing the loan-to-value ratio from the second property purchase onwards. “This ensures that the buyer can afford the repayments and in the event of repossession, they are also protected by the increased equity in the property,” she explains.
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