Give a thought to Dubai mortgage-backed buyers

There is no doubt that the Dubai property market is hot and the current rate of value appreciation, the strongest in the world at around 22 per cent year-on-year, are unsustainable. How then to manage a cooling of the market and avoid the boom-bust cycles which typify many immature markets while not eliminating long term sustainable growth is the challenge which the regulatory authorities are trying to tackle.

Dubai is unique in that over 75 per cent of property purchases are made on a cash basis. This suggests that the vast majority of the transactional activity is being conducted by individuals and corporations of significant networth. It is unlikely that an additional 2 per cent in transaction charges will deter focused, determined and savvy investors in property, particularly as the astute ones are typically chasing net yield and Dubai property is still one of the best performing globally in this regard.

Dubai is experiencing a phenomenon similar to the Hong Kong market in that a high level of offshore demand (and therefore liquidity) is driving up property values. In Hong Kong, property prices have virtually doubled on the back of the quantitative easing efforts of the US Federal Reserve.

One measure that the Hong Kong authorities introduced was to introduce a 15 per cent tax, on top of regular stamp duty, on buyers who are not permanent residents, companies or institutional investors. In Dubai’s instance, much of its growth can be attributed to liquidity being drawn from politically troubled countries around the region and injected into the local economy because of its safe haven status.

The inflow of funds has been welcomed and been a major contributing factor to helping kickstart the industry’s recovery. However, the industry cannot rely on regional geopolitical issues to be a major and fundamental driver of industry growth. If the aim is long-term sustainable growth, then the market must attract long-term committed buyers and investors, not those who are trading property as if it were a commodity, such as the now notorious “flippers”.

We have always advocated a sliding scale transaction fee structure to address the issue of flipping more directly. Instead of imposing additional financial burden on buyers, sellers would need to pay a transfer fee which would be significantly higher if the property was owned for one-year versus the fee payable if the property was owned for five years. This way, the issue of flipping is addressed head on, rather than increasing any barriers to enter the market for those buyers or investors who are making a long term commitment.

In light of the points above, the increase by the Dubai Land Department from 2 to 4 per cent is more likely to slow the growth of mortgage-backed buyers entering the market. These buyers require significant financing assistance to purchase their first home. Given that the additional 2 per cent transfer charges is likely to be paid for by the buyer, this amount can represent a significant proportion of the capital that needs to be accumulated to qualify for a mortgage.

In many instances, buyers have saved diligently to accumulate 15-20 per cent of the purchase price of the property plus the brokerage and registration fees that will apply. An extra 2 per cent registration fee can represent a significant increase in the capital that the purchaser seeking a mortgage needs to accumulate.

The bedrock of any property industry is its owner occupiers and, in the majority of cases in a mature industry, mortgage holders. They represent the core of the industry as it is they who view property as an investment in life, not just a way to make a quick profit or a place to park cash until the unpalatable situation in the home country settles down.

Owner occupiers, as mortgage holders, see real estate in a different light. For them, it’s about creating a lifestyle. It’s about creating a home which will provide an environment that is safe and secure within which the individual, couple or family can grow and develop in all aspects whether physical, emotional, social and, of course, financial.

In this respect, they have a lot more at stake than those investors with financial interests only and are more likely to remain committed to the property purchase they have made.

The typical mortgage holder plays an incredibly important role in providing some degree of stability and predictability to the market and its they who will have a major influence on the future long-term growth prospects of Dubai’s real estate industry.

— The writer is the managing director of Harbor Real Estate.