Dubai: It is a win-win situation for the property market with Dubai allowing mortgages on land given as grants. For the banking sector, it immediately means that the user base for its disbursals has expanded significantly. And, at the same time, it allows those granted plots — principally UAE nationals — to start developing on them without having to rely excessively on their own equity.
Taken to its logical conclusion, it means faster turnaround times on these plot developments. Also, with mortgages made available, those granted land will not have to rely on fund-as-you-go-along schemes to get their projects past completion. The on-the-fly financing have — more often than not — led to delayed projects in the past.
The Dubai Decree on mortgages for granted land can also be a game-changer of sorts for banks in the longer term. Banks here have relied predominantly on lending against property rather than land, partly because of the greater comfort factor this arrangement offers them.
“Historically, banks have not been eager to mortgage land because there were no mechanisms in place to ensure that repayment would be based on the development of the land itself,” said Sameer Lakhani, Managing Director at the consultancy Global Capital Partners. “They had to have visibility on income sources.
“Where a mechanism was imposed, it was ‘bilateral’, thus making it a tedious task. With the Decree, there comes a ready-made mechanism to be imposed across the board. This allows banks more visibility on what they are lending into, and thereby accelerate the whole process.”
Based on industry estimates, few banks lending against land with the “funding ratio restricted to 50-70 per cent of the land value at borrowing rates starting from 6-7 per cent,” said Dhiren Gupta, Managing Director at 4C Mortgage Consultancy. “However, for residential property finance, banks are still quite competitive with the offering rates of 2.99 per cent for the salaried borrower and 3.39 per cent for self-employed.”
Market feedback suggests that of the overall mortgage disbursals in Dubai, those against land would account for between 25-30 per cent. Through the new Decree, sources hope to add another 5-10 per cent to the mortgage tally by the end of next year.
Lenders have traditionally been keen to “provide finance on ready property as it contributes strong collateral against the finance value,” said an industry source. “Moreover, ready property can generate immediate income, which is an added assurance to the lenders as compared to land as there is no recurring revenue.”
According to Gupta, “UAE nationals would benefit with the mortgage release on the land as they get to build up a structure as per plot type. This would in turn create an additional enticement to promote real estate development on the granted land as finance options become readily available.”
The Decree sets clear the mechanisms against which the banks can take mortgage exposures on granted lands. It includes those lands “owned by the government and granted to the beneficiary for residential, commercial or industrial purposes.”
The Decree states that the “beneficiary may mortgage the land to any bank or financial institution registered duly in Dubai. The mortgage is legally binding for all concerned parties if the monies arising from the pledge of the commercial and industrial land will be invested to achieve the purposes of the original grant; if the monies arising from the pledge of the residential land will be invested in maintaining, expanding or replacing the building and the pledge is registered concerning mortgages in Dubai.”
According to Lakhani, “The Decree is to stimulate development in the city to a subset of the population that until now did not have access to such credit facilities. So, in a sense, it is accelerating the pace of real estate activity. It’s another step towards encouraging SME activity as well.”
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