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The lure of mortgage

Do UAE homebuyers prefer mortgage over cash? PW looks at the trends in the market

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The current market offers a good opportunity for first-time buyers
Property Weekly

Dubai is predominately a cash-driven real estate market. Yet, the current buyer-friendly phase (attractive property rates and high rental returns) has resulted in a substantial increase in mortgage transactions in comparison to the same period last year.

According to Srinivasan Padamanabhan, a business manager for mortgages at Mashreq, approximately 1,200 customers per month are buying homes with mortgages in the UAE market. “The property prices in premium, well-developed communities in the UAE are still affordable as compared to similar properties in some of the developed cities like New York, London, Singapore, etc. Buyers also look at rental yields available on properties, which are attractive in this place,” he says.

He also observes that the trend in the market is for end users to look at longer-term solutions on their mortgages, such as fixed-rate options for two years. He says such options ease the initial cash flow requirements for customers by helping them plan their expenses while moving into their dream home.

Market opportunities

For the first-time buyer, the current market offers the right opportunity to buy his own home instead of paying rent. Padamanabhan says, “A one-bedroom apartment in a decent well-developed community is rented around Dh80,000. The price of such an apartment would be around Dh1.2 million with an approximate equated monthly instalment (EMI) of Dh6,300 per month amounting to an annual cash outflow of Dh76,000. The equation to own an asset with the same cash flow is indeed compelling for first-time buyers.”

For the investors, developing communities within the UAE offers attractive rental yields of 7-8 per cent on the property value. “Considering the loan to value of 75 per cent offered on a property, the effective interest being paid is likely to be 3 per cent,” says Padamanabhan. “Therefore, a prudent property investment in a fast-developing community can provide a net yield of 4-5 per cent post interest payments. Such a return is unique to the UAE market and is secure considering there is an asset that is likely to provide capital appreciation as well.”

Sawan Karia, managing director of Home Matters, says property is universally regarded as a safer form of investment than equity markets. “With bank deposits yielding virtually zero return, rental yields can offer significantly higher returns to buyers. For example, when you buy a two-bedroom apartment in the Greens for Dh2 million with a mortgage of Dh1.5 million over 25 years, the monthly mortgage cost is Dh7,712 or Dh92,544 per year. A conservative rental return of Dh130,000 per year offers a good return while also providing capital growth prospects.”

Bank rates

The end users and investors both have good reasons to make real estate investment in this lucrative market, and market experts also point out that the bank’s lending offers further allows the buyers to acquire an asset at a good deal.

According to Dhiren Gupta, managing director of 4C Mortgage Consultancy, “The mortgage market is still quite appealing with the current bank offered rate [promotional rate], which most banks are proposing to the customers. In spite of the surge in Emirates Interbank Offered Rate (EIBOR) pricing, banks somehow managed to keep the lending rates low with the bracing period of 2-5 years. This attracts buyers and encourages them to purchase the property on a mortgage. Moreover, current market dynamics are prone to end-user investment, hence availing a mortgage facility is ideal to facilitate the property purchase.”

EMI payment

Gupta considers Dubai a buyer-friendly real estate market and the base sale price of properties in the resale section gives privilege even to current tenants to convert their rental payment into monthly purchase instalments. “Considering, if one is paying an annual rent of Dh60,000 for a one-bedder, paid on quarterly payment. So on the current prevailing interest rate of 3.49 per cent on a 25-year term, if he plans to buy a property worth Dh1 million, his monthly instalment for a loan amount would be around Dh3,750, keeping 75 per cent funding of the property value. Hence, we can see the difference in the monthly rent of Dh5,000 vs EMI of Dh3,750 towards the mortgage loan.

“However, what’s required here is the self-assurance of paying for home loan EMI rather than rental payment. It is also important to analyse whether you have a secure job, your lifestyle, family planning, extra cash cushion for the down payment and other related annual service fees.”

He also adds that the rental price further makes real estate investment alluring. The rent is on the higher side whereas the property sale price is stagnant or comparatively small in the secondary market. Also, for off-plan construction, developers are offering lucrative payment plans, which allow investors to book the unit with minimal booking fee.

Affordable housing

Gupta explains, “Most buyers these days are first-timers who want to get into property market investment within the range of Dh1 million to Dh2 million or less. The demand for affordable housing is much higher as compared to the luxury section. The salaried segment is keen to invest in property as they can save on the rental amount, which is usually higher than the monthly mortgage repayment. Dubai Marina, Jumeirah Village Circle, Dubailand, Downtown, Jumeirah Lakes Towers, and Discovery Garden are still attracting buyers from different segments.”

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