Protective measures: New regulations for real estate financing introduced by the Central Bank of the UAE and watched over by institutions including the IMF will help to prevent a repeat of the last property cycle Image Credit: Illustration: Pranith Ratheesan, GN Focus/picture source: Corbis

While buyers keep splashing cash to buy property in the UAE, the mortgage industry is maturing at a steady pace, watched over by a proactive UAE Central Bank and institutions such as the International Monetary Fund (IMF). With a newly announced mortgage cap that regulates products for most borrowers and developments, banks now need to tailor products to fit regulatory and consumer requirements. However, mortgages lagging behind cash transactions may be a cause for concern.

Market growth

“Banks in the UAE booked approximately Dh12 billion worth of mortgage loans last year across all emirates for residential properties,” R. Sivaram, Head of Retail Asset and Cards Business, Emirates NBD, tells GN Focus, citing internal estimates.

“We saw significant tractions in the home financing market last year. Growth was backed by recovery in the real estate sector, consumer confidence and global economic revival,” Sivaram says.

Last year saw property prices in Dubai rising to hit a growth rate of 22 per cent on an annual basis, according to research by Jones Lang LaSalle.

Dubai alone saw Dh62 billion worth of housing unit mortgages and sales during 2013, according to Dubai Land Department, of total land and property transactions worth Dh236 billion.

“The Abu Dhabi and Dubai markets contribute to about 80 per cent of mortgage business for all banks,” Tony Graham, Executive Vice President — Retail Banking, United Arab Bank, tells GN Focus. “We were very successful. Our business last year was definitely better than in 2012. We saw strong volumes throughout the year including in the fourth quarter; 2013 was the year that people really felt the crisis was over and the UAE was back.”

Euphoric predictions

Speculation on the back of Dubai’s Expo 2020 victory and announcement of several large projects created a sense of euphoria, which was noted by regulators. “Looking ahead, growth in the coming years will benefit from a number of mega projects and Dubai’s successful bid for the Expo 2020,” said IMF’s Harald Finger in a statement released at the end of his UAE visit on January 30. “The total cost, pace of execution and financing of the new mega projects remain uncertain. If not implemented prudently, these projects could exacerbate the risk of a real estate bubble.”

A quick analysis of conversations, reports and questions would probably reveal that “bubble” was the most used word in the last two quarters of 2013. However, the wisdom to regulate brought in sobering mortgage rules, putting an end to speculation on how far and how fast property prices would climb in the UAE in 2014. “The new maximum loan-to-value (LTV) ratios for mortgage lending will provide banks with a buffer against undue exposures while also helping to limit the degree of speculation in the real estate market,” Finger said.

To the speculator bent on driving prices up, the property sector with its new improved rules will seem to be a conspiracy of all stakeholders. Combined with the mortgage cap, other developments are expected to keep the market in balance. Emaar, a part state-owned developer, banned real estate agents from selling off-plan property before completion.

Improved regulations

“The government is making decisive moves to try and improve market regulation and ultimately make the emirate a more attractive and stable investment environment after residential rents increased by more than 25 per cent last year following a 16 per cent increase in 2012,” Mat Green, Head of Research and Consultancy, UAE, CBRE Middle East, tells GN Focus. “Supporting this effort, a number of measures have been implemented over the past year, including the Central Bank’s new mortgage rules and Dubai Land Department’s decision to double transfer fees on property sales.”

The mortgage cap, which came into effect a month after it was published in the Official Gazette at the end of November, addresses LTV ratios on every kind of product and borrower — UAE nationals, expatriate residents and non-residents buying their first, second or third off-plan or completed property. “The new regulations have increased competition with banks now competing on financing packages, which will benefit consumers,” says a spokesperson for Abu Dhabi Islamic Bank (ADIB).

Loan tenor can be no longer than 25 years, with the maximum age at final repayment being 65 for expats and 70 for UAE nationals. Customers’ incomes also matter — the repayment instalment should not exceed 50 per cent of monthly incomes and the cap is set for eight years’ annual income for UAE nationals and up to seven years’ annual income for expats.

A mortgage cap may work in the favour of consumers because it mandates banks to create products that are viable.

“It is healthy that [the cap] differentiates between first and subsequent properties. It discourages speculation and keeps affordability. The regulations require banks to do a stress test — it is one thing that you can make your mortgage payment today, but what if it goes up, since we are at a low end of the cycle in terms of interest rates? We have a good, proactive regulator here. That is sustainable in the long run,” says Graham.

Things are different from the peak of 2008 when mortgages were available for properties that never existed beyond their plans. Today, only a handful of banks finance non-resident mortgages and the few that consider off-plan properties have tie-ups with reputed developers.

“Emirates NBD finances completed properties with registered title deeds. In addition, we also offer self-construction home loans and second-degree mortgages for government housing schemes [loans to UAE nationals under Government Housing Programmes are an exception to the LTV],” says Sivaram.

However, given the demand and the fact that loans for non-residents are covered under the mortgage cap, banks, such as ADIB, that do have such products, find it rewarding.

“We have seen high demand from non-residents. The UAE’s safe haven image, increased trade flows and rising tourism have boosted its real estate market. In addition, the unsettled economic and political conditions in other regions have encouraged overseas investors to invest in the local real estate market,” the ADIB spokesperson says.

One of the results of the optimism is that work has started on many stalled projects, adding to the number of projects that can be financed by banks. “There is renewed interest in a lot of completed properties. People are moving to the UAE, which is good for demand. Real estate developments have restarted, which is good since it balances supply and demand. They will be completed properties, which we are happy to finance,” says Graham.

What next? Going by Finger’s statement, expect stricter regulatory control even as rogue banks are brought in line. “It will now be important to agree, as planned, on transition paths for banks that are currently not meeting the new limits. Looking ahead, the Central Bank could consider further tightening these rules if price increases in the real estate market remain very large,” he said.