UAE banks recommend reducing mortgage rates to improve liquidity

In recent months the UAE administration has announced a wide array of initiatives to help stimulate the local real estate market. These measures are a welcome intervention and have added to a growing momentum of positivity in investor sentiment. Changes in regulation and more proactive engagement with overseas and expatriate buyers are certainly expected to help boost the market. But many experts are advising a loosening of the 75% mortgage cap.

With the ill-effects of unrestricted lending precipitating a worldwide financial crisis in 2008, governments around the world felt a need to have more hands-on control over their mortgage markets. It was in this context that the UAE government placed a ceiling on the loan-to-value (LTV) ratio for expatriates at 75 percent in 2013. At the time, this cap was seen as a prudent measure to curtail excessive exposure to bad debt. However, the cap inherently limits market potential in many ways as well. For instance, several first-time buyers and those with constrained by the upfront costs they can afford, are priced out of the market under these restrictions. Therefore, where the cap protects banks in an unstable market, it is becoming a barrier to end-user demand, which actually stimulates stability.

Facilitating a wider demographic of buyers will energise the market

The UAE property market has been flooded with new supply over the past year, leading to a market correction in prices. This has created a flurry of buying activity, with banks reporting rising demand for mortgages as buyers seek to take advantage of prices plateauing. The growing mortgage demand amidst a stabilising real estate market is primarily being driven by people who are either deciding to switch from rentals to ownership, or looking to upgrade to larger properties, as well as investors wanting to take advantage of high rental yields.

Recent government initiatives offering long-term visas to selected investors and professionals, and allowing foreigners 100 per cent ownership of businesses outside free zones is further expected to stimulate mortgage demand alongside the favourable payment terms being offered by real estate developers. This growing demand for mortgages has prompted the UAE banking group to consider asking the central bank for a relaxation of mortgage lending rules to stimulate the real estate market. At the moment, first-time buyers of a home, (primary market) that is worth up to Dhs5m, can only borrow up to 80 per cent of the property value if they are UAE citizens. This cap reduces to 75 per cent for foreigners. The UAE Banks Federation’s retail banking committee is proposing the limit be raised to 85 per cent for UAE nationals and 80 per cent for foreigners. ⁽¹⁾

The 25% up-front capital requirement generates an intrinsic disparity, favouring investors with available liquidity over the average middle-income household or smaller investors. In essence, while the cap has been effective in preventing the UAE real estate sector from introducing unwanted variables into the nation’s banking ledgers, it has also placed limitations on the market achieving optimal maturity.

Gemini Property Developers CEO Sunil Gomes believes that the Dubai real estate sector can induce an even more substantial investment from Indian buyers, as well as a more widespread engagement with expat investors in general, by reassessing the current mortgage restrictions. Sunil feels that current regulations governing Dubai mortgages for non-residents and expatriate residents might need to be aligned with many of the recent revisions in legislation. With ten year visas and extendable retiree visas promising to deepen the city’s relationship with its numerous non-Emirati residents, he feels that the time is right to facilitate the real estate investment potential of this critical demographic.

An opportunity for the Dubai and UAE real estate market to redefine itself

Recent months have seen a buzz develop around the potential for a boom in the affordable housing segment. Any opportunity for expansion within this segment will be constricted by such buyers having to provide a deposit of 25%, which is significantly higher, especially in the affordable category, than what they experience in many other markets around the world.

Sunil from Gemini adds that the growing influx of young professionals into the UAE, with the gathering pace of economic diversification, presents a great opportunity for the local developer community. Relatively high rentals mean that several middle-income families would prefer to invest in paying off a mortgage instead. However, a sizable number of potential investors, especially end-users or owner-occupiers, with the capacity to make the projected monthly repayments are held back by the 25% deposit and other associated upfront costs (that can add up to a significant 33% cumulatively). ⁽²⁾

Sunil feels that while the Dubai and UAE developer community are eager to target the emerging market in affordable properties, in his assessment, such a segment could be far more widely engaged by legislating an LTV ratio that allows lower up-front outlays. In his opinion, financial regulation needs to be seen as a flexible and interactive leverage over market forces and relaxation in current requirements would provide a more optimal stimulus.

The time is right, and ripe, for an easing of the mortgage cap

With several international markets even enabling 100% loans for approved customers, the UAE mortgage cap puts the country’s real estate market at an inherent disadvantage. While a zero down payment home loan in Dubai might never eventuate, there is certainly room for extending greater credit at a time when the city is experiencing a burgeoning demand from owner-occupier buyers.

Sunil suggests that a more opportunity aware and flexibly regulated cap could provide the Dubai and UAE real estate market with the right stimulus it needs. He believes that recent visa legislation reflects the UAE administration’s vision of a deeper engagement with the country’s sizable and productive expatriate population. In this context, mortgage regulations that enable the participation of a wider range of potential investors would be highly beneficial in reviving market demand and empowering the country’s developer community.