A Dent In Dubai’s Property Recovery?

The UAE central bank announced its intentions to limit mortgages to expatriates and Emiratis in the country in December but it has received a mixed response from banks and property experts.

A circular sent to commercial banks by the central bank, and seen by Reuters, said mortgage loans for foreign individuals should not exceed 50 per cent of property value for a first purchase of a home, and 40 per cent for subsequent homes. Caps for UAE citizens were set at 70 per cent and 60 per cent.

Central Bank governor Sultan Nasser al-Suweidi said the circular was a blueprint for further discussions with the banks and other parties, and that it would take at least nine months for new legislation to be implemented.

“I would presume that the central bank has taken this initiative in order to pre-empt another surge in the bank’s non-performing levels, which in some cases peaked at 20 per cent of bank’s overall loan books and also to weed out speculators from the market,” said Jonathan Fothergill, director of valuations at Cluttons.

“In this respect, I think the general rationale of this instrument is a good and positive step helping to lead to a more sustainable market.”

Nicholas Maclean, managing director of CBRE Middle East agrees that the ruling will help prevent market speculation.

“In the run-up to Cityscape last year we saw the beginnings of a speculative market and I don’t think the market has recovered sufficiently to justify this. The intervention of the central bank to effectively direct sales towards owners, occupiers or users is a positive step,” he said.

Dubai’s property market crashed during the economic downturn in 2008/2009, with prices falling up to 60 per cent. The collapse was blamed, to a large extent, on the rampant ‘flipping’ by speculators in the market.

However, the emirate’s property market began to recover last year.

Residential villa prices in the emirate rose 24 per cent in 2012 and are now 21 per cent higher than in January 2008, Jones Lang LaSalle (JLL) said in a recent report. Apartment prices also rose 12 per cent last year but remain 12 per cent less than in January 2008.

While market recovery is expected to continue in 2013, the new central bank ruling will slow down its pace, said JLL.

“The new guidelines are likely to reduce demand in the residential sector and slow the recovery of prices in 2013,” the report added.

“I think that the cap will certainly weed out speculators and flippers but at the same time will also deter genuine end users,” agreed Clutton’s Fothergill.

“It is inevitable that the initiative will likely impact negatively on the market for end users just as it is finding its feet once more. Not many expatriates in the country can claim to be in a ready position to put down 50 per cent of a Dhs2.5 million property,” he said.

However, according to CBRE’s Maclean, rather than having a major impact on the marketplace, the new ruling will have a stabilising impact.

“I don’t think the new legislation is going to slow down prices, as prices are increasing as a result of the increase in demand and given that the way people buy is not necessarily in majority cases by mortgage, I don’t think it’s going to have an impact on pricing,” he said.

“The mortgage section of the buying community is relatively small at approximately 20-30 per cent, therefore around 70 per cent of the market are cash buyers or have some other form of funding.

“The majority of the market therefore is unaffected by this change,” he added.

The incident raises questions over authorities’ regulation of banks as the UAE recovers from Dubai’s corporate debt crisis of 2008-2010 and seeks to regain balance in its real estate market.