Dubai update on mortgages

Dubai may be one of the economic hot spots of the world, but the immaturity of the mortgage finance market is causing concern among property developers and those in the lending industry because it could potentially damage prospects for a thriving housing market.
"More banks have to offer mortgage services,” said Rameez Manzoor Rufi, vice-president of Rufi Real Estate and Construction, in a recent report. “Right now they are really sitting on the fringes and playing wait and see games. Once more banks get involved you will see increased sustainability. More people will buy."
In total there are around 13 lenders including a number of local Islamic lenders. The largest are Tamweel and Amlak, who mainly lend to domestic nationals. Unusually, only 20% of Dubai’s inhabitants are nationals, around half are South Asian and the rest are Arab, Iranian and Western.
The change in Property Registration Law in Dubai in 2006 means that , foreign owners can register land under their own names with the Dubai Land Department, rather than under the developer’s name (as was previously the case). With non-nationals able to own land in designated plots, and the availability of both leasehold and freehold property, more international lenders have moved into the country - such as Barclays, Deutsche Bank and Standard Chartered. National Bank of Dubai has just signed a deal with UK broker John Charcol to offer mortgages to UK residents wishing to buy an investment property in Dubai.
Yet, while Dubai boasted a GDP of 8.9% in 2006 (CIA World Factbook) and the population is expected to double to three million by 2010, lenders are still wary and view it as an emerging market. More international lenders have been drawn to Dubai, but there are some major deterrents. For example, there is no credit reference bureau, which means some applicants are refused credit or offered higher interest rates.
Sanjoy Chowdhury, senior manager for regional corporate affairs, Standard Chartered Dubai, said that his bank is currently lobbying the UAE Central Bank to set up a central credit bureau. He believes this would solve many of the problems.
Paula Bulloch, mortgage manager of Dubai-based broker Global Eye Group, said it can be difficult for non-nationals to get a mortgage because foreign borrowers must produce extensive documentation to get a home loan (such as six months of bank statements). A simple late payment on a credit card record can prevent a good borrower from getting a mortgage, she said. In some cases, she added, buyers pay a deposit to a developer for a property and later find out they cannot get a mortgage and end up losing their deposit, which doesn’t promote confidence in the housing market.
Barrier to sales
In Dubai, mortgages are sold attached to a new development and, typically, one mortgage lender partners with a developer to provide the finance. However, some developments have no finance available at all and this immediately eliminates many buyers because not all of them have cash and not all want to remortgage their home elsewhere to fund a property in Dubai.
Bulloch adds that interest rates tend to be higher in Dubai than in the UK (at 8% to 8.5%). Interest rates are set against the Emirates Interbank Offered Rate (EIBOR), currently 5.5%, and are reviewed every six months. She explains that rates are higher because lenders class Dubai as a risky emerging market and the interest rates on mortgages are set accordingly.
The other problem is that only variable mortgages are available, which leaves borrowers exposed to possible interest rate rises. While there are huge differences between interest rates from different lenders, increased competition has made mortgages more flexible (and remortgages are now available). However, riskier products such as self-certification are rare.
Fear of a market correction has also led to a reduction in loan to values (90% to 85%), says Bulloch.
Anticipated growth
Despite the problems, mortgage lending has been expanding rapidly. Deutsche Bank estimates that mortgage lending grew from Dh4 billion in 2005 to Dh11 to Dh12 billion in 2006. In 2005, mortgage lending accounted for 2% of GDP, tiny by emerging market standards. Moody’s estimated that mortgage lending as a proportion of GDP should be 15% to 30% in emerging markets, giving Dubai plenty of room for growth.
Standard Chartered, which now has 10 branches in the UAE, reported that it has seen huge growth in mortgage lending from people working in Dubai who want to own their own home and from property investors. Chowdhury said that about one third of borrowers are first time buyers in the region. The bank moved in to Dubai two years ago and started selling mortgages in 2006. It provides mortgage finance in conjunction with developers and offers remortgaging products.
Other banks that have had a presence in UAE for many years have recently been expanding their mortgage offers. Barclays has been in UAE for more than 30 years and it launched a mortgage service in Dubai in 2006 following the change in property law.
“With the changes in the property law ownership in Dubai, specifically with regard to non-resident ownership and the ongoing highly positive economic climate in Dubai, we believe that it is exactly the right time to bring our breadth of international mortgage experience to this market,” said Philip Ward, Barclays’ head of mortgages in Dubai. “We have examined the marketplace in great detail and believe that our products will hit the right note with prospective buyers.” It claims to be the first to offer a choice of currencies for mortgages (in UAE dirhams, pounds sterling, Euro and US dollars) and exactly the same mortgages are available to residents and non-residents.
Lloyds TSB, too, has a long history in Dubai, and it launched mortgages five years ago for expats working in Dubai. In the middle of 2006, it expanded this to non-residents looking to invest in Dubai and is now considering an Islamic mortgage. Simon Wyatt, marketing manager with Lloyds TSB International said that, while things have improved in Dubai and there’s a legal framework in place, it’s a bit like Spain 20 years ago.
The arrival of new lenders with experience in the more mature Western markets is likely to stimulate growth; but with no credit bureau, mortgage finance simply not available on some new developments and a need for more flexible products, the market has a long way to go to reach maturity. In the meantime, as developers struggle to keep up with the economy and demand, they will be the first to suffer.
Karen Beavis
Category: Business Guides
Date added: 30 July 2007