Why UAE’s new mortgage cap makes little sense
The UAE's central bank may be determined not to allow another bubble to form, but the cap may also hurt a fledgling recovery in the property market and highlight the unpredictability of the regulatory environment for investors.
January 2, 2013 2:40 by Reuters
Last September, people lined up for hours in a square outside the headquarters of leading Dubai real estate developer Emaar Properties, waiting for a chance to buy units in a luxury apartment complex.
The complex, in a fashionable area of downtown Dubai, had not yet been built. But the buyers, who included foreigners from Europe and Asia as well as local citizens, were so keen to get hold of the apartments that they were willing to sign up based on construction plans.
Some were hoping to make money even before the units were completed, by selling on their ownership if property prices rose. The scene recalled, on a smaller scale, Dubai’s property bubble of the mid-2000s, when frenzied speculation sent real estate prices soaring.
By introducing caps on mortgage lending, the UAE’s central bank signalled this week that it was determined not to allow another bubble to form.
The rules could ensure that the wealthy country grows in a more stable manner than it has done over the past decade of boom and bust. But they could also hurt a fledgling recovery in the property market – and the abrupt way in which they were introduced illustrates the risks of doing business in an unpredictable regulatory environment.
“There was no consultation on this…it was unilaterally decided by the central bank,” said one Abu Dhabi commercial banker, who declined to be named because of the political and commercial sensitivity of the issue.
“It makes no sense to limit lending to expats when the property market has just begun to see a revival.”
A circular sent to commercial banks by the central bank on Sunday says mortgage loans for foreign individuals should not exceed 50 percent of the property value for a first purchase of a home, and 40 percent for second and subsequent homes.
The caps for UAE citizens were set at 70 percent for a first home and 60 percent for subsequent ones.
Foreigners, most of them working in the country, account for about 80 percent of the UAE’s population of roughly 8 million, and are major buyers in designated areas where they are permitted to own property.
Gaurav Shivpuri, head of capital markets at consultancy Jones Lang LaSalle MENA, said about 30 to 40 percent of home and commercial property sales in the UAE were through mortgages. Bankers estimate about 60 to 70 percent of mortgage customers in the country are expatriates.
So the central bank’s new regulations, which resemble those imposed in some other countries including Singapore, could have a major impact on the real estate sector.
“If and when such measures are implemented, they could well take some of the fizz out of the residential market from a sales perspective,” Chavan Bhogaita, head of the markets strategy unit at National Bank of Abu Dhabi.
“However, looking at this with a longer-term or strategic view, one could argue that such a move would help to remove speculators from the market – which would certainly be a positive aspect.”
The question being asked by many UAE bankers and real estate developers this week is whether the central bank may have acted too soon, in which case it risks stifling a property market recovery that has only become apparent in the last few months.
UAE property prices plunged over 50 percent between 2008 and 2011, triggering a corporate debt crisis in Dubai that forced the restructuring of billions of dollars of loans. In 2012, residential prices in parts of Dubai began to pick up and developers are again laying plans for high-end projects.
Mohammed Ali Yasin, managing director at NBAD Securities, said he did not think the new rules would end the recovery of the property market, but they might slow it.
“Banks, which are currently lending up to 85 percent of the property value, will face challenges to deal with this new mortgage cap,” he said. He added that about 40 percent of bank lending in the UAE was to real estate firms.
Another worrying aspect of the circular was its abruptness; several commercial bankers said they were caught off guard by the move, and called day-long meetings on the last day of the year to assess the impact on their business.
Many said they needed to find out details that were not given in the brief circular. For example, no time frame for implementation of the rules was specified, and it was not clear if the rules would affect existing mortgages.
“This only came yesterday so it’s still early to analyse the implications. We’re still examining the impact of it,” said Suvo Sarkar, general manager for retail banking at Emirates NBD , Dubai’s biggest bank.
“We will be contacting the central bank very soon to clarify a few things like time frame for implementation.”
Central bank officials could not be reached to comment on Sunday or Monday. But the suddenness of the circular raised questions over whether the central bank was coordinating closely with other parts of the government.
Abu Dhabi’s state tourism development company, TDIC, signed a deal with Abu Dhabi Islamic Bank earlier in December to start offering investors 100 percent mortgages of up to 30 million dirhams ($8.2 million) for purchases of luxury homes on the emirate’s Saadiyat Island, local media reports said.
It is not clear whether the new mortgage rules will be strictly imposed; the central bank has previously tried to regulate the lending of commercial banks, only to back off after the banks protested.
The central bank announced in April that from Sept. 30, banks would have to limit their exposure to state-linked entities. Some big banks were above the limits when the deadline passed, and in December, the central bank announced it was suspending the rules while it consulted banks.
Expectations that the new mortgage rules could meet the same fate may have limited falls in the share prices of UAE property developers and banks on Monday. Emaar dropped only 1.6 percent.
In a statement the company, which is partly state-owned, said it welcomed the new rules.
“The decision by the central bank regarding mortgage limits will contribute to strengthening the property sector by encouraging serious buyers to invest in the country’s property sector,” it said.
“Emaar has recorded a strong response to its property launches this year, and we expect the trend to continue in 2013 by drawing on the positive growth of the economy and growing demand for homes in premium lifestyle communities.”