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29 March 2024

Banks reluctant to lend on incomplete projects

Some lenders have restricted lending to one property per applicant. (EB FILE)

Published
By Anjana Kumar

About 80 per cent of the financial institutions are reluctant to consider loan applications in developments that are not complete, according to Colliers International.

In a report on the Mena overview for the third quarter, the real estate consultancy said 70 per cent of the banks surveyed set the minimum monthly salary requirement at $5,450 (Dh20,018) for mortgage loans.

The minimum salary in the UAE for residential properties was in the range of $2,725 to $5,450 per month. There were 13 financial institutions in Colliers survey.

About 77 per cent of them are currently providing residential property loans, although there has been a significant tightening of lending terms and conditions.

The loan-to-value ratios (LTVs) have been lowered to 50 to 85 per cent whereas in 2008 the LTV's saw a high of 99 per cent.

Although 60 per cent of the respondents indicated no distinction between loans to purchase an apartment and/or villa, the remaining respondents showed a preference for villas over apartment units. Thirty per cent of the financial institutions said they have restricted refinancing on existing property, mainly due to the declining property prices and reduced equity of the investor.

Lenders, meanwhile, have restricted the approval of loan applications to applicants working in specific industries, notably the property industry, because of the impact these sectors have suffered in the downturn.

Eligibility for loans is now linked to the applicant's length of service in the UAE, requiring a minimum period of six months to two years to qualify for a loan, said Colliers. Besides, 40 per cent of the lenders surveyed have restricted lending to one property per applicant.

The artificial inflation of property prices by speculators prior to the third quarter of 2008 deterred many long-term investors from entering the market. "Results from the survey, however, would seem to indicate a growing demand for property finance from investors with longer term objectives such as home owners or buy-to-lease investors," said the report.

Credit needs

Lenders reported a hardening of credit requirements for both residential and commercial property loans. This follows the sharp decline in property values witnessed by the industry over the past 12 months as well as the industry aversion to undue risk.

They are expecting the credit standards to ease significantly over the next six to 12 months. Project finance is focused mainly on government-linked developers, while funding for new developments are not favourably viewed, funding for on-going projects are still considered and subject to the credit worthiness and reputation of the developer demand.

The overall demand for residential property finance and refinancing has declined. However, end-users and long-term investors are now entering the market, stimulated by reduced property prices. Lenders expect demand for residential properties to revive in the next six to 12 months.

The demand for commercial property finance has also declined over the past three to six months. Downsizing of corporations and delays of previously announced expansion plans has contributed to these declines.

The demand for and availability of project finance has dropped in Dubai, while demand for Abu Dhabi remained unchanged. The demand by first-tier developers for funding of current, on-going projects is expected to increase defaults.

Default rates, on both commercial and residential property lending were reported to have increased, however mortgage providers are constantly negotiating with existing customers to ease payment terms and are taking proactive measures including so-called "installment holidays", to keep defaults at minimum. Most of the banks also experienced rise in loan defaults during the past six months.

The commercial property market has been more severely affected by the economic downturn than the residential segment.

Unlike the residential property market, the value of commercial property is a factor of the net income the property yields to the investor. Yields are, however, affected by occupancy levels and rental rates which in turn mirrors the global business environment and economic performance and which will also affect the demand for commercial property.

About 55 per cent of the banks said they are at present against lending on commercial properties. The average LTVs range from 65 per cent to 85 per cent with interest rates between 4.5 per cent and nine per cent per annum. Despite the current limited liquidity in the market, 57 per cent of the respondents said lending criteria and loan restrictions were likely to ease during the next six to 12 months.

Developers are finding it increasingly difficult to raise funding for projects due to turbulent credit markets and the lack of appetite for development in the market. Prior to the downturn, developers were able to fund projects by using loan finance as well as the proceeds from the off-plan sale of units. The Escrow laws that came into effect in the recent past has eliminated the free access developers previously had to investors' funds. The appetite for lending in the sector among international banks has always been low, leaving the dominant role to be played by local banks.

According to the survey, there were limited financing options available for developers. Only 42 per cent of the lenders surveyed considered lending for development projects, but are now more cautious in lending and require detailed studies on the performance as part of the approval process.

A clear preference is indicated for government-linked major developers over private developers. Although financing for new developments are not favourably viewed by lenders, financing for current, on-going projects are still considered based on the credibility of the developer.

Project finance

The survey showed only little demand for project finance during the past six months. It was the general opinion among the participating lenders that the demand for project financing witnessed a significant decrease in Dubai, while demand for projects in Abu Dhabi remained unchanged.

Following project delays, cancellations and redundancies among developers, lenders collectively agreed that credit for project finance will remain strained in the short term.

About 86 per cent of the lending institutions surveyed had an optimistic outlook for project finance, indicating a minimum of 12 months to witness a positive change. The rest of the lenders did not see a decrease in project finance, but rather an unchanged situation remaining throughout 2010.

On the office market, the average occupancy rate for the office sector including Dubai International Financial Centre (DIFC) was about 36 per cent. In a series of surveys conducted by Colliers, the result showed the highest occupancy rate was on the Sheikh Zayed Road, which currently registers at 84 per cent, a decrease from previous survey at 98 per cent. "The fact that we are witnessing a decrease in the occupancy rate, by 14 per cent, within the same buildings indicates both downsizing and possible relocation as we have seen corresponding increases in occupancy rates in all other areas surveyed except for Sheikh Zayed Road," said Colliers.

Downtown Dubai has recorded a one per cent rise in occupancy rates between the first quarter of 2009 and the third quarter of 2009, while Jumeirah Lake Towers saw the highest increase in occupancy rates from six per cent during the same period.

The average occupancy rate, including the rate for office units under fit-out, is expected to reach 44 per cent in the coming three to six months. The lowest demand for Dubai office space is currently registered in Tecom C, with an occupancy rate of eight per cent with a further one per cent under fit-out.

Rental rates in Dubai have continued their downward trend amid the financial crisis, starting after the peak in the third quarter of 2008. Landlords are currently witnessing 24 per cent decrease between the first quarter and the third quarter of 2009.

Average rental, covering the surveyed areas, currently stand at $469 per square metre. In DIFC, the average rentals stood at $1,100 per square metre per annum.

The largest fall in rental was registered in Jumeirah Lake Towers, 56 per cent between the first quarter and the third quarter of 2009.


Abu Dhabi leasable area supply Estimates decline

Colliers has scaled back initial supply estimates in Abu Dhabi from 1.65 million square metres net leasable area to 1.05 million sq m during 2009-2011.

The largest stock of forthcoming supply is scheduled to enter the market in 2011, adding more than 521,000 sq m, leading to cumulative supply of 2.45 million sq m in 2011 and an increase by 55 per cent between 2009 and 2011.

Abu Dhabi office market is expected to see an oversupply in the first quarter 2010. It was earlier expected that demand-supply equilibrium will match by end-2010.

Due to announced cancellations and delays, additional planned office stock to enter the market in 2009 constitutes 271,900 sq m leading to a cumulative supply of about 1.68 million sq m.

Rental trend

Unsatisfied demand for office space on one hand, and limited supply entering the market over the past few years on the other manifested in sharp rental increases and maintained an upward trend for 2008.

Despite limited primary grade office space entering the market in 2008 and limited supply forecasted for 2009, the office sector witnessed its first decrease by 20 per cent in first quarter 2009 and have thereafter continued its downward trend showing a decrease by 18 per cent between first quarter and third quarter 2009.

Demand for commercial space has declined as a direct result of the economic downturn, creating a downward pressure on the average asking rental rates and concurrently sales prices.

Residential units rise

Abu Dhabi residential sector will consist of about 188,000 units by year end, an increase by 1.3 per cent over 2008.

Current demand for all types of residential property in Abu Dhabi has outstripped available supply, with occupancy levels of about 97-98 per cent reported across the city. Despite the undersupplied residential sector, the average rental rate in Abu Dhabi has declined. Rental rates are adjusted according to demand and supply and therefore, during current circumstances with an undersupplied market, the rents should rise.

Current average rental rate at $425 per sq m per annum shows a decrease by 18 per cent between first quarter and third quarter 2009.

Similar attributes, amid the downturn, can also be observed for Abu Dhabi residential sales prices. Growth since launch date has been strong with an average price appreciation of 70 per cent. The demand for affordable housing has increased significantly since the financial crisis started affecting the UAE.

The middle-income category has been undersupplied for many years, but developers such as Aldar, Sorouh and Al Qudra are following the same trend and are directing investments towards the construction of affordable housing, which will be offered between $1,466 and $2,932 per sq m.

As of 2008, Abu Dhabi residential sector had a shortage in supply by 50,000 units leading to a cumulative shortage of 120,000 units by 2013.

Due to insufficient supply by 2011, Abu Dhabi residential sector will require an additional supply of 49,000 units over 2012 and 2013.

 

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