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Expat mortgage cap sends shockwaves across UAE banking sector

By Vicky Kapur

The UAE Central Bank’s decision to cap mortgage lending for expatriates at 50 per cent of the property’s value is sending shockwaves across the country’s banking sector.

As you read this, most banks’ retail and mortgage heads are huddled in closed-doors meetings, charting their next moves and trying to estimate the repercussions of this new directive.

A number of banks have already communicated to their mortgage sales teams and agents to immediately stop marketing the 70 or 80 per cent loan-to-value ratios (LTV) that they were offering customers until yesterday, and start with the 50 per cent offers.

Many banks, it seems are ready to even revoke the pre-approvals that property hopefuls have already secured from banks. That will certainly cause a stir among participants and, at the same time, slash the money that banks charge for pre-approvals (since it is usually a percentage of the overall mortgage applied for).

Until yesterday, many bankers were hoping to leverage a once-again-resurgent Dubai property market to push aggressively ahead with their mortgages, growing the loan books again and, at the end of the day, steering the banks back to the same levels of profitability as in the boom years.

The UAE Central Bank, it seems, was worried about exactly that – a similar level of aggressive lending resulted in a peaking of bad loans among UAE banks, something that they are still saddled with.

It is fairly obvious that the Central Bank took the step in a bid to pre-empt another surge in the banks’ non-performing loans (NPLs), which seem to have peaked at about 20 per cent of some banks’ overall loan book.

Ask any banker worth his salt, and he’ll tell you that this figure is way too high for any bank to sustain itself in the long term.

In the absence of an official statement from the UAE’s Central Bank, second-hand news is trickling in from banking sources who claim to have received a circular from the country’s apex bank.

According to banking sources, mortgages for expatriates are being limited to 50 per cent of the property’s value for their first property, and those to UAE nationals at 70 per cent of the property’s value.

And this is for their first unit – for subsequent units, expats can get a mortgage for 40 per cent of a property’s value while UAE nationals will be allowed to borrow 60 per cent of the unit’s value.

This news, spreading as it is on the last day of 2012, took the market by surprise.

The share price of market benchmark Emaar Properties slipped by more than 1 per cent on opening this morning while construction major Arabtec Holding saw its shares slip 0.9 per cent, and shares of Drake & Scull International, another Dubai-based construction firm, were down by half a percentage point within the first 15 minutes of the DFM’s opening.

The immediate impact of the directive – introduced as it is to weed out speculators entirely from the UAE’s property market – will be felt by genuine investors and end-users as well.

Not many expatriates in the country can claim to be in a ready position to put down 50 per cent of a Dh2.5 million property.

At the same time, a number of fence-sitters who might be contemplating entering the Dubai market at some point in the near future will have to re-evaluate their financial standing – they will be expected to cough up more than double the average deposit of 20 per cent required until now. Most UAE banks, after all, were offering an 80 per cent loan-to-value ratio to expats.

Of course, UAE banks are bound to see a slowdown in the mortgage growth after witnessing a resurgence recently. And property developers will have to rethink their go-to-market strategy, perhaps lengthening the payback periods they provide their clients with.

Let’s look in detail at how the move is expected to impact the various key components of the UAE’s property market:

Flippers/Speculators: The cap is squarely aimed at weeding out speculators, and it is expected that it will succeed in doing just that. Anecdotal evidence suggests that, in tricks reminiscent of the pre-crash era, speculators were once again entering the market in a big way. But those that were putting up a 10 per cent deposit for numerous units and hoping to hop on to the next bandwagon after a 10 per cent appreciation in the property value (in effect doubling their capital) are in for a rude shock. The Central Bank has, deliberately, stopped the music this time around – and those left with the flippant parcel or two in their hands will find it tough to get rid of them at prices they were hoping to.

Genuine Investors/End-Users: Unfortunately, genuine property investors as well as those who were hoping to soon buy a home in the UAE will be negatively impacted as well. As mentioned earlier, not many people can dip their hands into their pockets and produce a million dirhams in spare cash. Still, those with the right intention will find a way of buying their homes, even if it means that some of us might have to go for ‘medium’ or even ‘small’ instead of ‘upsized’ homes.

Banks/Mortgage Providers: The move is also partly aimed at banks that were, slowly but surely, getting back to their old, aggressive lending ways. The Central Bank obviously doesn’t want a repeat of what happened in 2008/09, and this will definitely result in a slowdown in their loan book growth. Still, banks are a resilient lot, and many analysts expect them to come up with ingenious ways to at least partially sidestep the new regulations. Foremost among those ways is what the US banks were guilty of in the past – i.e., inflating the value of a $1 million unit in the books to show its valuation at $1.5 million. At 50 per cent LTV, the client therefore gets access to $750,000, or effectively 75 per cent of the property’s value. Only a vigorous fiscal policing by authorities will help avoid this trap.

Real Estate Developers: Most developers will have to rethink their marketing strategies. It won’t be easy to ask clients to cough up half the unit’s price in upfront payment when it is not a ready property in which the end-user can live (and thus start saving rent) or rent it out (and thus start making a return on investment). The most obvious way that developers will have to adapt is by offering easier construction-linked payment plans, deferring the bulk of payments until the unit is ready to be handed over.

Property Market in General: Expect more lower-end units to change hands than the premium priced ones. After all, it will be easier (relatively speaking) for a lot more people to shell out Dh450,000 for a Dh900,000 one-bedroom unit in the Greens than Dh1.25 million for a Dh2.5 million villa in The Springs. The market, at the end of the day, will cool down a tad – which is what the Central Bank will be hoping too. A steady market will mean that many more people will be in a position to buy property here, in effect sustaining the growth and helping avoid bubbles and mistakes of yesteryears.