Developers hit by bank funding cap
The UAE Central Bank says all banks operating in the domestic market may lend only 20 per cent of their domestic deposits for land purchase and development.
This law was enforced in the UAE in the early 80's, at a time when there was a global dip in the real estate market. The government obviously wanted to control an over-exposure to the real estate sector then.
"The law is probably outdated but it has not been repealed so far," TK Raman, Chief Operating Officer of Abu Dhabi-based Finance House, told Emirates Business. "Most lenders in the market are getting closer to that level and are becoming more selective as a result."
Developers have started to feel the pinch. Kwon Hong Sa, Chairman of South Korean developer Bando Corporation, said: "We have found many institutions interested in providing construction finance but it is financing for land that we have realised is rather difficult to get in the market." Bando is looking for $1billion (Dh3.67bn) of external funding for land purchases to start construction of its projects in Dubai.
"We have so far approached eight financial institutions, two local and six international, with regard to this," added Hong Sa.
"Korean banks are unfamiliar with Dubai land transactions and procedures so we think it could be quicker if we had funding from a local bank or institution. Banking systems in Korea are different from those in Dubai and generally the obstacle we face is the need to produce information on the market here in a format that is acceptable to institutions in Korea," he said. Bando has a turnover of $150m in Dubai and $500m in Korea and has self-financed its $400m maiden Dubai venture – U-Bora Towers.
Raman said: "It's not that lenders don't recognise the credibility of international developers and acknowledge their achievements abroad. It's just that when you are a relatively new player in the market you are probably not a high priority for lenders."
Hadara Development and Investment, which plans to enter the Dubai realty sector, are looking to strategically align with partners for borrowing purposes.
Chief Executive Tariq Ramadan said: "What we believe is that borrowing is hard to come by for both local and international developers. It is better for developers to be self-reliant to a certain extent."
Buniah Chief Executive Mohammed Al Safeen said: "In Dubai today there is no such thing as easy funding for real estate projects. There are quite a few practical options available – for example if a developer pays for land in full it can be mortgaged.
"Also joint or co-ventures and strategic alliances are options that developers in the market continue to use as financing tools for their projects. And pre-sales is a revenue stream that developers continue to depend on for raising capital."
However big-time developers say for them to obtain finance is not difficult but alternatives such as joint ventures are more sustainable options for securing funds.
A Damac Properties official said: "We have our own funds so we are not looking for financiers. We do sometimes opt for joint venture, not because of financial constraints but because of the nature of land acquisition in international market.
"In Malaysia and India, for example, it is difficult for even big developers with a considerable fund base to develop solo. But in Dubai we might consider a joint venture; again not because of financial constraints but because of the nature of the business or the partner."
A Nakheel spokesperson said: "Our international development strategies include joint ventures such as our investment with leading Australian developer Mirvac and with leading companies in targeted markets and development projects in which we can add value through our innovation and expertise.
"To help us deliver our projects in the coming years, we are putting into place prudent agreements with regard to the cost of construction. We've approached contractors on the basis that they're our partners, which is why we've attracted top-flight companies for this.
"We've spent a lot of time formalising locked-in agreements for building materials such as steel. If you lock in with contractors early enough, the price escalation risk can be removed, which is so important. Joint venture opportunities in Dubai will always be a consideration, but there's nothing I can disclose at this stage."
Al Safeen said: "The bigger developers are more fortunate as they are able to source funds in the market. It is the mid-size developers who are not able to leverage much due to their business structure who find it really hard. Our own benchmark is a little different. We don't typically like to arrange project finance for something which exceeds 24 months. We think that for a new developer starting a project, the financing may spill over to three to four years until he really starts selling properties."
Interest rates for land loans vary from 7.5 per cent to 10 per cent and there are additional charges.
"Specifically on financing for land in Dubai, generally nobody gives a 100 per cent loan. A minimum 30 per cent down payment is required and the balance can be financed. The idea is that the developer or investor has to represent a risk-free proposition to the lending institution. I am optimistic about the fact that as the market matures you will see more of an international situation where more international lenders enter the market," Safeen said.
Sundar Parthasarthy, Senior Vice-President of Abu Dhabi Commercial Bank, said lenders had started to check out developers more thoroughly before providing funds. "We look at the background of the developer. We look at their cash flows and whether they are sustainable and examine their management background. The developer today has to be that much more financially secure to enter the market here. A company may be big in its home country or other markets but nobody may know that in this market," he said.