Home loans play small role in Dubai realty

Mortgage financing is still playing a very marginal role in the real estate transactions in Dubai with bulk of the deals being done through equity, according to the industry analysts.

Between 2006 and 2008, while a mere 25-30 per cent of real estate transactions in Dubai were concluded with the backing of mortgage financing, the remaining deals, 70 per cent to 75 per cent transactions, were agreed upon on pure equity.

Danial Schon, Vice-President, Schon Properties told Emirates Business that this ratio is abnormal as in the Western countries such as the United States and Canada, 80 per cent of the real estate transactions have mortgage backing while 20 per cent are done on full equity.

He said the fact that buyers in the Dubai real estate market have put in too much of their own equity shows the underlying faith of the buyers in this property market and is proof of the confidence levels.

"Moving forward, this ratio needs to tilt towards longer mortgage periods, lower interest rates, and the mortgage-to-equity ratio must go in the direction of the United States or any other developed countries for that matter," he noted.

The growth in mortgage finance in the country is impeded by so many factors.

According to Jean-Luc Desbois, Managing Director of Home Matters, independent mortgage consultants based in Dubai, the existing mortgage scene in the emirate is suffering due to lack of standardisation.

"Individual credit policies being followed by individual institutions require uniformity to encourage eligible buyers. Rental yields were a welcome component for an overall income source until recently, but many institutions now do not consider it when evaluating an individual's potential.

He said greater clarity is required on lending policies for the self-employed, who in many cases are more secure than salaried personnel.

"The mortgage industry has experienced significant exposure as a result of financing high-end properties, which were in oversupply and hence faced major price corrections. The resulting negative equity is the reason for increased LTV ratios and their relatively conservative stance," Desbois added.

Schon argued that a greater contribution is needed from the mortgage industry to fuel the real estate industry's recovery.

"Finance entities need to employ revised KYC [know your customer] guidelines on a case-to-case basis to avoid blanket elimination of deserving individuals or lending to non-eligible candidates," he said.

The real estate market in Dubai bottomed out in April 2009 and has been appreciating aggressively since then, the confidence in the industry is back, and end-users are priced back into the market.

In order to cash in on the favourable economic circumstances, industry leaders want the mortgage industry to actively support the Dubai real estate market recovery and assist these genuine end-users to purchase their homes and offices.

The potential solution lies in the availability of a long-term funding facility and the establishment of a regional securitisation pool, according to Schon. Unfortunately some banks are said to be calling for additional collateral from the borrowers of home loans in order to cover themselves against the fall in prices of properties they have financed.

From the bank's perspective they are trying to ensure that they remain fully covered by the value of the underlying security. "But unless the original mortgage loan agreement specifies that the bank can require additional security in certain circumstances I do not believe it is right for them to do this. It would also be highly unusual for this to be allowed for a normal residential mortgage in other countries," said Chris Dommett, chief executive officer, John Charcol Middle East, while talking to Emirates Business.

He argued that if the customer is not in arrears in his repayments, there should be no question of additional security being required. "The bank assesses the risks at the time the loan is approved and thereafter builds in a margin both in the loan-to-value ratio and the pricing to compensate for these risks. Rather than demanding additional security, the banks should be working with their customers to ensure that mortgages remain affordable," he further said.

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