Let us start with the international banks lending in the UAE mortgage market. Why is a customer in the United Kingdom paying 6.75 per cent for a home loan – which means the bank is earning a margin of 1.25 per cent above the base rate – while a mortgage in the UAE
will cost 8.25 per cent, a thumping 4.75 per cent margin above the local discount rate?
That means an international bank has a profit margin on mortgages in the UAE that is three times higher than in the UK. To be fair, these global giants are not alone.
All 23 UAE home loan lenders charge similar interest or profit rates for mortgages on residential property. But the smaller lenders can at least argue they have a higher cost base and the global giants are just profiteering in an emerging market.
Some 90 per cent of home loans in the UAE are adjustable rate mortgages, where the interest rate is adjusted according to indices such as the London Interbank Offered Rate (Libor) or the Emirates Interbank Offer Rate (Eibor). Currently, interest or profit rates in the UAE stand at Libor or Eibor plus 400 to 500 basis points.
The UAE mortgage or profit rates have not been adjusted since the US Federal Reserve started cutting its base rate last year. Only last week there was a cumulative 1.25 per cent cut by the Fed, and the UAE Central Bank followed suit immediately. Did the local home loan companies jump to cut their rates?
Far from it and with good reason: banks like to be slow in reducing rates and quick in raising them to squeeze extra profits out of borrowers. Smaller home loan companies can argue they have to raise funds through mortgage-backed securities and not the inter-bank market, and yes this is more expensive.
But surely this is all a question of degree: what is sound business profit and what is a rip-off? Surely it is in the mortgage companies’ long-term interest to keep home loan rates as affordable as possible to grow their market?
Investment bank EFG-Hermes has published a study of the nascent UAE home mortgage market, which points to a 10-fold growth from $4.4billion (Dh16bn) today to $44bn by 2012. The implications for the development of the real estate markets in the UAE are enormous both in terms of expanding the market to the widest ownership as well as for selling prices.
The study concludes the existing local mortgage market leaders,
Amlak Finance and Tamweel, are both likely to lose mortgage market share to other local and international banks, although both companies clearly have huge scope to expand their business in the five-year period.
You have to wonder why, with 23 lenders in the UAE home market, one bank or mortgage company has not yet chosen to take the lead and slash home loan lending rates, or profit rates as they are known by Islamic lenders. At the moment, Amlak and Tamweel are competing to provide the fastest approval of loans – one hour or 48 hours, respectively. Why not compete on the actual mortgage or profit rate?
In the UK, banks such as HSBC proudly battled the competition by offering keen mortgage rates that are currently only 1.25 per cent above the base rate. A couple of years ago it might have been reasonable to argue the mortgage market in the UAE was small and so institutions needed to charge more to cover their costs.
But mortgage lending is a very profitable business today. Amlak has posted profits of Dh301 million for 2007, an increase of 131 per cent over 2006, according to preliminary financial results. Tamweel has posted a net profit for 2007 of Dh451m, an increase of 195 per cent compared to 2006, a figure that excludes the Dh699m of income from IPO proceeds. This is the third consecutive year that Tamweel’s net profit has increased three-fold.
The implication that UAE mortgage companies are making excessive profits at the expense of mortgage borrowers is clear enough. Perhaps in a still small but growing market such as the UAE, a 200-basis-point margin would be justified. But 400 basis points is quite outrageous.
It is also not good for the development of the local real estate sector, because the cost of finance is being kept artificially high and distorting the development of the market. Fewer people are able to afford homes as a consequence and landlords can, therefore, charge higher rents from people who have no choice but to rent.
Perhaps free market competition, or intervention from the UAE Central Bank will sort out this hiccup in the development of the local property market. But at the moment home loans in the UAE are a big rip-off.
Why are home loan rates in the UAE such a rip-off?