Buying A Property: Financing expected to accelerate

Buying a propertyImage Credit: Supplied

Banks and financial institutions are again starting to pour money in the UAE and Dubai property market and in following the strong growth in the housing market in recent years. The property mortgage sector, in particular, has evolved to cater to new demands in the market.

Caetano Fernandes, Head of Mashreq Gold at Mashreq, says banks and home loan providers are now re-entering the mortgage market for those who are buying a property.

"In 2010, there were only a handful of lenders providing mortgage financing and with stringent financing terms,” says Fernandes. “But over the past 24 months, more and more financial institutions have lined up to tap into the opportunities in this sector.

"Mortgage lenders and banks view mortgage loans as a low-risk, secured asset with a stickiness factor due to the nature and life cycle of the product.” More than 30 banks are providing mortgage products today and there are small, independent mortgage companies that are popping up, giving consumers more options.

“With more banks lending, the key to success is the competitiveness of their products and how well they can service customers,” says Jean-Luc Desbois, Managing Director of Home Matters. “This is good news for the consumer.”

Increased exposure
Experts note that banks have increased their exposure to the mortgage sector, which was previously seen as a restricted market.

"As recovery has progressed, so has the willingness of banks to lend to the property sector again,” says Mohammed Jamil Berro, Group CEO of Al Hilal Bank. “But, although banks have increased their exposure to the sector, the process has been a cautious one.

"The introduction of regulations by the Central Bank has ensured that aggressive lending to the segment remains in check.”

Various measures have been introduced and gradually implemented to weed out speculators and bring in stability to the sector.

“These measures started with the increase of the property registration fee from 2 per cent to 4 per cent. The rental law was amended to bring in a nice balance between tenants and landlords,” says Fernandes. “Mortgage regulations implemented by the Central Bank clearly redefine the maximum amount of loans that can be granted.

“Clear guidelines were laid down on the maximum debt service ratio and the maximum loan-to-value [LTV] for the first and subsequent property purchases for both nationals and expats.”

He continues: “These regulations have started to yield results as we have recently observed stability in property prices. The market has reached a stage where the sizeable gap between the seller’s asking price and the price buyers are willing to pay is narrowing.

“Mortgage books of lenders have shown positive growth on all parameters, with no compromise on the book quality, which can be attributed to prudent lending practices followed while extending credit facilities.”

Raman Muralidharan, Regional Head of Customer Value Management — Middle East and North Africa at HSBC, says a prudent approach by banks coupled with stricter government-led regulation will ultimately create a stronger economic infrastructure in the country.

However, obstacles remain. “Mortgage acquisitions continue to be a challenge for banks for a few reasons,” says Muralidharan. “The majority of property purchases are mainly cash driven, with mortgage making up approximately 20 per cent of all property purchases. Customers who need financing now need to place a larger unfinanced down payment.

“Moreover, they also need to pay high transaction fees, broker fees and insurance fees, which can  together add a further 7-9 per cent to the total upfront payment, which cannot be financed as part of the mortgage. Hence, with the growth of the property market, the market for lending has become increasingly challenging, leading banks to adapt their strategies in response to new regulations and customer demands.”

The buyers
The property market is driven by two types of purchases: primary transactions where a property is purchased directly by the developer and secondary market transactions where a consumer buys a property from another consumer.

“Secondary market transactions have dropped significantly for two reasons,” says Muralidharan. “First, the rental yield is no longer strong enough for investors. Secondly, the amount of unfinanced payments [down payment and other upfront fees and charges] have increased as a result of Central Bank and government regulations.

"This means we are seeing fewer speculators in the market. With 75 per cent LTV as a minimum, it will be difficult to see enough end users who have the necessary capital to buying a property.”

Meanwhile, Berro says the higher down payment has enabled banks to target less risky customers.

“Banks are expected to continue eyeing this segment and increase due diligence,” says Berro. “As the property market stabilises, it is expected that regulations regarding high down payment will be relaxed. This will encourage banks to increase further their lending to this segment.”

The future direction of prices will hinge on the level and pace of new supply coming to the Dubai property market. This is more significant in Dubai and less so in Abu Dhabi, as per Standard and Poor’s (S&P) recent Ratings Services report.

“Excluding unforeseen shocks, S&P believes a big drop in prices is unlikely in the short term,” says Mohamed Damak, Credit Analyst at S&P. “That’s good news for banks, which have large loan exposures to real estate.”

Source: Hina Navin, Property Weekly


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