Debunking the lure of risky loans

MortgagePost the global financial downturn, mortgage rates have decreased in the recovery phase l Shutterstock

Dubai’s property market is no longer a site of frenzied shopping activity by cash-rich investors. Regulations set by the UAE Central Bank and policies of financial institutions are gaining more weight in the market as mortgages outnumber sales. Consumer-creditworthiness reports from the newly active Al Etihad Credit Bureau have brought thoughtful lending in the market, which has already been hit by caps on mortgage and resettlement fees. While each quarter brings its own trends in this maturing market, long-drawn payment plans and mortgages for off-plan property will continue to be the norm in the foreseeable future.

According to a report by the Dubai Land Department’s (DLD) Real Estate Research and Studies Department, the emirate saw 23,000 real estate transactions worth Dh129 billion during the first half of the year. Cash sales accounted for about Dh53 billion, while mortgages accounted for more than Dh65 billion.

Interest rates, which saw a steep decline last year, are partly responsible for this. “The report confirms beyond any doubt that the real estate sector in Dubai is heading towards sustainable growth,” Sultan Butti Bin Mejren, Director General of DLD, said in a statement. “This can be ascertained from the continual increases from one quarter to the next, which have been a feature of the market over the last two years.

“In light of the report’s findings, investors and developers can have realistic expectations and formulate effective strategies in the short and medium term to meet the needs of the sector.”

While the total value of transactions this year is about 15 per cent higher than last year, the number of transactions has gone down. “According to our analysis of the DLD transaction data, the number of transactions in H1 2015 has declined by almost 30 per cent as compared to H1 2014,” says Erik Volkers, Senior Consultant, Research and Consultancy, CBRE Middle East.

Credit bureau

The Al Etihad Credit Bureau will slowly start making its presence felt in the market. Since June, all banking majors in the UAE have reportedly started using credit reports issued by the bureau.

“The introduction of Al Etihad Credit Bureau enables banks to ascertain the credit worthiness of clients before extending any facilities,” says Shehzad Hameed, Head of Retail Products, Middle East and North Africa and Pakisatan (Menap) and Europe, at Standard Chartered Bank. “A number of banks in the UAE have already started using the bureau reports and consider it an integral element of the lending decision.”

It is fair to say that consumers will need to monitor their credit behaviour to be seen as low risk. Not only will the report impact lending decisions but banks say that it could even impact lending rates for each consumer — those who are considered low risk will inevitably get a better deal.

“Credit bureau reports provide mortgage lenders with data on consumers’ debt exposure and repayment history,” says Hameed. “Such information, which was not available earlier, has a direct impact on the lending decision. Accordingly clients soliciting mortgage finance or any type of borrowing might find it more difficult to obtain credit facilities in the event of a bad credit history.”

While some banks say the impact is already being felt in the personal loans space starting in the second quarter, it is still early to determine its effect on mortgages. “As only certain banks have started using the bureau reports, it’s [too] early to attribute any impact on the mortgage market,” says Hameed.

The credit bureau, however, will have a long-term impact on ensuring market sustainability. “The credit check system is effectively helping financial institutions to derisk their loan books, and by doing so avoiding a recurrence of the bad debt situation that arose during the last real estate cycle,” says Volkers. “While the new checks have perhaps slowed the speed of mortgage applications, they are a necessary part of the process, allowing banks to carry out a comprehensive review of applicants’ financial position and their ability to meet future payments.

“Credit checks are a standard part of finance applications in other developed markets globally, and it is positive to see that the UAE has chosen to follow suit, reflecting the maturing nature of its real estate market.”

Loans overtake cash

In the recovery phase since the global financial downturn, which affected Dubai’s property market, mortgage rates have decreased significantly. Starting at about 8 per cent in the beginning of last year, by year end it was averaging at 4.6 per cent. The lowest interest rates for expats and nationals are 2.9 per cent for a two-year fixed reducing rate and as low as 1.68 per cent for flat rates. A variety of interest rate structures that take various requirements into account have made it easier to service loans.

The impact is visible on the growing percentage of mortgage buy- ers. “From the total value of the H1 2015 transactions, 52 per cent was mortgage and 48 per cent cash,” says Volkers. “In H1 2014, around 43 per cent of the transaction value was mortgage and 57 per cent was cash.”

A couple of years ago, the property market was largely cash-dominated with about 80 per cent of all transactions carried out in cash. Property loans showed a decline in banks’ portfolios in 2013, even as the number of mortgage lenders doubled in two years. But things are changing now.

“The property market has witnessed a shift in the mix between cash and financed buyers,” says Hameed. “Earlier, the market was dominated by cash buyers, which constituted about 70 per cent of the real estate market. We see a more balanced market in terms of this mix due to the rise of mortgage buyers, which form about 50 per cent of the market.”

He attributes it to “the changes in the global economic environment that translate into a shift from an investor and cash buyer’s market to end-user mortgage buyers”.

Mortgage caps

Sceptics say mortgage caps, combined with low interest rates, are taking away the possibility of home ownership from lower-income Dubai residents, more than 80 per cent of whom are tenants rather than owners. However, there is no doubt that mortgage caps have fulfilled the purpose for which they were launched — to curb speculation.

“There are various factors that play a key role in shaping the mortgage market,” says Hameed. “The mortgage regulations introduced by the Central Bank at the end of 2013 largely contributed towards market stability. They played a key role in developing an orderly mortgage market. The caps introduced act as a measure of control over the real estate market and provide one control framework for lenders. This has brought more stability to the overall real estate market and also helped banks to manage risk on their mortgage portfolio.”

Mortgage caps introduced loan-to-value (LTV) ratios for UAE nationals and expats, buying their first or subsequent homes at different values, starting from 80 per cent for UAE nationals buying property valued at Dh5 million and below and 75 per cent for non-UAE nationals buying their first homes. Borrowers are limited to one mortgage in each LTV category, which shows that the owner-occupier is at the heart of the regulations.

Based on DLD data, there has been a 14 per cent decline in the number of unit sales and a 15 per cent decline in the total value of these trans actions during the second quarter compared to the same period last year. However, the average transaction value is still 2 per cent higher than in 2014.

“The reduced level of speculation is attributed to the prevailing macroeconomic uncertainties, coupled with regulatory measures implemented during 2014 [mortgage caps] that were aimed at curbing speculative activity and making the market more attractive for end users,” says Volkers.

Off-plan payments

When lending started in earnest after the 2008 crash, it also started with justifiable caution. Off-plan projects, which sometimes only existed on paper, were identified as one of the biggest factors for the downturn. With checks in place, off-plan properties are now beginning to emerge with newfound respectability. Payments are an important consideration.

“As the market has started to cool over the past year, payment plans have become an increasingly important driver of the investment decision for off-plan property, sometimes even outweighing price per square foot,” says Volkers. “Flexible, back-weighted payment plans are allowing investors and end users to secure properties with a minimal initial down payment and low instalments, with a large lump sum paid upon or after completion.”

According to the Q2 Property Monitor report by consultancy firm Cavendish Maxwell, “Approximately 24 off-plan launches were recorded in the first half of 2015, 19 of which were released in the second quarter. This resulted in about 7,900 additional units being added to the 1,781 units in the first quarter, all set to be delivered over the next three years.”

The report says that initiatives by developers to encourage single-unit purchasers with flexible payment plans have opened up the off-plan market to a new end user and investor market. This is a significant step and is encouraging first-time buyers.

This will reflect in the lending space as well. “Taking into consideration the abundance of construction projects launched in the past 18 months and given that off-plan properties are covered by the mortgage regulations, we expect a higher consumer demand for financing under-construction properties,” says Hameed.

Mortgage regulations allow 50 per cent LTV in case of off-plan purchases for both UAE nationals and expats, regardless of the number of the properties the borrower owns.

Source: Shalini Seth, Special to Property Weekly


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