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Property prices in Dubai are continuously increasing and the market is in its boom period. The steep rise in property values worries people in the real estate business including investors and buyers, who are concerned that the rapid increase is a possible indicator of the market heading towards another property bubble.
However, the Dubai property market has strengthened its fundamentals in recent years. The government is proactive in introducing stronger regulatory measures in its endeavour to stabilize the market and develop a sustainable and mature real estate sector.
The Central Bank of the UAE's new lending cap and the Land Department's doubling of transfer fees are two such measures to stall the overheating of the property market. Property Weekly examines the norms to find out the overall effect of these measures.
As per the Central Bank's regulation, the mortgage limit for expatriates, calculated on a loan-to-value basis, is 75 per cent on first house purchases of less than Dh5 million. The limit is reduced to 65 per cent for properties costing more than this amount. Subsequent properties will be financed at a rate of 60 per cent regardless of value.
For Emiratis, the lending limit is capped at 80 per cent for the first property priced up to Dh5 million, and 70 per cent for properties that cost more than this amount. Subsequent property purchases will be financed at a maximum rate of 65 per cent regardless of value.
Furthermore, the Land Department doubled property transfer fees from 2 per cent to 4 per cent about six months ago to deter flipping and speculation in the market. These are known to have been some of the causes of the 2008 real estate crisis.
Jean-Luc Desbois, Managing Director, Home Matters, says measures and intervention from regulators were required in order to slow down the recovery of the real estate market in the UAE because property prices were approximately 80 per cent higher than before in many areas in Dubai. There was an increase of about 30 per cent in 2013.
With reduced lending limits and hiked transfer fees, Desbois says ''the market and house prices are already softening. Transaction levels have also slowed down and sellers now have to reduce asking prices. We forecast prices softening by up to 10 per cent in the second quarter.''
Khawar Khan, Research Manager at Knight Frank, a property agency and consultancy, says the Central Bank's rationale behind changing the mortgage lending rules was to ease residential price growth to sustainable levels and prevent the formation of another real estate bubble.
''On its own, it is difficult to assess the impact of the stricter mortgage lending criteria because it was implemented shortly after the transfer fee increase.
''Nevertheless, prime residential price growth in Dubai did decelerate to around 15 per cent from October to December last year — notably slower compared to the preceding quarters, when the growth rate averaged 21 per cent.
''This suggests that the cooling measures are beginning to take effect, although we believe the transfer fee increase has played a more important role in the matter,'' he says.
Due to rapid rise in rents in Dubai, many people are considering buying their own properties. Khan says this is mainly because people view renting as dead money, whereas investing in property means the buyer is able to accrue value on an asset over a period of time.
However, potential buyers have been hit by the higher transfer fees and deposits, which, combined with skyrocketing residential prices, have made it impossible for genuine end users to realise their dreams of owning homes.
Mortgage regulation is a step towards building an orderly market. Shehzad Hameed, General Manager, Retail Banking Products for Middle East, North Africa and Pakistan, Standard Chartered Bank, says the aim is to ensure that banks and financial institutions providing mortgage loans do so in accordance with best practices and have control frameworks in place.
''The regulation introduces a measure of control over the UAE's mortgage and real estate market, which helps in preventing speculative activity through leveraging and also reduces overall loan losses and market volatility,'' he says.
Russell Owen, Property Consultant, ERE Homes, says this is a proactive move by the government considering the history of the US, the UK and Europe on the whole reveals that financial crises have occurred due to people borrowing excessively from banks with little regulation to keep it in check. ''With this regulation in place, Dubai is one of the first cities in the world to introduce monitored lending, ensuring the borrower has the capacity to cover the bill, which is a good step towards establishing a more mature and safer market.''
A mortgage market without any cap or lending restrictions makes it easy for property buyers and flippers to take more mortgages to purchase several units with bank money. Sunil Saraf, Managing Director, Tanjay Real Estate, says, ''When people overexpose themselves to mortgages and take three to four loans for property purchases to benefit in the short term from a rising market, it creates artificial demand, which, in turn, leads to price rise.''
With a lending limit in place now, Saraf believes people's borrowing capacity will be restricted to one or two mortgages, since a large equity or down payment is required in order to take a property loan. This, in turn, will help reduce speculative transactions, which brings some stability to the market and protects the middle class indirectly from debt traps.
Saraf adds that it is very important to monitor and manage mortgages to control borrowing by people, especially in a country that is mostly occupied by expats, since extending mortgages for the purchase of three or four properties at higher loan-to value ratios can be dangerous.
Real estate moves in a 360-degree cycle, which starts with strong fundamentals, leading to a boom and peaking before correcting itself and settling into stability.
''What has been observed is that Dubai's real estate has a shorter cycle than other mature markets such as India or Europe, where it takes 10-12 years, or even more, to complete,'' says Saraf. ''The emirate's previous cycle saw a crash in late 2008. Recovery began by 2011 and 2012-13 saw price appreciation, which continues with the market booming. However, it is yet to reach its peak.''
He adds that because of the Expo bid win, the current cycle may sustain a longer boom period.
However, Saraf's advice to property buyers is that they should exercise caution in property investments and exposing themselves to mortgage during a shorter property cycle. If a buyer takes on a mortgage on a property of high value during a peak period, and the market enters its correction phase, the value of the asset may go down. This means the borrower would owe more money to the bank than the value of the property itself.
For instance, in a scenario where the borrower could take a loan at a high loan-to-value ratio — 90 per cent of the total amount for a property tagged at Dh1 million—it would present great risk to both the lender and borrower if market goes into price correction. The value of the property may drop to Dh700,000. In this situation, the borrower must dig into his savings or assets to settle the loan, which is a liability.
Moreover, if he is already overexposed with multiple loans of a similar nature it would mean arranging for multiple times that amount to settle all the mortgages.
This exerts extraordinary financial pressure on the borrower, which would ultimately affect his personal life.
Saraf strongly believes that this situation must be avoided. Instituting a new lending limit, with 25-35 per cent mandatory down payment, is a step in the right direction as it offers a cushion of at least 25 per cent from market correction to the buyer, which protects him from ending up in negative equity. Thus, according to Saraf, the new lending restriction is a positive move to curb speculation to a certain degree and discourage people from overexposing themselves to bank borrowing, which is ultimately good for the market as a whole.
Saraf also says that involving Rera and introducing, and implementing, strict guidelines for developers and developments have further helped in curbing market speculation by developers, which is a large-scale occurrence.
''Brokers may temporarily view the regulation as a reason for reduced numbers of property transactions but they will benefit from more transactions in the long run because the market will sustain itself for a longer period. It is good to have a stable market, which goes steady for many years and gradually grows in the mid to long term, instead of having a speculative market that shoots up like a rocket and then crashes,'' says Saraf.
Mortgage or cash?
In recent years, the market has seen a rise in mortgage buyers. Owen says, ''Two or three years ago, the market was cash buyer oriented because mortgages came to around 8-9 per cent, so people did not make purchases with bank finance. Now, people can get a loan at 3.9-4.5 per cent.
''There is a change in the market as more people are getting mortgages for buying property. They view buying more beneficial to paying rent since the yield is higher than the mortgage interest and they can make 6-7 per cent profit, and gain on capital appreciation as well.''
The mortgage rule has also affected people's buying habits to some extent, says Owen, especially when they are looking for a second property, which is not a necessity or for immediate use. ''People now opt to wait before looking for a second property until they have saved the minimum equity required to acquire bank finance. They may also consider buying property of lower value, reducing the spending amount by at least 10 per cent.''
The new lending rule is not putting people off purchasing property, says Owen, but is encouraging wise purchasing or buying property of slightly lesser value. In his view, this rule will not have a major impact on the market.
''The people who buy five or six small units generally have the money and don't take bank finance. The rule will, however, affect the end user who will take bank finance to purchase property.''
Desbois also believes that the mortgage cap will affect end users more, making property purchase difficult for those who buy to live. ''With most four-bedroom properties averaging a purchase price of Dh5 million, a family looking to settle in a home needs to arrange 42 per cent of the purchase price (35 per cent down payment and fees). On a purchase of Dh5.5 million, this equates to a cash contribution of about Dh2.3 million from the buyer, which is a massive amount for most people. We recommend that the cap be increased to a loan to- value ratio of 75 per cent for properties tagged up to Dh10 million instead.''
Transfer fee woes
Several grievances were expressed over the raised expenses on property transactions, but buyers and the market seem to have accepted it. Saraf says the regulation has definitely put the brakes on property flipping.
''Frequent flipping is bad for the market especially since property is not akin to paper stocks sold frequently to reap profits. In a mature market, real estate moves steadily in a logical direction and the increase in transfer fees is a step in that direction as it deters people from buying today and selling tomorrow.''
This has also been instrumental in bringing down speculation, helping to build a stable market with communities for people to live in and commercial complexes for businesses.
Owen points out that the increase in transfer fees did slow down the market in the initial stages, but people who had the money and needed to move still did. ''Moreover, a 4 per cent transfer fee is relatively low compared to other countries. For example, in the UK, you pay upwards of 5 per cent, and in the US and most of Europe, you pay up to 7-8 per cent,'' he says.
The change is a favourable step, says Owen, but nothing had come to a standstill because the changed transfer fee is still a pretty good rate and Dubai continues to be an attractive place to purchase property and live in.
However, there are rumours in the market that the transfer fee will be increased further to up to 6 per cent and if a property is sold within a year, transfer fees up to 8 per cent will be charged. The authorities are determined, says Owen, to put a stop to short-term property flipping and stabilising the market.
Off-plan properties are growing more popular among property buyers who are looking to grab a good deal at affordable prices because lower loan-to-value mortgages on ready properties have made buying a home an expensive proposition for many people.
Desbois says the new rule is driving people to look at off-plan properties or those under construction, which is much more risky. There are very few mortgages for off-plan projects and customers are buying units on payment plans.
''There is risk of delay in property handovers, and changes in personal situations may impact the purchaser's ability to meet repayment obligations or finance final payments. Consumers buying off-plan properties also have to prove that they have the income to keep up with the payment plan,'' says Desbois.
On a final note
Various steps taken by regulators have led to the Dubai real estate market to mature faster than most people would believe. Desbois Corbis recommends that end users should be assisted and encouraged to buy affordable property because significant increase in rents and cost of living is inevitable.
Saraf suggests regulators should also think about how the lower middle class can afford housing units in the country. This part of the population pays rents the entire time it inhabits this country and is thus unable to save any money. Owning a home would also signify great commitment to the UAE and the money invested in property here would help the economy as well.
In order to achieve this, developers should be given greater incentives to develop housing for the lower middle class, which could be offered to buyers at better ownership terms — such as on a sevenor eight-year payment plan along with some financing. These steps will make buying property in Dubai an achievable dream, Saraf adds.
Source: Hina Navin, Special to Property Weekly