Accessing credit: Increased mortgage options to facilitate greater investment

The property sector in Ras Al Khaimah is developing and expanding on a number of fronts. While investors remain cautious, many are also feeling increasingly confident, and this renewed confidence is evident in the fact that RAK developers have been handing over residential units as well as retail and office space. Local banks have taken notice and are identifying markets like RAK as ideal ground for offering mortgages.

THE MOVE FORWARD: United Arab Bank’s (UAB) recent mortgage agreement with RAK Properties, a local real estate developer supported by the RAK government, is one example of this shift.

The two companies announced in October 2011 that they had signed a memorandum of understanding which would pave the way for UAB financing on real estate being developed by RAK Properties. UAB has agreed to offer RAK Properties’ clients traditional sharia-compliant loan options and an interest rate of 3.99%, according to Arab Finance, a brokerage firm.

RAK Properties reports that the bank has further agreed to grant loans of up to 85% of the property value for UAE nationals and up to 80% for expatriate buyers. Although expatriates were once not permitted to purchase real estate in RAK, this law has been changed, and non-UAE citizens are eligible to access mortgage financing on any freehold development in the emirate.

RAK Properties has already secured financing agreements with HSBC, the National Bank of Abu Dhabi and Commercial Bank International. Rakeen, another local development company, set up a financing arrangements with India’s Bank of Baroda in 2009 for properties at its Bab Al Bahr development on Al Marjan Island. The firm has also teamed up with HSBC to help supply lending options to its foreign clients.

The privately-owned Al Hamra Real Estate Development Company (AHREDC), a key property developer in the emirate, has signed a number of financing deals with both foreign and local banks, including UAB, HSBC, Bank of Baroda and Lloyds Bank. As of early 2012, mortgage lending through AHREDC-affiliated banks was around 70-75% loan-to-value. Though the majority of properties sold by the firm are self-financed, AHREDC reports that financing solutions are still an important component of RAK’s real estate market. Moreover, in the current economic climate, developers with prearranged financing agreements with banks have a distinct advantage over competitors.

READY PROPERTIES: According to both RAK Properties and AHREDC, credit is becoming more widely available in the emirate. This positive development can be at least partly attributed to a significant decrease in the number of off-plan purchases. Prior to the economic downturn beginning in 2008, many properties in RAK, similar to markets throughout the world, were sold before any construction had begun.

This pattern of speculative buying can artificially inflate prices, causing significant risks for both lenders and buyers. Now that most real estate in RAK is ready property at the time of sale, lenders feel more comfortable extending mortgages.

While some market observers may be tempted to focus on the decrease in demand after the financial crisis, the drop in off-plan purchasing is a positive development that should not be overlooked. It has not only facilitated growth in the mortgage market but has also strengthened the real estate sector.

“Although lower demand is certainly a challenge for RAK’s property market, speculative buying has also subsided, and many of our customers are now end-users,” Rashed Sultan Al Khatri, the director of marketing and sales at RAK Properties, told OBG. “This adds a greater measure of stability to the market and helps ensure more even-tempered, organic growth.”

It appears that RAK’s real estate sector and mortgage market are steadily growing in tandem. As speculative purchasing has decreased and property is being handed over at key development projects, the mortgage market is more confident about lending, and more available financing is generally facilitating increasingly high levels of real estate investment within RAK.