Credit where it’s due: Homebuyers may begin taking out mortgages at higher rates

While Qatar’s projected demographic and economic growth should provide robust demand for property over the coming years, the most significant shift in the market could be the result of a stronger and more consistent uptake of credit. Indeed, many developers and brokers are hoping for improved conditions for mortgage growth. This would increase the potential market for property on the peninsula and expand the range of offerings on sale.

Qatar’s mortgage market is still underdeveloped. While the introduction of freehold property for non-nationals, begun in 2004, encouraged commercial banks and home financing firms to pay more attention to Qatar and offer more products, uptake has been slow. According to Saudi Arabia’s National Commercial Bank (NCB), the mortgage penetration rate in the country is 12%, compared to 14% and 17% in the UAE and Kuwait, respectively. These levels are well below those in developed countries like the UK and the US, which have mortgage penetration rates of over 60%.

THE WAY HOME: Qatar’s drive toward home ownership has been led by the Qatar Development Bank (QDB), set up in 1997 as the Qatar Industrial Development Bank to support small and medium-sized enterprises. Since then, the bank’s duties have expanded, and in 2008 the government increased its capital from QR200m ($55m) to QR10bn ($2.75bn).

QDB manages government-funded housing loans, which are crucial to the state’s social policy in its National Vision 2030 strategy. In 2009 the bank made loans of at least QR600,000 ($164,760) to 5400 Qataris. In 2011 the government raised the bank’s loan and advances portfolio to QR1.2bn ($329.5m) and the loan tenor for interest-free loans to 37 years. As such, the maximum monthly repayment for a Qatari accessing one of these loans is QR2700 ($741.42). Given that the average monthly rental rate for a one-bedroom flat in the West Bay area is QR7000 ($1922), these types of loans should encourage more home ownership among nationals. The state’s commitment is further evidenced by the QR5.2bn ($1.43bn) allocated for housing loans in the 2011-12 budget.

FOREIGN OWNERSHIP: Although Qataris have the highest salaries in the GCC, according to the Hay Group, a global consulting firm, and although they benefit from social policies like land grants and interest-free loans, there is still significant scope for mortgage growth. While many Qataris make cash purchases for luxury properties, there is still demand for loans to bolster purchasing potential. Furthermore, bank credit is a central component of the expatriate and investment market, a segment that has the potential to become significantly larger than that of Qataris.

There are 18 designated areas in Qatar where expatriates can own property, three of which are on a freehold basis, and the rest on a leasehold basis. As these areas become fully developed, the market for mortgages will grow substantially. The segment was also boosted in 2006 when new regulations allowed for residency status for foreign property-owners in Qatar.

READY TO MORTGAGE: However, despite the move to liberalise the sector and open the market to foreigners, mortgage growth has been limited. This may be about to change. In 2011 bank lending to the real estate sector almost doubled, peaking at an annual growth rate of 95.1% in October 2011, according to the Qatar Central Bank. Although this comes from a very low base, it suggests a change in approach in the banking sector. According to Seraj Al Baker, CEO of Mazaya Qatar Real Estate Development Company, “A lot of money stayed away from real estate, but banks now do have an appetite. Access to finance is now not so much of an issue and there’s a lot of liquidity.”

The credit growth will likely not be limited to developers and commercial mortgages alone, but will be available for retail mortgages for individual buyers as well. In January 2012, for example, Qatar National Bank (QNB), the country’s biggest lender by market value, announced the establishment of the QNB Mortgage Loan Centre, which will support customers’ needs in the mortgage market. The centre will offer loans with interest rates as low as 4.35%, and clients will also receive free property evaluations. IBQ and Commercial Bank are also pushing their products, with the latter offering a rate from 5.99%, a tenor of 20 years and a loan-to-value ratio of 70% for Qatari citizens.

DEMAND GROWS: Mark Proudley, associate director of DTZ, a real estate brokerage, consultancy and research firm, said banks’ moves in the mortgage market may have perpetuated the slight increase in sales at developments like the Pearl-Qatar, a freehold project offered to both nationals and expatriates.

Mortgage uptake will be crucial to foster further demand and price growth in the market. The banking sector is well placed to expand its mortgage portfolio, compared to counterparts in the region and elsewhere. Following the global economic crisis, the local banking industry was bolstered by government funds and is now in a strong, liquid position. The average capital adequacy ratio of banks in the sector was 22.3% in mid-2011, according to the IMF. The sector has also been able to limit defaults, with the non-performing loan ratio at 1.7% in 2010, compared to a level of 7.2% in the UAE, according to Credit Suisse.

The strong deposit position and relatively low interest rates suggests that the market is set to see strong credit expansion. Samba Financial of Saudi Arabia believes domestic credit in Qatar will grow to about 20% in 2012, the highest of any GCC market. However, there are substantial challenges to the growth of the Qatari mortgage market. To ensure stability in the wake of the economic crisis, and to avoid the pitfalls seen in several developed nations’ banking systems, the government placed certain borrowing constraints on banks operating in Qatar. For example, in October 2010 the central bank introduced regulations limiting the financing offered by domestic and foreign banks to companies and individuals whose collection risk is related to real estate to 100% of Tier 1 capital.

CREDIT LIMIT: The central bank also introduced specific laws for home loan terms, setting the maximum limit for deductions from a borrower’s salary at no more than 75% for Qatari nationals and 50% for expatriates, with loan tenors not to exceed 20 years. Furthermore, the maximum loan cannot exceed 70% of the property’s total value. Such regulations have limited the take-up of mortgages, with the last point proving particularly unpopular with brokers and developers. “The central bank’s restriction of mortgages to 70% of the value of a property is a big challenge,” Jed Wolfe, regional associate director of Asteco, a global commercial real estate firm, told OBG. The requirement for expatriates to fund 30% of the cost of a property upfront has substantially altered the risk portfolio of many potential buyers, said Wolfe.

BANKING NEEDS: The new laws also carry some hindering implications for banks. Chief economist at the NCB, Jarmo Kotilaine, stated in a NCB report on the GCC mortgage market that, “International experience suggests that the level of mortgage lending [is] critically dependent on having adequate facilities for registering properties, ensuring cost-effective access to credit information, and providing for efficient foreclosure systems. Shortfalls in these areas tend to lead to selective lending and shorter tenors with adverse implications for access to housing.”

Authorities are addressing a number of these issues, though the market still suffers from transparency issues that make it hard to measure benchmark prices.

“Prices do not necessarily reflect the actual value of an asset,” Al Baker told OBG. “We need banks to play an active role in the mortgage market, and we need a transparent market so banks can value it fairly.”

The government has indeed been moving in the right direction. In March 2012 the Peninsula Qatar reported that the government is drafting a mortgage law that would protect the market from a future credit crunch and establish a property benchmark for lenders and developers. Such legislation would send a clear message that the country is establishing a mature and stable market for investment in property, benefitting future homeowners, developers and investors.