Dubai: Negotiating mortgage lending

The UAE’s central bank has postponed plans to implement a cap on mortgage lending, a move welcomed by Dubai bankers who had been concerned the tight restrictions originally proposed could limit lending growth just as the real estate sector is showing signs of recovery in certain sub-sectors.

At the end of 2012, the central bank issued a circular to banks saying it intended to restrict mortgage lending to a loans-to-value (LTV) ratio of 50% for first-time foreign property buyers, and to 40% for second or subsequent real estate acquisitions. For UAE nationals the cap was looser, with the reserve setting the mortgage limit at 70% LTV for first-time buyers and 60% for subsequent properties. The central bank said the objective of imposing the caps was to reduce speculation in the market and reduce risk exposure for the banking sector.

However, on January 21, Sultan Bin Nasser Al Suwaidi, the governor of the central bank, said any ceiling on mortgage lending would not be introduced for at least six months in order to allow for consultations with banks.

“Currently, there is no such system regulating real estate financing for individuals. This is now a proposed system to be issued in six to nine months, depending on when special procedures will be implemented. What has been issued now is a kind of consultation with the banks,” Al Suwaidi said.

The central bank has issued a questionnaire to all UAE banks, seeking their views on the appropriate LTV ratios and other mortgage related issues, he added.

According to Jones Lang LaSalle, there was a 65% increase in real estate transactions in Dubai in 2012, though some of the traction could go out of this rebound if funding becomes more difficult for potential buyers to find.

“A property market revival would improve the outlook for banks, which still face asset quality pressures from their real estate loans,” a recent report from the National Bank of Kuwait (NBK) said. “Central bank data shows that real estate loans accounted for 21% of banks’ total loan books in September 2012.”

While there have been some indications of a recovery in Dubai’s property market, NBK did warn that prices were at least 45% down on their peak of four years ago. As there remains a considerable oversupply, any improvement in bank property lending is likely to be gradual, the report said.

A note from credit rating firm Moody’s issued in mid-January also said an improvement in the property market was important for the prospects of Dubai’s banks. “Significant asset quality problems remain in Dubai, primarily relating to the weak real estate sector, as well as Dubai government-related entities and other major corporates, which are undergoing restructuring,” Moody’s said. “We believe that the net profits of Dubai-based banks will remain particularly pressured, while Abu Dhabi-based banks should see net profits improve in 2012 and 2013.”

The Emirates Banks Association (EBA) has already made a counter proposal to the central bank’s cap plan, suggesting a LTV ratio of 75% for initial property purchases by a foreigner and 80% by locals, and 60% and 65% for the second and subsequent properties bought by expatriate and UAE citizens, respectively.

While saying he is not opposed to mortgage caps, describing them as beneficial to both customers and banks, Abdul Aziz Al Ghurair, chairman of the EBA, said Dubai’s banks would likely be more affected than banks in other emirates if restrictions were too tight.

Al Ghurair, who is also the CEO of Dubai-based lender Mashreq PSC and chairman of the Dubai International Finance Centre, sought to allay concerns over any mortgage cap and its impact on both the banking and real estate sectors, saying that only about 30% of all property transactions in the emirate are conducted using mortgage loans. While a relatively small proportion, this still represented some $12bn worth of transactions in 2012, according to the Dubai Land Department.