Caught in the trap

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Real estate is a key driver of Dubai’s economy. HSBC bank estimates there are $42.5bn worth of projects currently under construction in the emirate.

Negative equity is a very real concern for thousands of homeowners as they watch property prices fall while mortgage rates rise. With repossessions looming large on the horizon, Alex Delmar-Morgan reports on what the banks need to do to arrest the problem.

Ajit khan is a worried man. Earlier this year, he bought a $626,000 apartment with a 90 percent mortgage in downtown Burj Dubai, one of the city's most sought-after residential addresses.

Counting on the outstanding returns realised by property investors in the emirate over the last six years, he had hoped to ‘flip' the property, and make a handsome profit without even having to take charge of the keys.

However, with property prices now falling in the wake of the global economic slowdown, and mortgage rates rising as the liquidity crunch hits the Gulf, Khan is unable to offload the property - and is paying the price.

His agent has told him the apartment is now valued at $516,000 and, with close to $544,000 in unpaid loans, he has fallen into negative equity, where he owes more to the bank than his property is worth.

Khan is among the thousands of foreign investors who flocked to Dubai's shores to snap up off-plan property during the boom.

Speculators, who had no intention of living in the properties they bought, lapped up cheap mortgage rates and banks' liberal lending policies, buying up real estate knowing that their large mortgages were covered by the rising value of their property.

Now with banks hiking the cost of loans and Dubai's six-year property bubble apparently burst, it's a very different picture for the emirate's real estate brigade.

"The problems of negative equity and mortgage default are now realities in Dubai," warns Matthew Hooton, head of real estate in the Middle East for law firm Ashurst.

Real estate is a key driver of Dubai's economy. HSBC bank estimates there are $42.5bn worth of projects currently under construction in the emirate.

This is set against figures published earlier this month by the same bank, which said advertised villas in Dubai fell 19 percent month-on-month in October, and apartments in the prestigious Dubai International Financial Centre (DIFC) district slipped as much as 30 percent.

Anecdotal evidence from agents points to even sharper house price falls. Some brokers say property prices on Dubai's Palm Jumeirah island have slumped as much as 40 percent since September as demand dries up due to reduced investor confidence and mortgage availability.

Price falls are a feature of an overheated market but when they are coupled with rising mortgage rates, a homeowner is hit by a double blow.

Last week, it was reported that banks including HSBC and the UAE's largest home loan lender Amlak, have hiked interest rates on new mortgages by up to 2 percent, and are now charging customers up to 9.75 percent.

Equally, those on variable rate loans or fixed rate mortgages, are being stung by banks ramping up interest rates way above the benchmark interbank rate, or ‘eibor' - the rate at which banks borrow from one another in order to lend to consumers.

Jean-Luc Desbois, managing director of Dubai-based mortgage broker Home Matters, estimates that the average interest rate now charged by banks on home loans across the UAE is 8 percent, compared to six months ago when it was around 7 percent.

One of Desbois' clients recently received a letter from the bank saying it was increasing the interest rates on his loan. The client used to pay 6 percent interest when he took the loan out - now the bank is charging him 9.5 percent.

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READERS' COMMENTS

Flip That House!!
Posted by Graeme Park, Dubai, UAE on Thursday 4 December 2008 at 09:38 UAE time


Am I wrong or is it the practice of "flipping" properties that drove up the prices in the first place? I couldn't afford to buy somewhere to live right now after this guy and many like him juggled "investments" to make obscene profits. If the market has changed and the "investors" are losing money now - then great - bring it on - It couldn't happen to nicer people. They are feeling the misery that they caused so many. Happy Christmas guys!

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