The era of the end user

With credit at a minimum and financing tight how are high-level speculators coping in the current market? Amjad Hussain, a partner at Eversheds law firm in Doha, specialises in setting up real estate funds to aid clients buy assets in the Gulf and abroad.

He reports that he is currently helping set up a Sharia compliant fund for a Qatar bank and is advising Qatari investors who are investing in the Shard of Glass, which when complete will be the tallest building in London.

"In terms of funding we are seeing that projects have slowed down and the cost of financing has gone up as banks are repricing risk and are looking at the risk associated with local and expatriate investors," says Hussain.

He reports that clients are avoiding refinancing in the current market as the price of credit has increased and he has found that financiers are now keen to exit projects and this is creating problems for investors.

"Banks are looking to see if they can use any provision to try and exit from funding a project as market conditions change. They may call in a facility or withdraw from honouring any further finance," observes Hussain.

In February, in a bid to boost liquidity, Abu Dhabi moved to inject US$4.35bn into the Emirate's biggest banks. These including the National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, First Gulf Bank, Union National Bank and Abu Dhabi Islamic Bank.

Alexander von Pock, manager of Financial Services at consultants AT Kearney Middle East, believes that such drastic measures will become more common across the UAE.

"One measure that has been taken has been the merger of Tamweel and Amlak and putting it under the tutelage of the government. If you look outside the Middle East a lot of banks are being nationalised to some extent to insure they perform their basic function, which is to extend financing."

Bank bail outs have been common place across the globe and Hussain believes that a bailout for the banks is in some ways directly a bail out for the real estate sector.

"In Qatar the Qatar Investment Authority (QIA) sovereign wealth fund is taking stakes in a number of banks so the idea is to prop up the banks and therefore inject money into the banking system, which feeds itself through to the customers and investors."

"Banks need to keep on lending or else their profits will stop so the worst thing that can happen is the banks stop doing business. If the government is investing in banks they are investing in mortgages, which equates to a bail out in my view."

UAE developers are obviously hoping that the mortgage market will get an injection of cash soon as in most cases their projects are funded by stage payments from investors, which are often dependent in turn on bank credit.

"Price ‘cooling' and low transaction volume in Dubai is a fact, but a severe crash is unlikely if demand constraints in terms of buyer financing begins to ease," a spokesperson from the Dubai developer Deyaar says.

Developers have to be realistic about how the present market is performing and Deyaar reports that it has put in place a number of initiatives to reflect the changing mortgage and credit market.

They report that projects planned but unannounced will be held back; projects that have been sold but not started will be consolidated; payment plans will be adjusted in line with new construction schedules and the company is looking to assist customers in dealing with mortgage providers.

The latter has become a popular option for developers, especially in Abu Dhabi where mega developer Sorouh Real Estate PJSC signed an agreement with three banks to aid investors in The Gate Towers project.

The deal, with Aseel Finance, ADCB and RAKBANK, offers investors the potential of acquiring up to 90% mortgages.

"This linkup is to allow Sorouh to create a deeper and wider coverage of the mortgage options it can give its potential purchasers," says Gurjit Singh, chief property development Officer at Sorouh Real Estate PJSC.

Singh reports that this initiative has stimulated increased interest from potential investors and he believes that such arrangements will become common place in the future.

"Mortgage penetration has been slow throughout the Gulf and this has been because real estate was seen as a trading commodity and speculators thronged the market," adds Singh. With end-users recapturing the market, hopefully there will be a move back towards long-term less risk lending.

In December, Mizin announced that it partnered with Rakbank to offer its existing customers, who did not initially need credit, the option to avail of a mortgage facility to finance ongoing payments. The deal was in relation to Mizin's Remraam project.

As part of the deal, investors can take out a 25 year mortgage to cover remaining installments. Investors can clear up to 20% of the mortgage each year and, should they sell the property within the lifetime of the mortgage, there is a 1% charge on the outstanding balance.

Direct links between financial institutions and real estate developers have long been common place in the UAE. The major shareholders in mortgage lenders Amlak and Tamweel are Emaar Properties and Dubai World respectively.

In November last year, Abu Dhabi Finance - a new mortgage provider for the UAE market - was set up and the main shareholders are Abu Dhabi Commercial Bank, Mubadala Development Company, the Tourism Development and Investment Company and developers Sorouh Real Estate PJSC and Aldar.

Having a direct link between mortgage lenders and real estate lenders would appear to be a conflict of interest but with speculators being flushed out of the market it will hopefully make it easier for end-users to obtain finance.

Looking at official figures from the Dubai Land Department, there is a trend emerging that offers a ray of hope. Each year for the last three years a spike on mortgage levels occurred in the month of May.

In 2006, 2007 and 2008 mortgage levels in May grew by 55%, 171% and 124% respectively and then returned to normal levels. Will mortgage lenders, banks, developers and agents see a similar growth in trade in 2009?

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