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A central bank circular issued on December 30 capped mortgages for expatriates to 50 percent of the value of the property for the first home and to 40 percent for the second. The amount UAE nationals can borrow was also restricted to 70 percent and 60 percent.
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Mortgages are an important form of financing for expatriates looking to purchase property, accounting for 66 percent of total registered transactions in Dubai during the first quarter of 2011, the most recent figures available on the Land Department’s website. Foreigners are major property owners and buyers, snapping up real estate assets worth AED28.3bn ($7.7m) in the first half of 2012.
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UAE bankers are reported to have requested the central bank delay the introduction by 30 days and are said to be planning to speak to it about raising the new loan-to-value lending limits. Sources told Reuters that banks are generally in favour of a cap but most would prefer a loan-to-value cap of around 70-85 percent.
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Opinion is split over the impact the cap could have on real estate prices in Dubai. Property consultants Jones Lang LaSalle said in a report they expect it to impact negatively on prices while Nick McLean, Middle East managing director of CBRE Middle East said the mortgage section of the buying community is relatively small and therefore unlikely to affect prices.
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Kabir Mulchandani, CEO of Dubai-based real estate investment firm Skai Holdings, said the cap may cause rents to increase. “If this regulation continues, rents will go up because end users cannot come up with 50 percent. It will lead to more investors owning property than end users.”
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Others disagree that the move will affect Dubai rental prices. “. I don’t think we are expecting it to impact on the rental price,” says Craig Plumb, head of research at Jones Lang LaSalle Middle East. “I think what is likely to happen is that the developers that aren’t able to sell the properties will rent them out themselves so that the pool of properties for rent will be around the same.”
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The cap follows other directives aimed at tightening the UAE’s financial system in the wake of the downturn. In April the central bank issued new caps on bank’s exposure to state-backed institutions at 100 percent of their capital and 25 percent to any one state-related entity. The move was postponed pending a review.
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Some of the UAE’s largest developers have seen their share price impacted by the announcement. Shares in Emaar Properties dropped 1.1 percent following the announcement but are now 5.2 percent higher while shares in National Bank of Abu Dhabi surged to their highest level since April 2006 after bankers met with the central bank on January 7.
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Economists are concerned the cap will reduce liquidity in the UAE’s property sector. “It will restrict the risks taken in the banking sector but it means the property and real estate sector still lacks the finance,” says Nasser Saidi, managing director of Nasser Saidi & Associates. The introduction of a mortgage law and specialised mortgage lenders would be a more effective way of protecting bank’s exposure to property, he adds.
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Mortgage brokers say the cap has prompted a flurry of potential buyers with pre-approved mortgages to look at purchasing property. Jean-Luc Desbois, managing director of mortgage brokerage Homematters, says around half of UAE lenders had so far adopted the 50 percent cap for new applications, while “a handful of banks are still business as usual”. \nReporting by Claire Valdini
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Pick up next week's copy of Arabian Business magazine on Sunday to read our full analysis on what the UAE's new expat mortgage law means for the Gulf state's property market.