The era of the end user

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In January, the value of the Dubai mortgage market was down by 64%, compared to the same time last year. However, the number of actual mortgages only dropped by 4.3%. Shane McGinley reports.

In 2008, Dubai banks lent US$31bn in mortgages to property investors, a year-on-year increase of nearly 100%. In 2009, things have changed and liquidity and the mortgage market are the talk of the property industry.

Official figures from the Dubai Land Department show that in January 2009 the value of mortgages fell by 64% when compared to the same period last year, declining from US$1bn to US$379mn.

At the same time a report by Proleads Global found that 52.8% of construction projects in the UAE, worth US$582bn, have been put on hold. The report also observed that the rate at which projects are progressing has slowed down.

Real estate accounts for 84% of projects in the UAE, therefore the obvious slowdown in the mortgage market is having an immediate impact on the sector's growth.

The effects were felt quickly by the banks and as soon as November last year Lloyds TSB had stopped financing apartments. Later in the year, it reduced the number of staff in its mortgage department by 70%, blaming a decline in demand.

Amlak, the UAE's biggest lender, stopped lending altogether temporarily and Tamweel, its next biggest rival, cut its staff numbers by 57. Tamweel and Amlak are currently in merger talks and a decision is due soon on the outcome.

While the overall value of the mortgage market has slumped, a closer look at the figures show that people are still looking for mortgages and banks are still giving them.

The difference is that speculators looking to borrow millions and billions have disappeared from the market and have been replaced by everyday workers looking to buy a permanent home.

In 2009, this is most evident by the fact that the majority of mortgages granted have been in residentially focused developments such as Al Warqa Third, Emirates Hills Third and Arabian Ranches.

The highest mortgage so far this year, as of February 15th, was granted along Sheikh Zayed Road and was for US$35mn.

The death knoll for Dubai's speculators began in October last year says Ian Albert, regional director of Consultancy Services at Colliers International in Dubai.

Albert says that at the Burj Dubai, where prices are considerably higher than average, properties were becoming too expensive for the average end-user due to the level of speculation taking place.

"We saw banks withdrawing financing at certain levels in October as they were getting nervous at the rate of speculation in that development," says Albert.

In October, Cityscape Dubai saw many landmark projects, such as the 1km tall Nakheel Harbour and Tower, being launched onto the market. While the number of mortgages nearly doubled, jumping from 162 in October 2007 to 318, the monetary value dropped 18% from US$950mn to US$775bn.

By December, the number of mortgages was up again, by 38%, but again the overall value for the month was down by 48%. In February, the trend appears to be going in the same direction as developers, mortgage lenders and agents get used to the new era of the end-user.

Chris Green, director of Independent Finance, confirms their business is down by about 75%.

"There has been a drop, at one stage everyone was looking for a mortgage. Now those who are coming to us are serious buyers, they are typically family people who want to buy a place and live here. The other is the person who has a property and needs to raise some property. If it's not built, often they need to raise capital for the next payment for the developer."

Looking at the top five banks that Independent Finance highlights, it appears that the cost of credit between August 2008 and January 2009 has only risen by 3.58%.

"The most significant thing is that the cost of your mortgage over the period has seen the most significant amount of difference," states Green.

According to Green, if a person applied for a 25-year US$122,512 mortgage in January 2009 it would have been US$9,615 more expensive than the exact same one applied for in August 2008.

"The chances of getting one are much more difficult and the ultimate clients that banks want to see I don't think exist anymore and are few and far between. Every mortgage we work with there is a bit of deviation that needs to be done with the lenders," adds Green.

In January, Emirates NBD, the Middle East's largest bank, raised its minimum monthly salary limit for expatriates by 200% to US$6,806.

A poll by ArabianBusiness.com found that 41.6% of those surveyed believe rising minimum salary levels is dangerous and will contribute to the downturn of the UAE economy. However, somewhat surprisingly, 31.3% describe it as a prudent move.

Of the banks surveyed by Independent Finance, the minimum monthly salary required ranged from US$2,178 to US$5,444. UAE salaried nationals qualified at the lower end of the salary scales.

Colliers International report that 74% of properties mortgaged in Dubai are apartments, 10% are villas and 16% are townhouses. Green says that off-plan properties are virtually impossible to get finance for.

"If it's a completed property then they are very successful and the most successful are people who are buying a place to live in - those ones we walk through with all the time. If it is a non-resident there are few banks that will offer mortgages."

The type of industry the applicant works in is another key factor says Green and he reports that real estate and real estate related sectors, such as interior design and decorating, have been hardest hit.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?

Related:

Market Performance

Tamweel - UAE
1.07
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