The 50 percent cap on UAE expatriate mortgages, unveiled by the central bank earlier this week, will curb rising prices and chances of a new Dubai property bubble, but will hamper efforts to stimulate a recovery in the market, experts said.
The move was part of a circular issued to commercial lenders by the UAE central bank and appears to be an effort to curtail any possible new housing bubble. Property prices plunged by more than 50 percent between 2008 and 2011, triggering a corporate debt crisis in Dubai that forced the restructuring of billions of dollars of debt.
A real estate industry source said that in addition to the 50 percent cap for foreigners, a 70 percent limit had been introduced on mortgages for UAE citizens. It is not clear whether the caps are recommendations or mandatory, the source told Reuters.
Expatriates make up the vast majority of the UAE's population of roughly 8m. Foreigners are allowed to buy property in designated areas; many from countries such as Iran and India have done so because they see the UAE as a haven from political and economic instability in the region.
It is not clear if the 50 percent mortgage cap for foreigners applies to citizens of other Gulf Arab states, who have been keen buyers of Dubai property.
“It is good news in the short-term as this will have an effect on prices rising too quickly recently so to curb credit should ensure we have a sustainable property recovery rather than a bubble that will burst,” Mario Volpi, head of residential sales and leasing at real estate agency Cluttons, told Arabian Business.
“The long-term effect remains to be seen as the region is generally cash rich so leverage is not a major factor in buying property here, although a lot of transactions recently were by expats buying a property to get away from wayward landlords who are doing all they can to increase the rents. So short term happy, long term not so sure,” he added.
The circular was issued to banks on December 30th said Jean-Luc Desbois, managing director of mortgage brokers Homematters. “Without the Central Bank providing its rationale behind the decision, it is still too early to make a call. If the lower loan-to-value ratios are implemented, it will have a negative effect on the real estate market and house prices. However we understand that the banks are actively engaged in discussions with Central bank and expect to receive a more positive communication over the next week,” he added.
Bankers said they were shocked by the circular, which could hurt confidence in the real estate market's recovery and hurt the share prices of property developers and banks.
"They are trying to regulate banks, but are controlling consumers by giving them limited choices," a senior executive at a local bank told Reuters. "It will lead to less investment by end-users."
An Abu Dhabi-based analyst said: "If implemented, this will impact on the real estate sector. After the property market improved, some banks had started lending up to 85 percent on some projects."
The analyst added: "It's positive when we look at the financial and lending perspective, but the question is whether this lending cap is practical."
The UAE central bank has previously sought to regulate the lending of commercial banks to reduce risk, only to back off after the banks protested.
Gaurav Shivpuri, head of capital markets at consultancy Jones Lang LaSalle Mena, said about 30 to 40 per cent of home and commercial property sales in the UAE were through mortgages. Bankers estimate about 60 to 70 per cent of mortgage customers in the country are expatriates.
The suddenness of the circular raised questions over whether the central bank was coordinating closely with other parts of the government.
Abu Dhabi's state tourism development company, TDIC, signed a deal with Abu Dhabi Islamic Bank earlier in December to start offering investors 100 percent mortgages of up to AED30m (US$8.2m) for purchases of luxury homes on the emirate's Saadiyat Island, local media reports said.
It is not clear whether the new mortgage rules will be strictly imposed; the central bank has previously tried to regulate the lending of commercial banks, only to back off after the banks protested.
The news has already had a negative impact on the industry, with shares in Dubai’s Emaar Properties, the developer of the Burj Khalifa, dropping 1.1 percent, with declines also seen in property companies Drake & Scull International (DSI) and Deyaar Development.
* With agencies