UAE 50% expat mortgage cap to dent recovery

Measure has been introduced to help prevent emergence of another property bubble

Dubai real estate, Dubai Marina, Dubai property

Dubai real estate, Dubai Marina, Dubai property

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

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Posted by: Expat

Continuation to my reply to SA1, as to Why?

* Dubai is one of the strongest contender for World expo 2020
* The infrastructure development has never stopped
* No other country has achieved what Dubai has done in last 20-30 years
* We have 8 Million visitors yearly
* Population is around 8 Million with 80% from foreign land, Why?
* One of the lowest crime rate & highest per capita income
* UAE owns one of the largest sovereign wealth, oil & several
* Why several International Hotels are queuing up in Dubai
* Why 50% of world retailers house their shop in UAE
* Where do you see a president so humble driving without a caravan
* Where would you expect a dedicated airport for A380, world tallest tower and Palm
* Almost the largest fleet of aircraft

Dubai, a country so young has a dream and a vision to build world's largest and host international events. They can succeed and may fail in some.......natural. But imagine if they achieve even 50% of what they dream!!!!

Posted by: SA1

Why one should buy property in Dubai?
- Are the laws towards inheritance transparent ?
- Due to extreme climate buildings exteriors erodes fast - what happens after 15 / 20 years? Will the Owners association have money for major revamp? Are these OA having sinking fund? Most of the current landlords are interested only in maximizing the rental yeilds and are barely paying service fees for current liabilities
- Strata law still in the making - Freehold properties are not under Dubai Municipality management. One of my friend has a road accident inside freehold area and Dubai police told him there are different rules/procedures, had he been hit in adjacent road which is outside freehold insurance claims and court procedures would have been straight forward.
- Seriously which buyer here is having long term view (10+years),

Posted by: Expat

Hello SA1, To answer your questions:

- Its better to buy than to pay rent which is lost, calculation still works in favor to own than renting
- Yes, to some extent it is but you can get a will made attested by Dubai court for a full proof
- I still see World Trade Center after 33 years
- Most of the developed community fall under DM limits, Greens, Downtown, Marina etc.
- 10 Years back no one had a long term view on China but frankly they can just digest most of the developed nation

Posted by: chetan palan

When central bank Or authorities take such a decision,It is with a broader perspective
Probably in their opinion , they want people to come in UAE & invest with more of their own Money,rather than borrowings.
This cud be with an intention to strengthen the view that UAE is a safe place even if one invests 50% of capital form their capital.This in long run ,gives positive message to Long term investors,rather than short timers ,who may exit after taking a Cream off the property causing volatility.This will stabilise market on a long term.
Anyways, people are coming to UAE for Investing otherwise also due to variety of reasons .
It makes sense for the authority to use the opportunity ,to cool down OR keep market to realistic level & at the same time, to test appeal of UAE to investors.
Lower property price /rents cud be advantage for residents.But that is an offshoot.
In my opinion authorities are trying to achieve more than one results with this step in a good direction

Posted by: Geko

RE agents and Speculators are not the creators of bubble. Bubble is nothing but abundance over ability to consume. It was in front of our eyes, none other than greedy investors to blame.

Time being, 50% slab is the right move. Existing properties are locked to some kind of less troublesome payment system and will recover eventually. Otherwise, as a buyer we would create one more bubble with free flow of finance that will be hard to digest as a person or as a country. Simple term, we do not have as many number of families to occupy these developments.

Sorry guys... Time being, banks and RE are not the right place to visit if we do not like bars.

Posted by: george anderson

Reality Check- here is a reality check for you.

People are more likely to lose their jobs in the US and UK than in the UAE. Do you stop Mortgages there as well?

Mortgages are a reflection of an advanced economy, where every working person has the right to invest in a home and not lose his money in rent.
Lets say someone buys a property for AED 2 million and pays back a principle of 100,000 x10 yrs=1,000,000. On leaving the UAE , he could probably sell the property for AED 1.5 million and still make a profit of AED 500,000. As opposed to paying a rent of 150,000 x 10 years= 1.5 million

I hope this made sense to you- in the absence of a mortgage system, Dubai would just be another small town with big aspirations and not a great city as it is now.

You need to look at the bigger picture as well- loss of jobs in banking sector, retail, interior designing, furniture , consumer sector etc.

Will also lead to more people using UAE as a "Saving Place"- and remitting their money back home.

Posted by: Straight

Really? How many of your staff have job guarantee for 3 yrs and above? atleast yourself if you are not a local... Many other ways to make money than trapping with glossy, we had enough earlier...

Posted by: Hadi S Shaikh

As harsh as it sounds this 50% rule is correct for UAE, if this was around many people like my self included would not have to buy over price property and all the negatives that came with it..

Posted by: Geko

George, provided the investor survives his first renewal with the existing company after his down payment. If not, he has to pickup a new job in 30 days or entire money still face jail for PDCs.

How many of us can get 10 or 15 years guarantee from our employer especially when the region is prone for bubbles and dubbles?

By the way, we have so many lob-Georges and lob-Sams now a days. Come on and come out with genuine proposal with real name guys...

Posted by: Realty Check

In my opinion, the concept of mortgaging should be done away with in the UAE. Not intending to create a sensation here but consider this - the duration of a home loan is typically 15-25 years. Just tell me how does an expat know he is going to stay here for that long?? There's no PR, no citizenship, no job security so how can you look at the horizon that far ahead. Freehold should only be limited to cash buyers who have enough money to buy a second home and dont need a job to fund it. All hell breaks lose when expat home owners having a mortgaged property lose their jobs and cannot stay more than a month in the country thereafter, especially when the market is on the decline. Banks are left with properties that are worth far less than the money they loaned for it!

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