By Shane McGinley
Sale is good for lenders, but flood of repossessed units to market may squeeze prices
The sale of Dubai’s first foreclosed property may signal the
start of liquidity returning to the mortgage market, analysts said Tuesday, but
warned the release of repossessed homes onto the market must be carefully managed
to avoid a further sag in house prices.
Barclays said this week it had sold its first repossessed
property at an auction held by the Dubai Land Department. The property, a villa
in The Springs, had a reserve price of AED1.2m ($326,700) and sold for AED1.22m
($332,145), a spokesperson for the bank said.
Dubai introduced a repossession law in 2008, under which
Dubai banks were authorised to give defaulting homeowners 30 days notice to
resume mortgage payments before beginning foreclosure proceedings.
Barclays was the first bank to, in January 2010, repossess a
home, clearing the way for lenders holding about $16bn of homes loans to
attempt to recover their losses.
It has been reported that up to around 200 foreclosure cases
are being processed by the Dubai Courts.
Analysts said this week’s sale is a positive indicator for
Dubai’s property market as lenders will be able to start offloading properties at
adequate prices, reducing their exposure to defaulting homeowners.
“I think it’s good for the market as a whole, good for the
lenders and good for the potential borrowers who need finance to get on to the
residential property chain,” said Nick MacLean, managing director of CB Richard
“There are quite a lot of properties that have come back to
the lenders over the last couple of years and they have essentially retained
them… The fact that a lender is disposing successfully of properties is sort of
indicative of some strength coming back to the marketplace.”
Maclean said a reduction in risk to lenders would eventually
trickle down the property chain to borrowers, resulting in improved liquidity
and lower mortgage costs.
will be more willing to come into the market place if they have got a better
chance of recovering their money if things don’t work,” he said.
Other analysts, however, warned against the impact of a
flood of repossessed homes on an already strained housing market.
Tom Bunker, investment sales consultant at real estate
agency Better Homes, said the release of homes must be staggered or run the
risk of pushing prices down further, potentially causing more foreclosures and
“If these properties are liquidated in an organised manner,
there should be little effect on the prices of similar properties in the
market,” he said. “However, if a large number of these properties reclaimed
through foreclosures are re-inserted into the market all at the same time we
could see another readjustment of certain property prices.”
Back in August 2002 when the first 1,388 batch of Springs Villas were snapped up off-plan the purchase price was AED 448,888 for a 3 bedroom villa. Therefore at AED 1.22 million profit is 170 per cent in 9 years best case.
All depends how much the dispossessed original owner borrowed from Barclays and whether it was two or three or five bedrooms. I'm assuming 3 bedrooms as there are a number of 2 bedroom on the market at AED 1.1 million on a few listing sites and the average asking price on those same listings for a Springs 3 bedroom is around AED 1.8 million and 1.2 million would therefore be an appealing figure to an investor.
However even so as a rental property it will take 15 years to break even and as an owner occupied dwelling will appreciate little if at all in asking price capital terms for the next 5 or 6 years. But then again that's what a mature market elsewhere looks like at the moment.
Of course sharp investors will now only buy a 3 bed Springs at 1.2 million, 30% off
In most countries the difference between the price that the property sold for under foreclosure and the ultimate sale price (if the sale price is more) is paid to the owner, after all costs of the forced sale are deducted. One gets a feeling from reading documentation that the UAE banks will not be doing this.
You make some interesting points but when you say that the property will "take 15 years to break even", what you are actually saying is that the investor will take 15 years to double his money. If the property is generating more income than it costs to run (i.e. service charges, insurance, letting fees and mortgage interest costs, if any), then it can be said to be performing above breakeven.
So how do the banks auction a property that is not yet built? Investor has paid 80% and Developer has not completed the villa (with no completion is sight). Investor stuck between the bank and the developer and no where to go!!??
Red Snappa: "Of course sharp investors will now only buy a 3 bed Springs at 1.2 million, 30% off "
I think sharp investors would run and hide. Prices are only going to head further south, as are rents. Buying at best possible price now might make you feel good. Until you check current prices again in 3 months.
Prices are still absurdly high considering (1) the glut of property (2) it isn't proper freehold (3) rules can change overnight, so you have no real security (4) the quality is rather poor (5) the financial crisis is likely to mean increases in indirect taxation to pay off the debts.
Hi Jezinho, some people may want to consider the capital (and cost of capital) before talking about breakeven. You may not need to repay your loans (neither interest nor main) but most people do.
If you want to consider only operating profit/EBITDA, that is OK, but that is not breaking even for most people nor any standard definition.
And no, it is not 15 years to double the capital. It is 15 years to repay the capital plus its cost. Roughly 1.5 M investment, 150K rental income per year, deduct the maintenance fees (let say 50K per year), you have 1.5m/100K roughly 15 years.
I think the estimate is roughly good, if not please show the error.