Andrew Day’s heart was pounding, his hands sweaty as they grasped a bank cheque writing away the life savings of both he and his wife. Sitting opposite, a real estate agent dangled keys to a three-bedroom apartment on the Palm.
“It was a bit scary,” Day tells Arabian Business.
“We could see the keys in his hand. The money was in mine and it was quite literally [a matter of] swapping the two.
“The land department guy disappeared for half an hour. Forty-five minutes later - purely because of the traffic - we were in our new house; it’s that simple, it’s done.”
Buying his first property had taken Day all but a few hours – enough time to flash a cheque and bargain down the price by AED300,000 to AED1.7m ($463,000).
But rewind two years and the long-term Dubai expat’s attempt to purchase a home was not so simple. Armed with only a bank’s pre-approval for a mortgage, Day was persistently thwarted by an endless chain of buyers sporting cash.
“It quickly became apparent that the bank’s backing was not enough,” he says.
“We went to see lots of places but we got the pretty strong impression that turning up with a mortgage meant we were treated like a second-class citizen. They transferred you to some bloke that had nothing better to do. You’re basically wasting their time.
“But if you have cash, a top agent will turn up to meet you.”
Cash accounts for 70-80 percent of property transactions in Dubai, according to the industry. That equates to $30-33 billion in real money splashed across the emirate last year.
Sam Wani, general manager of mortgage adviser Independent Finance, says the level of cash payments in Dubai real estate is extraordinary compared to the rest of the world.
“It’s not normal,” he says. “Global cash transactions [for property] are in the realms of 20 and 30 [percent] at the most.”
The imbalance means cashed-up buyers, who can offer a faster sale, can almost always out-bargain a mortgagee bartering for the same property.
“Cash has always been king in anything you do in business, whether [or not] it’s property,” real estate broker Mustafa Yassin tells Arabian Business.
“Cash buyers can always demand a little bit more leverage in negotiations because the person who is selling the deal will get it done in just a matter of days instead of waiting for the banks to finalise the necessary paperwork and approvals.
“At the end of the day, if you’re sitting on a property and you have the choice between a cash buyer or a mortgage buyer, you’d go for the cash buyer.
“[And for buyers], the turn-around time of getting that property and putting it back on the market, whether it’s for sale or rent, is much quicker and time is precious right now.”
Yassin says that one of his clients has bought 14 villas on the Palm each worth about AED10.5m, “and he’s paid for them all in cash”.
“He’s also bought a building in Discovery Gardens for AED28m in cash. He owns all of them; that’s just one guy,” Yassin says.
“Another client has over 100 properties and not a single one has he bought with a mortgage; he bought with cash. He buys and sits on them to collect rent.”
Cash has long dominated the property market in Arab countries, where paying bank interest is against Sharia law and many buyers do not trust the banking system.
Yassin, who moved from Chicago in the United States in 2002, remembers when mortgages were near unheard of in Dubai.
“I remember back in 2002, people used to come [to property sales] with garbage bags full of cash,” he says.
“I was a bit taken aback by it. That would never happen in the US. [In the US] if I’m walking out of the house with more than $5,000-10,000 in my pocket ... or if I’m at a bank and I’m pulling out an excessive amount of money, my guard is completely up. From the moment I walk in [to the bank] I observe to see who’s in there. When I leave, I drive around for a few minutes to make sure no one’s tailing me before I go to where I need to go.
“But Dubai is a safe place.”
Uzair, a Pakistani businessman who did not want his surname published, says he has bought more than 20 Dubai properties using cash.
“It’s a very good investment,” he tells Arabian Business. “I invest all over the world; I see great potential for the rental prices [in Dubai].
“I don’t have any issues [using cash].”
Uzair has seen regulation around property purchases tighten since he entered the Dubai market in 2004, when dirhams could be thrust under a table, but he still knows cash will outplay a mortgage on most sales.
“Certain properties aren’t available for people who go through the bank process because the seller is in a hurry,” he says.
A former broker who worked for one of the largest developers in Dubai during the property boom, told Arabian Business cash payments were particularly common when purchasing off-plan properties.
“I’ve heard of people walking in with suitcases and millions of dollars wanting to put down a deposit on properties,” the former broker, who is now an investment advisor and wished to remain anonymous, says.
“People were in business; that was the answer [if questioned about where the money came from]. There would be no definition of what that business was. It was a combination of people that were businessmen here and people that had businesses abroad or they’d sold a property abroad and were using that cash to buy property here.”
Yassin says the domination of cash means the property market is loaded with investors, as opposed to “end-users”, those who will end up living in the property.
“Unfortunately, the ones who are buying with mortgages are the end users,” he says. “The end users unfortunately ... if they want to buy at a launch they’re pretty much out of luck because you need the cash up front now, so they end up being the last ones on the totem pole.”
Yassin also has witnessed mortgagees consistently out-bartered by cashed-up buyers able to rapidly finalise a deal.
“Last week a client told me 'this is my third attempt at buying a property, the previous two times we’ve been gazumped by someone else who paid cash',” Yassin points out.
“It’s unfortunate, it’s unfair. That’s why the old saying ‘cash is king’ is still alive and will always be alive.”
But for Day, the idea of buying a property with cash was unheard of. He says he would not even have the choice in his home country, the UK.
“Even if you want to buy in cash in the UK it’s incredibly complicated,” Day says.
“We had £300,000 pounds (US$468,000) and instead of the [Palm] property we were thinking of buying a flat in London and renting it out. We went to see a few places in London; I went with cash thinking this would be like Dubai and everyone will meet me but they wanted to know where the money was coming from.
“[They asked] ‘have you got a UK bank account and have you been paying cash’ and this, that and the other. I thought ‘I don’t want to get into this’ so I didn’t bother. It’s far easier in this country to buy property than I think just about anywhere else in the world - and to sell it as well.”
Cash buyers in Dubai are predominantly from India, Pakistan and other Arab countries, in particular Syria and Egypt, as well as Iran, according to real estate agents.
The majority are businessmen looking for a safe haven for their cash. Cash investors only require a passport to purchase property in Dubai and do not need to live in the property or the country.
Wani says cash buyers often want to avoid tax and their own countries’ unstable real estate markets. Improved regulations following the global financial crisis have limited money laundering, he says.
“They want to park their cash in a region which is stable and yields in those countries are not as good as the yields they get here,” Wani says.
“They are mostly people in neighbouring countries who are sitting on large amounts of cash who are looking for investment opportunities where they can get high yield and safety of principle.
“Rental yields here are increasing 7-8 percent across the board so it makes perfect sense for cash-rich people to park their cash in the UAE.”
Since 2004, “cash” transactions have been completed with a cheque after banks moved to beef up security, introducing new “know your customer” regulations that demand details about where large amounts of cash have come from before they can be deposited.
The new guidelines followed a decision in 2002 to allow for the first time non-nationals to purchase property in the country. That led to a rise in the use of mortgages, mostly among Westerners.
“Most Westerners are looking for mortgages because mortgages are prevalent in Western cultures,” Wani says.
“They think they’re a safe, stable, long-term investment so they prefer and they ask for mortgages, whereas they’re quite a risk in Eastern countries.”
The number of mortgages used to buy property in Dubai declined following the real estate bust in 2008-09, when values fell by up to 60 percent and banks moved to crackdown on lending.
They started to make a comeback last year as prices rose 19 percent, but any increase in the proportion of mortgages in the market is likely to be impacted by the Central Bank of the United Arab Emirates’ plan to cap loan-to-ratio (LTR) levels, reducing the ability of non-cashed up buyers from entering the market.
The change will effectively give cash buyers another boost in the already tilted competition to snare property.
Nasser Saidi & Associates managing director Nasser Saidi told Arabian Business in January that rather than introducing the Central Bank’s proposed cap on LTRs, which would reduce liquidity in the property market, the UAE should look at implementing a mortgage law.
“We have to find other ways of financing a very important sector for the UAE economy and this [move] hasn’t answered that question,” Saidi said. “The answer is through the development of a proper mortgage market; the securitisation of loans and specialised mortgage lenders.”
But despite his own initial struggle to buy a home in Dubai, Andrew Day says the ease of dealing with a cash buyer means he also will favour a cheque over a mortgage when the time comes to sell his Palm home.
“I’m the same now. If I was to sell my house, we would do exactly the same,” he points out.
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