By Anil Bhoyrul
Bank sells property for just AED745 per square foot, 35% below market value.
The Palm Jumeirah has witnessed its first property repossession, resulting in a bank selling an apartment for just AED745 per square foot – nearly 35 percent below the current market rate.
Arabian Business understands that a three bedroom apartment in Al Shala, on the prestigious development, was “taken back” by the owner’s bank last week after he failed to resolve Dhs1.7 million of outstanding debt.
“He left the country and gave power of attorney to someone else. The bank moved in quickly and asked for Dhs1.7 million, which they got within a few hours,” said a source close to agent involved in selling it.
The property was
advertised by Networth Real Estate
on the website of UAE daily Gulf News, at an asking price of AED1.7 million for a 2,280 square foot three bedroom apartment. When contacted, the agent said it had “gone immediately for cash".
It is thought to be the first time any bank has taken back a property on the Palm.
Just last week, according to Bloomberg, Barclays, Britain's second largest bank, has won the first foreclosure orders in Dubai, clearing the way for lenders holding about $16bn of Dubai home loans to take action when borrowers don’t pay.
Barclays said in an e-mailed reply to questions from newswire Bloomberg that it won the foreclosure orders, without providing details of the cases.
Similar properties on the Palm are currently being advertised close to AED1140 per square foot, nearly 35 percent higher than the bank’s selling price.
Provisions for bad loans in the UAE surged 68 percent by to 32 billion dirhams ($8.7 billion) as of November, compared with a year earlier, according to Bloomberg.
It said that Islamic lender Tamweel, the emirate’s biggest mortgage bank, has several of its own foreclosure claims pending and estimates about 3 percent of its mortgages are in default.
“Banks will be more aggressive in pursuing legal action if they see the process is efficient,” said Antoine Yacoub, a banking analyst at Moody’s Investors Service.
“They were trying to avoid the courts and restructure most of their loans, but once they see a precedent has been set, they will be encouraged to push more cases through.”
The "market rate" is the rate at which a buyer and seller are prepared to conclude a transaction. Buyer and seller having contracted at this price means 745/Ft2 is now the current established market rate. That does not mean to say that the next transaction is not at a higher rate, or indeed a lower rate, though it is unlikely many buyers will be willing to pay much above this established rate in what is still a falling market.
The bank could have done an acution and might have got a much better price and also have a transparent mechanism in such deals.
The flat sell out should be more transparent and it has to be publicly auctioned, the excess money over the loan should be returned to the owner.
Dubai needs to be careful as I have seen this first hand in California. If we get more bank repossessed properties on the market, this will bring an already falling market prices to its knees, and in some prestigious areas that are holding steady at the moment. I.e. The Palm. Do you think buyers will pay retail rates for property when now wholesale is available? hmmm The good news is the banks will feel confident to lend a little more aggressively know they have a vehicle to carry out repossesions but to what and who? Property valuations will be extremely low and buyers will have to make up the difference. Letâ€™s see whatâ€™s happens in the next few weeks.
I too hope that the process is made transparent and honest to the public. It will help keep market rates sensible as well. I am always wary here that there is opportunity for graft and for instance it turns out a bank employee got him/herself an unfairly good deal at the expense of both the defaulter and the general UAE public. Nast suspicious mind I know.
As a valuer, this transaction cannot be treated as good evidence for obtaining Market Value. The RICS Valuation Standards defines Market Value as: â€˜The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsionâ€™. There are two comments here. Firstly, it is clear that the owner of the property was not a â€˜willing sellerâ€™ â€“ the bank sold it on his / her behalf based on the terms of the mortgage contract, and were clearly seeking only to recover their own exposure to cover their potential loss. Secondly, â€˜within a few hoursâ€™ does not denote a period of â€˜proper marketingâ€™. Selling this quickly in order to recover their costs is extremely irresponsible by the bank (which remains unnamed), as they did not seek to get a reasonable price for the asset. If I were the previous owner, I would currently be seeking legal action against the bank for negligence. Therefore, Jon, donâ€™t tell me that if the same asset was put to the market for a full marketing period by an owner that wanted to sell (but was not forced to), the same price would be achieved.
In addition to the concerns raised below on transparency, can we read it that the bank just wanted it's debt repaid and was not interested in getting the best price as any difference would have to be repaid to the borrower? There maybe a question of ethics and doing the best for your customers
The bank is under no obligation to sell the property for more than the outstanding loan. It only seeks to recover its debt. Why would the bank go through the trouble of auctioning it off and getting more for the property so that it can give the excess money to the owner who defaulted? The bank only wants what is owed and if selling the property at that price brings down the rest of the market, that's how it is in this business.
The true market price at present is probably someway between the 1140 sellers are trying to get and the 745 this one went for. This sale does look suspicious. No doubt we'll be told that it was publicly advertised, but that means nothing because if there are 1000 takers, who decides who gets it? Auctions are the only transparent way to dispose of repossessed property if a quick sale is required, and they should achieve the best price in the circumstances. I only hope the Dubai government mandates that repossessed properties MUST be disposed of at auction or in a transparent process where the best available price is obtained. Otherwise we'll be reading yet more scandals over the coming months about corruption and dodgy deals, and Dubai's business reputation really doesn't need any more battering.
KJS, your statement that the seller was not willing hence the price does not meet the RCS definition of fair value is incorrect, the owner was the bank as the origional purchaser had not paid his mortgage. The bank clearly was a willing seller, as they sold it. So uindeed a willing seller sold to a willing buyer. The US market, and the UK markets have recently fallen led to a majopr extent by the sales of repossesed properties by banks. No one is going to buy a house for more money that they can buy it from elsewhere regardless if that purchase if from a realestate agent, or an auction/reposession seller.