Up to $30bn in Dubai 2012 property deals in cash

About 70 percent of transactions fully paid in cash, much of it from overseas buyers looking for safe haven
Up to $30bn in Dubai 2012 property deals in cash
By Courtney Trenwith
Thu 31 Jan 2013 09:46 AM

As much as US$30bn in cash was used to purchase Dubai property last year, much of it from overseas buyers looking for a safe haven, according to an Arabian Business investigation.

Contrary to most Western countries, about 70 percent of property transactions in Dubai are fully paid in cash, while the rest are covered by mortgages.

It was as high as 80 percent 12 months ago, according to people in the industry.

Sam Wani, general manager of mortgage adviser Independent Finance, said the level of cash payments in Dubai real estate was extraordinary compared to the rest of the world.

“It’s not normal,” he said. “Global cash transactions are in the realms of 20 and 30 [percent] at the most.”

The point has been used in recent weeks by supporters of the UAE Central Bank’s plan to limit the loan-to-value ratio of mortgages to as little as 50 percent in a bid to avoid another property boom after the real estate crash of 2008-2009.

Emirates Banks Association chairman Abdul Aziz Al-Ghurair said on Sunday the low level of mortgage-related property transactions meant the proposed changes would not impact on property prices and would protect borrowers.

“People have speculated that it will be negative to real estate, [but] 70 percent of the real estate sales [are] on a cash basis so it’s going to impact 30 percent [of the market],” he said.

About US$42bn worth of property was sold in the emirate last year, according to Dubai Land Department, meaning up to US$30bn in cash flowed between property owners, including multiple sales of the same property during the year.

The majority of cash-buyers were from India, Iran, Egypt, Syria, other GCC countries, North Africa and Russia, Wani said.

They wanted to avoid tax and their countries’ unstable real estate markets, but Wani said improved regulations following the global financial crisis had limited money laundering.

“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 said.

“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.”

Saurabh Sharma, research and data manager for property analyst Reidin, said property prices in Dubai fared much better than the cities where the money originated.

“So it makes much more sense to invest in Dubai,” Sharma said.

Manu Mehra, a director at auditing firm KPMG UAE, said many also were successful business people relocating to Dubai from neighbouring countries, who wanted to avoid the rigmarole of dealing with a bank.

“He’s got his own established business in his own country but... if he’s got enough cash and looking to relocate to Dubai... he’s using that [money] to buy the property rather than going to the bank and explaining his credit history with another institution, especially when he’s new to the market,” Mehra said.

“There are people who have been sitting on cash and they’re looking into investing into property and move into Dubai.”

Cash investors only require a passport to purchase property in Dubai and usually do not live in it.

Wani said they were synonymous with ‘flipping’, the rapid on-sale of apartments, which often caused prices to artificially rise.

“These guys come in with huge sums of cash, buy the property, hold it for a few months and sell again,” Wani said. “As soon as they find a better yield somewhere else they’ll pull the money out.”

However, Sharma said property prices were based on sentiment and would not be affected by the rate of cash being ploughed into the sector.

Cash transactions accounted for as much as 80 percent of Dubai property sales until early last year, when Westerners started to return to the market, taking out mortgages, according to Wani.

“Most Westerners are looking for mortgages because mortgages are prevalent in Western cultures,” Wani said.

“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.”

Despite the small percentage of mortgages in Dubai, Sharma said the UAE Central Bank’s plan to cap the LTVs could have a short-term effect on prices.

“It depends on the agents and how they try to manipulate the market,” he said.

“They can portray that the cap is going to come and you’ll only get certain finances and [say that] it’s very good time to buy in Dubai, so the prices will go up in the short-term.”

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