Mortgage legislation to protect lenders

The Government is to issue the first law regulating the emirate’s growing mortgage industry in a move that observers say could encourage more lending by foreign and domestic banks and finance companies and persuade more buyers to invest in Dubai.

Several foreign banks had been “sitting on the sidelines” waiting for the law to be passed, said Chris Dommett, the chief executive of the independent mortgage adviser John Charcol Dubai.

“They’ll still have the credit risk, but won’t have the operational and regulatory risks that exist,” he said. “My guess is that more players will be entering in the relatively near future on the back of this.”

He said the more the market was regulated, the less chance there was of a “major correction” to property values.

“Confidence levels will be higher, it will attract a wave of more conservative buyers and it will encourage the banks to be a little bit more open in their lending,” he said.

Marwan bin Ghalita, chief executive of Dubai’s Real Estate Regulatory Agency, said the law “will give the lender more control and confidence in that all their rights will be registered with the Land Department.

“And if anything happens regarding foreclosure, they can follow an easy process instead of going through the courts.”

Defaults on loans are uncommon in Dubai, where property prices have appreciated strongly. Borrowers who are struggling to meet their payments can simply sell their property for a profit, allowing them to swiftly repay the lender.

However, when house prices begin to level off, as is widely expected, this will become less of an option. Morgan Stanley said recently that although property prices in the emirate had surged 79 per cent since the beginning of 2007, it expected to see a 10 per cent fall in prices by 2010.

Under the law, which could be in force within three months, mortgages for completed properties, those still under construction and long-term rented property will have to be registered with the Dubai Land Department. In addition, a court will be set up to deal specifically with foreclosures in the event of borrowers seriously defaulting on their repayments.

The announcement was “very good timing”, said Mr Ghalita. “The whole world is talking about a mortgage crisis and to what extent banks in Dubai are financing property.”

Dubai’s property boom began in 2002, when it allowed foreign investors to buy property on a freehold basis. The emirate’s mortgage business has burgeoned since then, with home loans in the UAE jumping 55 per cent in the year to March, according to the central bank.

But the emirate currently lacks a process to deal with foreclosures outside of the civil courts, which typically take two years to process cases and are unlikely to order residents out of the property to allow a lender to recover its money.

The lack of a personal credit rating agency in Dubai can also make lenders cautious about lending money.

Under the new law, any investor who defaults on a loan will have to sell their property via a public auction managed by the Land Department.

“The key for the banks is what process is in place to repossess and sell property in case of default,” said Mr Dommett.

“Fortunately, the market has been heading upwards almost continuously and there have been no loan defaults that have gone to the stage of repossession.”

However, he said, the new law was “vital to ensure that the banks have a clear process by which they can recover their money. That would particularly apply if the market was to go down.”

Law No 14 of 2008, signed this week by Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, will come into effect 60 days after it has been published in Dubai’s monthly official gazette.

The move has been welcomed by property developers.

David Nicholson, general counsel at the Dubai-based property developer Nakheel, said: “As the laws make rights and responsibilities and the enforcement process clearer, it will help eliminate some risks and encourage greater lending.”

Securing a mortgage in the UAE is often a complex procedure. Many banks and finance companies will lend only to people buying from a limited number of property developers, while confusion over the documents required to obtain a mortgage alienates borrowers.

The law will also require that mortgages taken out on properties in Dubai be sold only by registered financial institutions. In addition, it will require borrower and lender to present complete financial documents when the mortgage is registered. Property granted by the Government to Emiratis will be exempt from the legislation.

The National

Dubai stocks suffer worst fall in months

The Dubai Financial Market General Index yesterday plummeted 2.97 per cent, its biggest one-day drop in six months, falling 155.75 points to 5,094.56. The Abu Dhabi Securities Exchange Index slid 121.56 points or 2.55 per cent to close at 4,652.42.

The market capitalisation fell by Dh21.67 billion on the day.

Fears over the sustainability of property price rise in the UAE and whether banks are going to restrict lending to the real estate sector weighed on in the minds of the investors.

In Dubai, real estate stocks declined 3.98 per cent followed by the fin-ance and investment sector, which lost 3.05 per cent. Though it had the highest turnover of Dh178.36 billion, Emaar Properties was one of the major losers, declining 3.83 per cent to Dh10.05. Arabtec led the list of decliners, plummeting 9.91 per cent to close at Dh15.45. Mortgage lender Tamweel dropped 4.41 per cent to Dh6.50.

In Abu Dhabi, Aldar Properties and Sorouh Real Estate, among the top three stocks in terms of turnover, retreated 7.39 per cent and 6.42 per cent respectively. Overall, the real estate sector index dropped 6.79 per cent.

Morgan Stanley last week issued a report warning property prices, particularly in Dubai, would come under pressure - it forecast a decline of 10 per cent - with an oversupply expected in 2009. Also, the Abu Dhabi Chamber of Commerce and Industry published a report saying that the banks should be careful in their exposure to real estate and construction sector to avoid the US scenario. Gulf News had reported on Sunday that the Central Bank could tighten lending standards to curb the rise in real estate sector loans.

“I think there was some very aggressive selling from the GCC investors in real estate,” said Julian Bruce, director of foreign institutional sales, EFG-Hermes. “There are a few voices currently questioning the sustainability of property price rise in the UAE, Dubai in particular. In addition to the [Morgan Stanley's] report, there is also speculation regarding a government legislation related to restriction of flipping on off-plan sales. Now obviously if you see domestic investors perceiving that their opportunity to make money in some of these markets is going to be restricted, then the financial reaction to that is to sell real estate stocks.”

However, the market decline at this time of the year is similar to what happened during the period preceding Ramadan last year, according to Mousa Haddad, head of trade, discretionary mandate, National Bank of Abu Dhabi.

“So in the weeks before Ramadan we will see further declines. Volumes are getting lower, bids are declining - so basically there was pressure on the selling side - I would term it as ‘panic selling. ‘ But the fact is that the fundamentals are very strong - for real estate, banks and telecom.”

Among other factors, Bruce said, investors seemed to be shying away from emerging markets in general, and there was selling on Friday, the compulsion for which came from Russia. “A lot of investors investing in the Middle East and Northern Africa (Mena) region do have an exposure to Russia as well,” he said.

Elsewhere in the region, the Tadawul index of Saudi Arabia fell to a new low for the year, closing 3.55 per cent lower at 7,884.14. Bahrain’s index closed 0.82 per cent lower at 2,731.02. Qatar also declined 1.81 per cent to end at 11,297.86.

Gulfnews

UAE home loans jump 55% in the year to March

Mortgage lending in the UAE, which started opening its property sector to foreign investment in 2002, jumped 55 per cent in the year to March, central bank data showed yesterday.

Total home loans at the end of March were worth Dh64.95 billion ($17.69 billion) compared with Dh41.86 billion, a year earlier, the central bank said in a quarterly report on its website.

Total outstanding home loans grew 10.3 per cent from December, the data showed, as demand for properties in the second-largest Arab economy soars during a building boom.

The quarterly growth in home loans slowed from the fourth quarter, when total mortgages jumped 17.5 per cent. Year-on-year growth in mortgages also slowed in March compared with December, when total home loans had almost doubled.

The UAE’s burgeoning mortgage business has surged since 2002 as the economy expanded on a near six-fold rise in oil prices and some emirates, including Dubai and Abu Dhabi, began allowing foreigners to invest in properties.

Freehold ownership

Dubai has attracted foreign investors by allowing freehold ownership in many developments, while Abu Dhabi offers foreigners homes on 99-year leases in some areas.

Property prices in the emirate, home to man-made palm-shaped islands, surged 25 per cent in the first half of 2008 and are up 79 per cent since the beginning of 2007, Morgan Stanley said this week, adding it expected a 10 per cent decline in prices by 2010.

Banks have boosted their mortgage offerings, encroaching on the market share of home financiers like Amlak Finance, which has been expanding in new markets, including Egypt and Saudi Arabia, as competition intensifies at home.

The UAE pegs its dirham currency to the dollar, which has forced it to track seven US interest rate cuts since last September and pushed down home loan rates across the country as inflation soars.

Inflation has overtaken official lending rates in the UAE, making it cheaper for people to borrow than to keep money on deposit, encouraging investment in real estate, the main driver of the surging cost of living.

Reuters

Morgan Stanley report criticised

The projected 10 per cent decline in Dubai’s property market by 2010 as reported by Morgan Stanley on Tuesday has failed to take into consideration regional fundamentals, Dubai-based developers said yesterday.

“The report has assumed aggressive supplies and in our view it did not take into consideration many significant factors such as the expected oversupply is not going to be across all the market segments and economic growth potential,” Zaid Ghoul, Chief Financial Officer, Union Properties, told Emirates Business.

“The report relied heavily on markets like Spain and Singapore and has derived its valuation methodology based on those and similar markets in Eastern Europe neglecting the fact that those markets are fundamentally different than the Dubai market and the whole Middle East as a wider region,” Ghoul said.

He believes that the office market segment, villas and low-rise apartments will continue to be underserved and are expected to continue being in demand post-2009.

Dubai’s economic growth has recorded a compound annual growth rate of 18 per cent over the past seven years with gross domestic product exceeding $54 billion (Dh198bn) at the end of 2007. Even the Dubai Strategic Plan 2015 has a goal to grow GDP to more than $100bn by 2015, and has revealed a plan with significant investments to support infrastructure and the increasing demand for real estate, tourism and leisure sectors.

Ahmad Al Matrooshi, Managing Director – UAE, Emaar Properties, said: “The performance of Dubai’s real estate sector is essentially a reflection of the overall economy. Dubai projects an average annual growth of 11 per cent as outlined in the Dubai Strategic Plan. This is expected to sustain a buoyant real estate sector – which is still demand-driven. Although supply is expected to grow in the coming years, projections of Dubai’s real estate sector must be based on economic growth realities. With the Middle East, including Dubai, emerging as the hub of investments in infrastructure building, demand for residential, commercial, hospitality and retail real estate will continue to increase.”

Tarek Kandil, Chief Executive Officer, Define Properties, echoed the same sentiment. “I don’t believe that property prices are likely to drop next year. Although we expect an increase in housing unit supplies, demand will still far outstrip supplies. In the worst case scenario, it may not rise, but will certainly stabilise, considering the strong economy of Dubai and it being rated as one of the safest places in the region.”

According to Ian Powell, Business Development Manager of Bando Engineering & Construction, residential and commercial real estate prices are likely to remain positive well past 2014.

“We foresee continued growth in Dubai real estate market due to the high demand and interest from new international investors wishing to relocate to this part of the region.”

U Balasubramaniam, Chief Executive Officer, Dubai Sports City, said: “Developers are charging exorbitant service charges from Dh10 to Dh18 a square foot and upwards. That in itself speaks of the demand in the market, which indicates that the realty market will go higher next year as well.”

Union Properties objects to rating

Union Properties has disagreed with the “underweight” rating assigned to its share by Morgan Stanley based on a base case target price of Dh5.7 per share.

The stock fell 5.68 per cent to Dh4.89 on the Dubai Financial Market yesterday.

“The Morgan Stanley research team has not visited us requesting information that will allow them to initiate their coverage on Union Properties. We met with them a long time ago when they introduced themselves but none of the assumptions made was either obtained from our management or even discussed before the report has been issued. This is not the common practice and we have officially notified them of that,” said Zaid Ghoul, Chief Financial Officer, Union Properties.

The base case target value was based on the assumption that the Dubai market will see a correction in 2009, leading to price declines. “This assumption is totally wrong considering the fact that the majority of the inventory expected for delivery has been sold at a significant premium to the original price launch in line with the price increase witnessed in the market. Adjusting this assumption will have a significant effect on the target value and the assigned rating,” he said.

“The quality of research should be closely monitored. It is interesting to note that the analyst initiating the Morgan Stanley coverage and valuing Union Properties share at 40 per cent discount its net asset value, is the same analyst who initiated coverage valuing UP share at 1.6 times net asset value sometime ago,” Ghoul said.

“The target value assumed will be affected by price declines resulting from the correction expected in 2009. This is very remote. The more reasonable scenario is that of the Bull Case that assumed a price increase of 20 per cent (as this has already been achieved) and a target value of Dh7.5 per share,” the company argued in its reply to Morgan Stanley.

Emirates Business

Dubai property prices drop by 10%?

Dubai property prices, which have surged 79 per cent since the start of 2007, are likely to fall 10 per cent by 2010 as supply of real estate units outpaces demand in the Gulf emirate, Morgan Stanley said on Tuesday.

A sharper correction in Dubai’s real estate sector could have a ripple effect on its neighbours in the Middle East, with shares of 12 regional property firms dropping an average 35 per cent, Morgan Stanley said in a research note.

In a worst-case scenario, Dubai property prices would follow the pattern of Singapore in the late 1990s, when real estate prices plunged 80 per cent in 18 months, Morgan Stanley said, calling this a “low probability event”. Morgan Stanley further added:

“We expect oversupply to hit Dubai in 2009, leading to a period of price declines. While we expect these price declines to be limited to Dubai given the level of undersupply in surrounding markets, we cannot rule out a ‘contagion’ effect on Middle East, North Africa property shares prices, as investor confidence suffers.”

The bank initiated coverage of 12 Middle East property firms, including the region’s largest by market value, Emaar Properties, whose shares trade more than 100 per cent below Morgan Stanley’s 21.4 dirham ($5.83) target price. Home to man-made palm-shaped islands and an indoor ski slope in the desert, Dubai kicked off a regional property boom in 2002 when it first invited foreigners to invest in real estate. Since then, regional economic growth supported by a six-fold rise in oil prices has attracted streams of investors.

Last month, Standard Chartered Bank said Dubai was overheating because speculators were inflating prices of real estate still under construction. It recommended the emirate introduce a capital gains tax to deter short-term investors.

According to Morgan Stanley’s price index, Dubai property prices soared 25 per cent in the first half of 2008, and are up 79 per cent since the beginning of 2007. “Prices have been driven by a combination of genuine demand, speculation and, most recently, escalating construction costs,” it said. “For 2009, we expect prices to start coming under pressure as oversupply becomes evident. We forecast a 10-per cent decline between 2008 and 2010 in our base case.”

Some developers in Dubai are trying to weed out short-term investors. Palm island developer Nakheel is requiring buyers at its Trump International Hotel to wait a year before they can sell their units on the secondary market, UAE daily The National reported on Tuesday. While Dubai is the “bellwether” for the Gulf property market, slight easing of prices in the emirate may not impact Abu Dhabi and Qatar, whose property sectors should remain undersupplied until at least 2012, Morgan Stanley added.

Morgan Stanley