More Boom-and-Bust Seen in Dubai’s Cash-Driven Recovery

More Boom-and-Bust Seen in Dubai’s Cash-Driven Recovery

After five years living in Dubai, Akanksha Goel and her husband decided to buy a property instead of paying $68,000 a year to rent their three-bedroom house. It never happened. Though Goel, the owner of a small advertising agency, and her cameraman husband, were prepared to pay 50 percent upfront, the couple was classified as “high-risk” because she’s self-employed. They were offered a mortgage for 30 percent of the home’s value at double the rate given to buyers with the best credit.“We decided to bypass the hassle of buying here and we’ll just look into investing somewhere else,” Goel, 27, said in a phone interview. Goel, who is from India, and her Australian husband are looking in Sydney and London, she said.

Dubai real estate, gaining at the fastest pace in the world, is leaving out buyers who finance their homes with mortgages, depriving the city of long-term owners to balance out a cash-dominated market. While prices for prime properties surged 30 percent since 2011, the total value of mortgages held has steadily declined, dropping 2.4 percent in the first four months of the year from December, according to the latest central bank data.

As cash investors return to the Persian Gulf sheikhdom, banks remain cautious about granting mortgages as the United Arab Emirates central bank considers restrictions on lending. At the same time, homeowners who held mortgages since before the property market collapse in 2008 are selling and becoming renters now that values have recovered enough for them to repay their loans.

Family Homes

“We still need to wait for signs of recovery in Dubai’s core demand, represented by middle-income buyers willing to tie their fortunes to the country by acquiring a family home,” said Jan Pawel Hasman, a Cairo-based analyst at EFG-Hermes Holding SAE. “That would be reflected in increased mortgage lending.”

A low proportion of mortgage holders living in their own properties means a Dubai market that experienced one of the world’s worst collapses will be prone to future boom-and-bust cycles as most owners can easily sell or walk away from purchases, said Marios Maratheftis, head of Middle East research for Standard Chartered Plc. (STAN)

Owners with mortgages are also essential to city planners gauging housing needs and economic trends and they are an important indicator of future economic growth for industries from education and health care to services and retail, Hasman said. The value of outstanding mortgage loans in April was 156 billion dirhams, down 4.4 percent from December 2010, according to central bank data.

Off-Plan Buyers

Cash buyers have dominated Dubai’s property market since the emirate first allowed foreigners to own property in 2002. While that includes people who write a single check for a home, it also encompasses off-plan investors who buy directly from developers before construction starts. They usually pay 10 percent of the value at the start and the rest in installments as construction progresses.

“Central bank data won’t show the leverage in a market that’s mostly driven by off-plan property sales with low deposit rates,” Maratheftis said. “But leverage would be very high as buyers finance purchases with personal loans, credit cards and other forms of unsecured lending.”

Off-plan sales are making a comeback as developers from Emaar Properties PJSC (EMAAR) to Damac Holding use them to finance new projects. The method virtually disappeared after it contributed to speculation that helped lead to the market’s collapse. In the past 12 months, most banks have started to provide 50 percent mortgages to off-plan buyers, said Jaap Meijer, the Dubai-based director of equity research at Arqaam Capital Ltd.

Sales Surge

Property transactions jumped 30 percent in first six months of the year to 108 billion dirhams ($29.4 billion) Abdulaziz al Ghurair, head of the U.A.E. Banks Federation, said on Sept. 11 citing data from the Real Estate Regulatory Agency.

“It’s obvious that the new cash buyers outnumber the mortgage buyers,” said John Chang, head of Retail Banking at Noor Islamic Bank. “The growing property market has helped many previous mortgage holders sell their properties.”

Many homeowners who owed more on their mortgages than their homes were worth for the past five years are selling now that the properties are no longer underwater, said Nick Maclean, Middle East managing director at CBRE Group Inc. That’s showing up in rising rents across the city, he said.

Apartment rents unexpectedly jumped by 12 percent and villa rents rose by 13 percent in the second quarter from a year earlier, Jones Lang LaSalle said in July.

Dubai home values increased 21.7 percent in the second-quarter from a year earlier, beating Hong Kong for the fastest pace in the world, Knight Frank LLP said in a survey published on Sept. 9.

Moving Goalposts

Emboldened by the increase, sellers are raising their asking prices halfway through transactions, said Warren Philliskirk, associate director at Mortgage International, a Dubai-based broker. Several of his clients decided to continue renting in Dubai and buy property in their home countries after getting fed up with the increases. One customer gave up after facing price increases three times, he said.

Even if they’re not hit by changing prices, many potential buyers don’t see good value for money in Dubai compared with their home markets, said Jonathan Fothergill, director of valuations at Cluttons LLC. Foreigners make up more than 80 percent of the population of the U.A.E., which includes Dubai and Abu Dhabi, according to government estimates.

“They probably would be left with the option of buying something between a million and a half and 2 million dirhams ($408,000 to $544,000) which is a lot of money,” he said.

Regulation Concerns

Mortgage lending almost stopped completely for few weeks at the start of the year after the central bank issued a Dec. 30 a notice saying home loans to expatriates should be limited to 50 percent of the value, Meijer said. The proposed limit, which hasn’t been enforced, may be raised to 75 percent after talks between the regulator and lenders. Most banks are offering mortgages of as much as 85 percent and interest rates of around 4 percent, Noor’s Chang said.

“Given the current prevalence of cash buyers in the market and the return of speculators, a mortgage cap will not cool the market and will penalize those people who genuinely aspire to own their properties rather than the flippers,” Cluttons’s Fothergill said. “Some deterrent on flipping may be more effective.”

Dubai’s economy may grow 4.6 percent on average from 2012 through 2015, more than twice as fast as in the prior four years, the government forecasts. A housing recovery that started in the most attractive locations is slowly spreading to secondary neighborhoods, Ankur Khetawat, analyst at Cairo-based CI Capital Holdings said.

Bounce Coming

That will lead to a bounce in mortgage lending, with demand surging in 2014 and 2015 as buyers become more confident about the recovery, CBRE’s Maclean said.

“Mortgage purchases are never at the forefront of an economic recovery and they always lag behind one or two years,” CBRE’s Maclean said.

The increases in rents, coupled with the availability of home loans at attractive rates and terms, will bring more residents back to the market, Noor’s Chang said.

Residential mortgages will probably grow 10 percent to 15 percent annually in the next few years, Shuaa’s Meijer said. “That’s sustainable because the rates have come down so much” and interest of about 5 percent annually is the norm now, he said.

To contact the reporter on this story: Zainab Fattah in Dubai on

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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