With plunging values, missed mortgage payments, and abandoned homes, Dubai's housing market is a lot like others around the world. Except for one thing: There have been no foreclosures in the emirate. Until now.
Barclays (BCS) recently won the sheikdom's first foreclosure case in a local court. The decision, based on a 2008 law, paves the way for others to pursue claims. Lenders hold $16 billion of residential mortgages. Tamweel P.J.S.C., Dubai's biggest mortgage bank, has several foreclosure cases pending. "Banks will be more aggressive," says Antoine Yacoub, a Dubai-based banking analyst at Moody's Investors Service (MCO). "Once they see a precedent has been set, they will be encouraged to push more cases through."
For much of the past decade the emirate was one of the world's hottest property markets. Residential real estate prices quadrupled from 2002—the year Dubai first allowed foreign residents to own property—to mid-2008. The boom was fueled by a growing expatriate workforce and speculation. Prospective buyers routinely stood in long lines to snag homes in new developments, even before construction began. Investors frequently flipped apartments, using profits to buy more properties. Some apartments changed hands two or three times before ground was broken.
The global financial crisis has sent Dubai property values down 52% over the past year, says Deutsche Bank (DB). High-rises stand empty. Some foreign residents who can't pay their mortgage bills have simply abandoned their homes and fled the country, ditching their cars at the airport parking lot. That's because borrowers are required to write postdated checks when they take out a home loan—and people until recently could be jailed for bouncing a check in Dubai. Some 12% of the 27,000 residential mortgages in the sheikdom could go into default within 12 to 18 months, according to September estimates by Moody's.
Not long ago there was no formal system for dealing with defaults. Lenders avoided the courts, discouraged by the ambiguity of the legal process and a culture that frowns on forcing people from their homes. To help buyers, lenders usually try to work out troubled loans, extending payment terms or allowing borrowers to return some of their investment properties. Even so, many loans have been left in limbo.
The 2008 law should impose some structure on the process. It requires lenders to give homeowners 30 days' notice of their intent to pursue foreclosure. If the court finds in favor of the lender, Dubai's Land Dept. auctions off the property, with the proceeds going to pay off the loan.
Lenders may be selective in using the new law. Britain's Standard Chartered Bank, a big mortgage lender in Dubai, says foreclosure is "a legitimate course of action" but not its "preferred approach." As in the U.S., banks are reluctant to dump foreclosed properties on the market for fear of driving down prices, says Saud Masud, a Dubai-based real estate analyst at UBS (UBS). New projects, started before the bust, will add up to 30,000 housing units to the market in 2010, according to Deutsche Bank. "Mass auctions may reprice the property market in a meaningful way," Masud says. "It's a slippery slope."