Dubai Risking Bubble Redux With Lowest Rates: Mortgages

Dubai Risking Property Bubble Redux With Lowest Rates
Dubai skyscrapers including the Burj Khalifa, the world's tallest tower, rise from the desert in Dubai, United Arab Emirates. Photographer: Gabriela Maj/Bloomberg

Dubai, the desert sheikdom where home prices have plunged 65 percent since 2008, risks re-inflating its property bubble with the help of mortgage lenders offering easy terms and the lowest rates ever.

“We don’t want to encourage people to gamble,” said Abdul Aziz Al Ghurair, head of the United Arab Emirates’ Bankers’ Association and chief executive officer of Dubai’s Mashreqbank PSC. “It’s worrying when there’s unhealthy competition amongst banks.”

Banks slashed interest rates to the lowest on record and reduced down-payment requirements this year as borrowing rose and home prices rebounded in parts of Dubai. HSBC Holdings Plc’s Middle East unit offers some of the lowest rates at 3.99 percent, down from a high of 9.5 percent in 2009. Standard Chartered Plc and Barclays Plc have similar rates, lending 80 to 85 percent of a home’s value. Al Ghurair said he’s concerned that banks are going toward 90 percent loans.

Mortgage lending in Dubai is picking up after grinding to a virtual halt in 2008, amid signs that home prices have bottomed out and are climbing in areas such as the Palm Jumeirah artificial island. Residential and commercial mortgages jumped 24 percent by value in the third quarter from a year earlier to 1.19 billion dirhams ($324 million), according to research company That’s a third lower than the same period in 2008 when Dubai’s property market began to slump.

Projects like Mohammed Bin Rashid City, a new district named after Dubai’s ruler that features the world’s largest shopping mall and gardens bigger than London’s Hyde Park, have been revived in recent weeks after stalling in the slump. The sheikh today approved the construction of five theme parks valued at 10 billion dirhams. Developer Meraas Holding said it plans to attract 16 million visitors a year.

‘Attractive Opportunity’

“With the real estate market stabilizing, banks are seeing this as an attractive opportunity,” said Murad Ansari, a Riyadh-based analyst at EFG-Hermes Holding SAE. “Overall lending volumes have been sluggish throughout the U.A.E., particularly on the corporate side, so banks are looking to grow their loan book.”

About eight of the 30 banks operating in the United Arab Emirates are offering mortgages covering as much as 85 percent of the home price, said Jean-Luc Desbois, who founded his Home Matters mortgage consultancy in Dubai in 2006. Barclays’ lowest rate is 4.15 percent for mortgages with a loan-to-value ratio, or LTV, of as much as 80 percent. Standard Chartered’s mortgages start at 4.49 percent with an LTV of 85 percent.

Steady Growth

Al Ghurair, who also serves as the chairman of the Dubai International Financial Center Authority, said he supports voluntary banking industry guidelines to limit mortgages to 75 percent to 80 percent of a property’s value. He also supports a code of conduct that limits risky practices, to avoid pushing the central bank into enacting more restrictive rules.

“We need steady growth,” Al Ghurair said on Nov. 21. “We don’t want sudden growth and then sudden decline.”

Shuaa Capital analyst Asjad Yahya agrees with Al Ghurair’s call to limit mortgages to 80 percent LTV. A 90 percent ratio risks “getting banks into dangerous territory.”

Dubai’s property market was opened to foreigners in 2002, causing prices to jump as speculative investors used cheap financing to buy and sell contracts for homes before they were built. At the market’s peak, mortgages of 90 percent were common, Yahya said. Some banks offered 97 percent financing and others overvalued homes to effectively finance 100 percent of the price for some clients.

Financing Collapse

The credit crisis ended all that, pushing the emirate’s two biggest home lenders, Tamweel PJSC and Amlak PJSC, to the brink of collapse as prices plunged by as much as 65 percent.

This time around, banks are restricting mortgages to clients with the lowest risk of defaulting, Ansari of EFG-Hermes said. Regulations adopted since the crash and greater clarity on values also make a surge in lending and home prices less likely, he said.

“It might get a bit competitive, but I don’t think this will get to the point where it becomes reckless,” Ansari said. “Banks went through a rough time in 2008, 2009, 2010. I don’t think any bank would be willing to go back to that environment and see asset quality deteriorate.”

Mashreqbank reported declining profit for those three years, boosting provisions for bad loans as companies restructured debt and economic growth slowed. The bank, which makes mortgages with a maximum LTV of 80 percent, posted a 2 percent increase in profit in 2011.

The slowing pace of price declines in some areas and a rebound in others are giving banks confidence in property values in most Dubai locations, EFG-Hermes’ Ansari said. The Cairo-based bank doesn’t provide mortgages in the U.A.E.

‘Appropriate Discount’

Before the crash, home prices in Dubai “were beginning to compete with those in much more secure markets even without the associated legal structure and stability that we have in places such as London,” Raj Madha, an independent regional banking analyst, said by telephone from Dubai on Nov. 14. “Now an appropriate discount is reflected in the prices in the U.A.E. and therefore the concern that property prices would drop dramatically again is certainly not as great.”

The U.A.E.’s central bank in 2008 enacted rules limiting real estate lending to 20 percent of a bank’s deposits. Dubai established the Real Estate Regulatory Agency in 2007 and a property court was set up in 2008.

Noor Islamic Bank said client profiling is “much better” than it was in 2008 and that it’s essential to the bank’s selection of borrowers. The lender’s policies and rates are applicable to “safer segments” of borrowers, the bank said in e-mailed answers to Bloomberg News questions.

Lower Rates

Noor’s lowest rate is 4.75 percent with a maximum LTV of 85 percent. In 2008 it sold mortgages with an LTV of 90 percent to 95 percent at rages of 6.8 percent to 8 percent, it said.

Standard Chartered said its mortgages are largely focused on first-time buyers and people who plan to live in the properties they purchase. “Despite the increase in competition on the rates we see that overall, banks have been more prudent in lending,” the lender said in an e-mail.

HSBC’s head of assets, Ali Khan, said the risk of another bubble has been minimized. “Valuable lessons have been learned,” he said. “The market has matured and there is a higher level of regulation that governs mortgage lending for banks and for customers.”

Barclays won Dubai’s first foreclosure case in 2010, setting a precedent and easing concerns that the legal process would be lengthy and opaque. Since then, banks and developers have used the courts to repossess homes from delinquent buyers. Tamweel won the right to foreclose on five homes in June 2010.

Non-performing Loans

Banks have more reasons to be more cautious this time around. Many still carry non-performing loans on their books from the property crash. They are also dealing with calls to restructure existing loans to developers and other companies.

Dubai Group LLC, an investment company owned by the emirate’s ruler, is seeking to delay payment on more than $6 billion in loans. Dubai World Ltd., the former parent of developer Nakheel PJSC, reached a deal in March 2011 with about 80 banks to alter the terms on $25 billion of debt. Nakheel avoided default after receiving an $8.6 billion bailout from Dubai’s government.

Non-performing loans are expected to peak at the upper end of the 10 percent to 12 percent range this year and then fall slightly to the lower end of that range in 2013, Moody’s Investors Service said in a Nov. 7 report.

Still, mortgage lending carries less risk than corporate or personal loans because they are backed by properties, Jaap Meijer, Dubai-based director of equity research at Arqaam Capital, said by e-mail.

“Mortgages are attractive, as banks have to set aside half the capital required for consumer or corporate loans,” he said. Banks are mostly financing completed properties and ones in good locations where they see demand is strong.

Some of the restraint shown by banks now may evaporate as the market recovers, said independent analyst Madha.

“Lenders are initially very cautious and they get less and less cautious as people become comfortable with the status quo,” he said. “Eventually they become too imprudent.”

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