Dubai Suitcases of Cash Circumvent Loan Rules: Mortgages

Dubai real estate agent Laura Adams remembers the Iranian homebuyer because of how he wanted to pay.

“He literally put a suitcase on my desk, opened it up and it was full of 1,000 dirham notes,” the Carlton Real Estate managing director said in an interview. “I asked him to go across the road to Western Union and get it exchanged for a manager’s check, half a million dirhams ($136,000).”

Cash is king in the Persian Gulf emirate’s rebounding property market, limiting the power of regulators to control rising prices that fueled the last property bubble by imposing restrictions on mortgage loans to foreigners. Buyers from Iran to Russia to Greece are paying cash in as many as 70 percent of Dubai home purchases, up from 49 percent in 2007, according to researcher

The United Arab Emirates central bank, which oversees seven emirates including Dubai, issued the rules last month limiting mortgages to expatriates in an effort to prevent the type of speculation that created a property bubble that burst in 2008, sending prices down as much as 65 percent. While the caps may do little to curb price increases, they will hamper efforts by banks to revive credit growth.

Lenders are pushing back against the restrictions, which cap mortgages to foreigners, the majority of homebuyers and 80 percent of the population of the U.A.E., to 50 percent of the value of a first property and 40 percent of a second. U.A.E. citizens would be limited to 70 percent on a first home and 60 percent on a second. Previously there was no limit and banks were lending as much as 85 percent.

Muted Effect

“The overall level of impact on the market, which is overwhelmingly dominated by cash buyers, is going to be relatively small,” said Nicholas Maclean, Middle East managing director for CBRE Group Inc.

Emaar Properties PJSC, builder of the world’s tallest tower, sold fewer than 15 percent of its homes last year to buyers using mortgages, Morgan Stanley analyst Muneeba Kayani said in a note, citing the company. An Emaar spokeswoman, who asked not to be identified in line with company policy, confirmed the information in the Morgan Stanley report regarding sales but declined to provide a specific figure saying that the actual number is not public information.

Ali Rashid Lootah, chairman of builder Nakheel PJSC, developer of the man-made palm-shaped islands in Dubai, said the majority of its sales are funded with cash and that the impact of the law would be minimal.


Though most purchases aren’t made with banknotes, the 500,000 dirhams wasn’t the first cash-stuffed suitcase that Adams has seen at work. One customer told her he had the money with him because he’d just completed a diamond deal and didn’t want to stop by the bank, she said. A Russian buyer walked in with 250,000 euros ($336,000) as the down payment on a two-bedroom apartment in the Burj Khalifa, the world’s tallest tower, she said. The rest was paid with a single check.

“The lack of control on overseas currency in the U.A.E. has resulted in the prevalence of cash purchases,” said Craig Plumb, regional head of research at broker Jones Lang LaSalle Inc. “Buying property with cash tends to raise questions in other markets.”

Rising home values and signs of greater competition between lenders last year sparked concern that real estate speculation would return four years after it caused the market to crash. Apartment prices increased 19 percent and houses rose by 24 percent, according to broker Jones Lang LaSalle. Abdul Aziz Al Ghurair, head of the United Arab Emirates’ Bankers’ Association, in November said low rates and easier terms from mortgage lenders could lead people to “gamble.”

Lending Jump

Residential and commercial mortgages jumped 24 percent by value in the third quarter from a year earlier to 1.19 billion dirhams, according to Reidin. That’s a third lower than the same period in 2008, when Dubai’s property market began to slump.

Governments in Singapore and Hong Kong introduced measures to cool property prices in the past two years. Those included lower loan-to-value ratios, or LTVs, as well as taxes on property sales, Morgan Stanley said in a report Jan. 8.

“Property prices in both markets have continued to rise because of ample liquidity given negative real interest rates and nominal mortgage rates below rental yields,” Morgan Stanley analyst Muneeba Kayani wrote.

Investors paid in cash for around 80 percent of homes bought in Dubai in the past six years, CBRE’s Maclean said. The only exception was in 2007 when around 33 percent of home transactions were funded through mortgages, he said.

Cash Consistency

“The most interesting thing about the breakdown of mortgage and cash buyers is how consistent it has been,” he said. “Even at the peak of the market, borrowing actually was low by international standards.”

The lending restrictions may exclude as many as 25 percent of buyers, who won’t be able to collect the 50 percent down payment, according to Ryan Mahoney, chief executive officer of property broker Better Homes. He said around 40 percent of his clients get mortgages to fund properties, generally with value of around 1.5 million dirhams. Investors and cash buyers tend to buy properties that are priced above 3 million dirhams, he said.

Restricting lending may work against efforts to create a more stable Dubai property market by increasing purchases by people who buy their own homes to live in rather than renting them out or seeking to sell at a profit.

The rules may result in “excluding the people we are trying to encourage: the end users and the ones who work and live in the country, which is certainly not what the government intended,” said Plumb of Jones Lang. Cash investors can make the market more volatile because they’re likely to move their money quickly when a better opportunity emerges, he said.

Banks Protest

Dubai’s banks, which will bear the brunt of the central bank’s lending restrictions, are proposing a mortgage cap of 75 percent for foreigners, bank association chairman Al-Ghurair told reporters on Jan 27. The association is also recommending a cap of 80 percent for U.A.E. nationals for their first mortgage and 65 percent for second homes, he said.

Directives sent last month to lenders restricting mortgages were meant to “draw their attention to certain standards that are expected to be adopted under the new system,” central bank Governor Sultan Bin Nasser Al-Suwaidi said in an interview with state-owned newspaper al-Ittihad published on Jan. 21. The U.A.E. plans to issue regulations governing the mortgage market in six to nine months, he said.

Main Banks

Abu Dhabi Commercial Bank PJSC has the biggest share of the U.A.E.’s mortgage market at 24.3 percent, according to Jaap Meijer, director of equity research at Dubai-based Arqaam Capital Ltd. Emirates NBD PJSC commands 19.2 percent, National Bank of Abu Dhabi 14.3 percent and First Gulf Bank 12.9 percent.

A down payment of 50 percent on a home purchase is “too restrictive” considering average prices range from 1.5 million dirhams to 3.5 million dirhams for apartments and single-family homes, said Murad Ansari, a Riyadh-based analyst at EFG-Hermes Holding SAE.

Real estate accounted for just 22 percent of loans at the end of 2011 and 18 percent of those were for expatriates, Digvijay Singh, a Dubai-based analyst at VTB Capital Plc, said in a Dec. 31 report.

Mortgage lending “is an opportunity for banks to grow their loan book in a market that otherwise has been stagnant in the absence of demand from the corporate sector,” Ansari said. “This adds another blow, which means retail credit demand may also slow down as well.”

Speculators Return

Though there is disagreement on the size of the mortgage restrictions, concern about speculation has prompted wide support for some type of limits. The proportion of homes bought with loans was the highest in the two years leading up to the property crash. At the time, borrowers frequently put down as little of 10 percent of a property’s value and sold them as prices soared.

The last three months of 2012 witnessed a noticeable return of speculators as sellers “were becoming unrealistic with their expectations and buyers aimed to ride the recovery wave in some areas, expecting prices to jump 25 percent in few months,” Adams from Carlton Real Estate said.

“Something had to be done,” Adams said. “Now whether it had to be 50 percent LTV I’m not sure, but we certainly started to see flipping of properties in some areas.”

Single-family homes will be most affected by the lending rules because the properties are popular with expatriate families and prices have increased sharply, Adams said, referring to communities such as the Arabian Ranches, Meadows and Springs.

“Buyers who have to put down a large sum of money will be now aggressive in negotiating prices,” she said. “It’s not the same when you are buying with someone else’ money.”

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