U.A.E. Plans to Limit Lending to Home Buyers

http://www.nytimes.com/2013/01/10/world/middleeast/uae-plans-to-limit-lending-to-home-buyers.html

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DUBAI — Just when Ali Zarzour was about to make a down payment for a 4.5 million dirham, four-bedroom villa in Dubai, a new mortgage rule was announced overnight that cast doubt over his plans.

Seeking to protect the improving property market from the kind of collapse that hit the city and the world in 2008, the Central Bank of the United Arab Emirates sent out a letter on Dec. 31 asking banks to restrict lending to home buyers.

If implemented, the new rule would mean that prospective expatriate home owners would only be able to borrow 50 percent of the value of a property from a bank for their first home and 40 percent for a second purchase. Emiratis will have a higher limit — 70 percent for a first home and 60 percent for the second.

The new rules will be a big change. Lenders have traditionally offered mortgage rates of as much as 85 percent for interested buyers.

For Mr. Zarzour, the changes would mean that the deposit required for the down payment on the new house, worth $1.2 million, would nearly double from one day to the next. As the purchase he is contemplating would be his second home, he now may need to make a 40 percent down payment of 1.8 million dirhams, instead of 900,000 dirhams.

“The bank now has my payment on hold until the central bank confirms the new rule, which could take up to 30 days, but if it is implemented I will change my mind about this purchase,” he said.

Prices of homes in the U.A.E. fell by an average of about 50 percent during the financial crisis in 2008 as borrowers defaulted on unaffordable loans.

Recently, the property market has finally shown signs that it is recovering and even becoming frothy. According to statistics from CBRE, the international real estate advisers, lease rates have risen 17 percent over the last year. Some well-known locations like Downtown Dubai have seen bigger increases.

Developers have announced several large projects aimed at attracting investment. One is Mohammed Bin Rashid City, which will include 100 hotels, new residential areas, the largest shopping mall in the world and a park larger than Hyde Park in London.

“As the sentiment improves in Dubai real estate, this new rule is aimed at stopping speculation and helping the market to recover value at a sustainable level,” said Nicholas Maclean, the managing director of CBRE in the U.A.E. “Back in 2008, there was a huge amount of speculation which resulted in buyers with no intention of holding property long term for investment or occupancy — the government is keen not to have this repeated.”

Analysts say the new measures aim to reduce the risk of a new real estate bubble — although they will hurt borrowers and banks in the short run.

“The new measures are aimed at taking some of the heat out of the market and preventing prices from increasing at an unsustainable pace, as occurred from 2006 to 2008,” said Craig Plumb, head of research for the Mideast and North Africa region for Jones Lang LaSalle, another real estate advisory company.

“Ultimately, it should have a positive outcome for the market,” he said.

Buyers from places like Iran, Russia, India and elsewhere who have put money into Dubai real estate are unlikely to be slowed by the new rules, real estate professionals say.

Dubai real estate has also benefited from money from other Arab countries like Egypt and Syria that are being rocked by political turmoil. These individuals mostly bring cash.

“These investors want to diversify their wealth, and at the same time Dubai is a city where the nouveaux riches from these countries feel good,” said Sebastien Henin, a portfolio manager at The National Investor, an investment management and advisory firm in Abu Dhabi.

But in the short term, buyers who need mortgages will likely stick to renting.

“One overnight decision with somewhat immediate effect could potentially have a big impact on the market, especially for young professionals and first-time investors,” said Qasiem Nasser, a doctor who recently moved to Dubai from the United States.

As potential buyers opt to rent instead, prices on the rental market are set to rise, according to Mr. Maclean. Average rents for one, two and three-bedroom apartments fell 54 percent between the fourth quarter of 2008 and the fourth quarter of 2011, but are now rebounding amid renewed confidence in the Dubai market, according to a report by CBRE that was released last month.

Some brokers say the bank’s decision has already chilled the market.

“Even without the rule set in stone yet, it has created panic in the sense that buyers are hesitating and rental market interest has nearly doubled overnight,” said Benjamin J. Smith, the chief executive of Smith & Ken, a company that provides a range of real estate services in the U.A.E.

Banks like HSBC and Emirates NBD have asked the central bank for a 30-day extension to renegotiate the financing limits and define a code of conduct.

A number of real estate professionals think the central bank’s caution makes sense.

“This will promote a more sensible level of lending although profits will be less,” said Daniel Whitlock, a Dubai-based investment manager at Elysian, a global property brokerage and consulting company.

The mortgage market will contract in the coming quarters and access to finance will be trickier, said Mr. Henin of The National Investor.

“This new cap has been introduced to protect both financial institutions and landlords against a sudden property market collapse,” he said.

Still, cash buyers who do not need mortgages may be able to pick up bargains, restricting property ownership to those with relatively high incomes, analysts say.

“The cap will slow the market but not halt its growth,” said Khalid Howladar, an analyst at Moody’s Investors Service in Dubai.

The industry is now waiting for the end of this month when the central bank is expected to confirm whether it will go ahead with the cap.

“It’s a brave but essential move to curb the high increase in prices and support the rental market which has fallen over the years,” said Mr. Whitlock of Elysian. “The decision shows great maturity in a very young market.”