Cap Concerns
Big Project ME investigates the consequences and reactions to the proposed mortgage cap put forward by the UAE Central Bank
Earlier this year, the UAE Central Bank’s proposal to cap mortgages to 50% of a home’s value caused a considerable stir in Dubai’s real estate market, with real estate agents and home buyers unnerved by the implications of the move.
The Central Bank proposal stated that expats would only be allowed to borrow 50% of a property’s value, while UAE nationals would be limited to 70%. The move to the new rates was described by the Bank as a way to combat the speculative buying that fuelled the highly inflated prices that Dubai saw prior to the market crash.
However, the initial reaction to the rates was far from positive, with bankers and real estate agents united in expressing concern over the effects the proposal would have on the real estate market.
“A deposit of 20% to 30% would be appropriate for the UAE and in line with European standards,” said Renan Bourdeau, managing director of propertyfinder.ae. Furthermore, several potential home buyers told Big Project ME that they were unwilling to invest in a market that has no built-in stability and where dramatic legislation could be introduced at random.
“People that were going to purchase are now holding back and waiting to see what is going to happen,” said Ryan Mahoney, CEO of Dubai-based estate agent Better Homes, in a criticism of the move.
As scepticism continued to mount, the UAE banking industry, through the Emirates Banks Association, made a formal plea to the central bank, asking it to raise the mortgage cap for the purchase of first homes to 60% for non-nationals and 80% for nationals.
Led by Abdul Aziz al Ghurair, chairman of the Emirates Banks Association, the banks put forward further amendments to the proposal. These included provisions such as whether the projects in question were under construction or if the investor was a UAE resident or non-resident.
With criticism growing, the Central Bank was forced to issue a statement reassuring nervy investors and bankers that it would not impose the limits without consulting commercial banks, while pointing out that the ruling wasn’t imminent anyway.
As the dust settled and greater analysis applied to the matter, experts slowly started to realise that the move could be a good thing, as Nick Maclean, managing director at CBRE, explained.
“I think a conversation about lending (over here) is an extremely good thing, and I think the initial proposal, if that’s what it is now, was never meant for implementation. But instead, it was a discussion document that was meant to determine whether or not limitations on the amount of borrowing, and the types of people who could borrow, could be put into place,” he explained.
Furthermore, he added that the response from the local banks was heartening and ‘very interesting’.
“There were some very interesting components to their response. So between the two institutions, I think they have the same motivation, which is to make the market here more sustainable and steady and I think that’s to be applauded,” he added.
Hussain Sajwani, chairman of Damac Properties, chimed in to the debate, telling Big Project ME that in his opinion, there should be a limit imposed on borrowing, as it could only benefit the real estate market and local developers.
“I think there should be a limit, because we don’t want to see banks finance 90% of a project, like we’ve seen in the past, and that was one of the main reasons for the market crash,” he said.
Furthermore, he said that if the cap was implemented, it would weed out the speculators and investors who weren’t serious about projects.
“I think we want serious investors who’ll put serious equity on the table. I don’t think the market wants an investor who’ll put 5% and speculate. That’s what caused the problem in the past, and I don’t think the market needs those kinds of investors,” Sajwani stressed.
Maclean added that he expected the cap to have a steady medium to long term effect on the UAE real estate market.
“I think there’s a lot of positivity to be taken from the efforts to calm the market, but at the same, not impact on the speculative buyers who are coming into the market without mortgages,” he asserted
