Banks and developers have held a series of meetings to address the growing risk of property buyers defaulting on deals after paying deposits. As an indicator of the dimensions of the threat, Marwan bin Ghalita, the chief executive of the Real Estate Regulatory Authority (RERA), told The National late last year that some developers had reported up to 40 per cent of buyers falling behind on their payments. However, no defaults have been registered.
"All defaults are handled by the Land Department. They did not register any defaults yet and by law they have to give investors 30 days before they do so," Mr Ghalita said yesterday. Ian Albert, the regional director of the property consultancy Colliers International, said his firm was helping banks assess risk and changes in loan-to-value ratios on their property portfolios. "We are talking to banks about potential defaults. At the moment a lot of banks are having internal meetings looking at that possibility of defaults," he said. "They are looking at all their options for these situations."
Analysts say another effect of rising default levels will be that developers are left short of cash. Defaults on payments on property will leave developers with liabilities of up to US$25 billion (Dh91.82bn) over the next two years, said Saud Masud, a property and construction analyst at UBS. Industry officials said there was some uncertainty surrounding the issue of liability in case of defaults. "So far this issue has been handled case by case," said Adel Lootah, who heads the Dubai Property Society.
Under interpretations issued late last year by RERA of existing regulations, buyers who default are liable for 30 per cent of the full purchase price. At the same time, developers are required to link payment schedules to construction. According to UBS estimates, about a quarter of the residential property sold in Dubai was bought with mortgages, bringing the total in outstanding mortgages to about Dh110bn at the end of last year. The value of the overall residential property market is estimated at Dh500bn.
"When you have a market of this size, then a default of $25bn is not that much," said Mr Lootah. "We are going through a downturn, but the strong developers will survive it." Property prices across the Emirates have fallen by about 25 per cent in the past quarter after speculative money was pulled out of the country following the Lehman Brothers collapse, and local lending has practically ceased as banks hoard cash and restrict lending.
"We will see more voluntary and involuntary defaults in 2009, it will basically be the year where the effects are the greatest," said Roy Cherry, a property analyst at Shuaa Capital. Mr Masud estimates that only about 40 per cent of the 140,000 units scheduled for delivery this year and next year will be completed. In addition, he estimates that 30 per cent of Dubai's residential properties may be vacant by the end of next year as the population falls and oversupply increases.
Asked about possible defaults, Mr Masud said: "I think that situation can only snowball. Initially, high prices locked people out of the market. Now they are facing falling [property] prices." Another problem is individuals who cannot find a mortgage. "I have lots of calls from individuals and a pattern is emerging," said Mathew Hooton, the head of real estate at Ashurst, a law firm. "They have signed contracts and now they cannot get the mortgages."
Typically, these clients signed a memorandum of agreement with the developer at Cityscape or other trade fairs, where the developer promised them a mortgage with a particular bank, which is now no longer available. "Many people who bought off plan in 2008, especially at the peak in the second half, today find themselves in a negative equity situation. With the prevailing uncertainty around the economy and increasing job insecurity, many may be inclined not to pay any more," said Mr Cherry.