Financial literacy: As the Dubai property market heats up and prices surge by the most in the world, international investors are eager for a piece of the action. But there is just one small problem: getting a mortgage.
Banks still wary of giving mortgages to overseas buyers of Dubai property
As the Dubai property market heats up and real estate prices surge at the steepest rate in the world, international investors are eager for a piece of the action.
But there is just one small problem: getting a mortgage.
Bryan Ong, the director of a private tuition company in Singapore, said he began looking for bank financing this year to fund investments in Dubai's property market, which he said looked attractive.
"Initially it was because of the high rental income," he said. "However, after knowing that they do not finance overseas buyers, I put my investment on hold."
Preferring to finance his purchase with a mortgage rather than cash, he deferred his plans.
Banks, stung by Dubai's property crash of 2009, have largely ceased underwriting mortgages to overseas buyers, whose missed payments are more difficult to collect because of limited legal recourse.
What had been a profitable business while markets were rising quickly became a source of bad debts when the property bubble burst.
With property prices on the increase again, banks said they are still wary.
"We don't finance overseas buyers," said Suvo Sarkar, the general manager of retail banking at Emirates NBD. "At this point we don't believe the economics stack up."
Lending to overseas buyers comes with a multitude of additional costs for banks.
Documentation becomes more difficult, as does establishing sources of income for customers of certain nationalities.
A customer default can be problematic, as a UAE bank is likely to have little recourse over a buyer in another country. By law, a mortgage held by a UAE resident must be secured with a cheque.
"We've done it in the past," Mr Sarkar said. "We used to do it pre-crisis, but post-crisis we tightened the policy and we haven't opened it up just yet."
Overseas buyers are still out there with swelling purses, but they are forced to pay out of pocket instead of using bank financing.
Banks and estate agents estimate cash buyers account for between 70 and 80 per cent of the current transactions in the property market, helping to drive a sustained recovery in UAE real estate.
Rental rates for one-bedroom apartments in Dubai have increased by about 30 per cent in the past year, according to Knight Frank.
Although banks said mortgage transactions have recently picked up, Central Bank data shows that the value of outstanding mortgages on banks' balance sheets contracted in the first quarter of this year by Dh3.8 billion to Dh155.9bn, the biggest dip since the first quarter of 2011. It was also the third consecutive quarter of declines, the data showed.
Cash buyers' purchases of distressed properties originally financed by mortgages have been cited as a factor behind the declining amounts of home loans outstanding. In the meantime, banks are not underwriting enough new mortgages to keep up as interest rates plumb historic lows.
But most banks are already averse to taking risks on mortgages to overseas buyers - and brokers have to work hard to persuade them, said Sam Wani, the general manager of Independent Finance, the mortgage adviser.
"We try to avoid taking non-residents," he said. The company makes exceptions in certain cases, such as salaried staff in governments or big blue-chip companies that can provide tax returns and bank statements.
In the past year, Mr Wani says the majority of overseas customers have come from India or the UK, with Russians, Iranians, Syrians and Egyptians also accounting for a significant proportion.
The biggest problem is that income levels can be "difficult to authenticate", Mr Wani said, particularly in countries where tax systems are less robust.
"If you're from Kenya or even Russia, it's almost impossible to get a mortgage approved for non-residents. They have almost non-existent tax regimes," he said. "Getting a mortgage for a non-resident from the UK is much easier."
Emirates NBD said its aversion to overseas buyers may change as the UAE's legal infrastructure strengthens and it becomes easier to recover overdue payments.
"We'll be reviewing our policy in the near future," Mr Sarkar said.
"It's a question of what sort of growth we'd want in our book, from a credit appetite perspective."