Banks used to be eager to lend money to buy property, but all that has changed in the credit crisis.
Loans for homes harder to come by
ABU DHABI // Just three months ago, the property market in the UAE seemed immune to any talk of a downturn, with easy borrowing making homes more affordable and demand continuing to rise. But banks and finance companies have since tightened their lending criteria in the wake of the worldwide credit crisis, and Amlak, the country's largest home lender, has suspended new loan applications until further notice.
Ironically, homes have become more affordable, but it has become far more difficult to buy them with financing. A straw poll conducted by The National revealed that lenders have been demanding larger down payments, some as high as 50 per cent of the purchase price - effectively putting a purchase out of reach for most people. In addition, lenders have become much more discerning about who they will lend to.
For example, the buyer of a Dh2 million (US$544,440) flat in Al Raha Beach in Abu Dhabi will need to stump up about Dh500,000 to the developer before even being considered for a loan. To make matters worse, the cost of borrowing has also shot up. Lenders typically charged interest rates of about 7.5 per cent in September. Rates for loans are now more than nine per cent, if they are available at all.
The situation is in stark contrast to last year when lenders were eager to attract business, in some cases offering to finance as much as 95 per cent of the value of a home. Although property prices have softened in recent weeks - down four per cent in Dubai and five per cent in Abu Dhabi last month, according to HSBC Bank - prices remain high. The chances of buying a one-bedroom flat in either city for less than Dh1m are slim. However, unless lending resumes at reasonable interest rates, prices will have to fall to attract purchasers.
"At the moment, I can fully understand the reasons why banks are reluctant to lend speculatively in the real estate sector," said Vincent Easton, the sales director at Sherwoods Independent Property Consultants. "However, if Dubai wants to secure its real estate market, it has to ensure that finance is available. "It is unrealistic for people to put 50 per cent down on a Dh7m property. Banks are telling us they are prepared to lend 80 to 85 per cent, but there are a lot of criteria attached to that. There needs to be more attractive options available to purchasers."
More than 30,000 new units are expected to be delivered in Abu Dhabi by the end of 2010, and 140,000 in Dubai, market analysts say, making this possibly the biggest test of the property sector to date. Neil Birmingham, a senior mortgage adviser at the Dubai-based company Independent Finance, said the chances of somebody on an average salary securing a home loan had been "greatly reduced" and were now "slim to none".
Lenders "are being ultra-cautious and only lending to the cream of the crop". Such borrowers typically have salaries of more than Dh30,000 a month, have been based in the country for several years and have paid off a substantial percentage of the value of the property. The flow of finance to non-residents, too, has slowed as lenders, most of whom have already achieved their annual targets, sit out the remainder of the year.
Mr Birmingham said the situation was unlikely to improve until the Central Bank's recent cash injections of Dh120 billion trickled down to bank customers. Until then, most prospective buyers must "sit and wait" rather than snap up property on the cheap from distressed sellers. "There are some great bargains out there for the cash buyer," he added. The only hope for buyers is the increasingly flexible finance schemes being offered by developers, said Chris Dommett, the chief executive of John Charcol Dubai, the Dubai-based mortgage expert.
Major developers such as Emaar are introducing flexible payment plans and financing schemes to compensate for the funding gap, he said. Under the schemes, banks would agree to finance potential homeowners on the basis that the developer pays a portion of the purchase price before the borrower comes up with the full down payment. The developers, in effect, are assuming the risk, and providing some of the financing. More measures like this will be needed to keep the market afloat.
firstname.lastname@example.org * Additional reporting by Roland Hughes
Posing as the buyer of a Dh1.7m, one-bedroom flat at Aldar's Al Raha Beach development in Abu Dhabi, The National's Robert Ditcham tried to secure a loan from several regional and international lenders. He told the lenders he had a monthly salary of Dh20,000 and had already paid the developer a down payment of Dh340,000, or about 20 per cent of the value of the property. HSBC HSBC's home loan department said it would finance 60 per cent of the value of the home at an interest rate of 8.5 per cent. If the buyer chose to pay only a 30 per cent deposit, the interest rate would be 9.5 per cent. The bank reviews its interest rate every three months. After asking for monthly salary details, the mortgage assistant was not able to confirm whether the application would be approved. Instead, it was promised a mortgage adviser would call within two working days to establish creditworthiness. According to HSBC's online list of approved developments, the loan-to-value ratio was 50 to 60 per cent for homes under construction and 50 to 70 per cent for units already completed. In June, HSBC offered UAE residents 70 to 80 per cent finance at 7.99 per cent, according to second-quarter market data from the property services company Asteco. Now: 50-70 per cent Before: 70 to 80 per cent Tamweel: Tamweel offered to finance a maximum of 75 per cent of the flat at an interest rate of 8.9 per cent. The company said it would not finance units valued at more than Dh1,350 per square foot. Earlier this year, Tamweel offered up to 95 per cent financing at a rate of 7.4 to 8.65 per cent, Asteco said. Now: maximum 70 per cent Before: up to 90 per cent Lloyds TSB Dubai The British bank said it was unable to provide mortgages for any property except villas, a recent policy change, according to the assistant. The buyer of an apartment under construction in Abu Dhabi would clearly have no chance of securing a mortgage. The owner of a completed villa, on the other hand, would have had to pay a one per cent arrangement fee and an 8.5 per cent interest rate. According to Asteco's market data, Lloyds TSB offered 85 per cent finance at between 6.25 and 7.5 per cent in June. Now: no mortgages unless villas Before: 85 per cent Amlak A person wanting to buy an Aldar project would not have qualified for a loan even if Amlak had still been accepting fresh loan applications. The country's largest home lender would have financed three projects by the developer Sorouh at a rate of 9.75 per cent, but not projects by Aldar. In normal circumstances, the company would have typically financed 80 per cent of completed projects and 70 per cent of those under constriction, subject to certain criteria. Before the credit crisis, Amlak offered 90 per cent finance at 6.5 to 8.75 per cent, Asteco said. Now: 80 per cent of completed projects and 70 per cent of those under construction Before: approximately 90 per cent National Bank of Abu Dhabi After confirming that NBAD would finance projects built by Aldar, a representative said the rate for units under construction was 9.5 per cent, compared with 7.5 to 8.5 per cent before the credit crunch took hold. The assistant said it would finance 75 per cent of the value of the units in Abu Dhabi, meaning a buyer would need to pay another five per cent to the 20 per cent already paid to the developer. For Dubai projects, the company offered a loan-to-value ratio of just 50 per cent. But, crucially, individuals with a salary of less than Dh20,000 a month would be required to transfer their monthly salary payments directly to NBAD. Those who earned Dh10,000 a month would not be eligible at all. Now: 75 per cent Before: approximately 90 per cent