Monday, December 31, 2012

UAE Central Bank caps mortgages at 50% of property value for expatsand 70% for Emiratis

In a move apparently aimed at eliminating speculators from the real estate market, the UAE’s Central Bank has decided to direct banks in the country to cap mortgage lending for expatriates at 50 per cent of the property’s value.
According to banking and real estate sources, mortgages for expatriates are being limited to 50 per cent of the property’s value for their first property, and 40 per cent for the second unit.
For UAE nationals, the rate will be slashed to 70 per cent for the first property and 60 per cent for the second unit.
A number of banks that  they were yet to analyse the circular from the UAE Central Bank and were therefore not in a position to comment on the move.
It said the new rules would be enforced at the start of 2013, adding that the Central Bank gave no reason for the decision.
Nevertheless, the Central Bank has been locked in a drive to bolster the country’s financial sector following the 2008 global fiscal distress and regional debt default crises that jolted many local banks.
In May 2011, the Central Bank enforced new rules on retail lending, capping personal loans at 20 times a borrower’s monthly salary and stipulating that the loan must be repaid within 48 months.
Those regulations covered all retail loans including personal, auto, housing loans and credit credits, and were aimed at controlling lending activity and excessive charges by banks following public complaints about a surge in bank fees.
According to Central Bank statistics, however, mortgage lending has not seen a major spike in recent months. The latest available data for August 2012 shows that real estate loans issued by UAE banks stood at Dh162.6 billion, marginally lower than the Dh163.2 billion registered at the end of 2010.
This means that, in effect, mortgages have stagnated at this level for 18 months. The Central Bank’s move, in such a scenario, is being looked at as a proactive one rather than a reactive one, aimed at ensuring that the country’s banks’ non-performing loans do not see a repeat of the spike that they saw after the 2008/09 global economic slowdown.
Banks in the country have seen specific provisions for NPLs surge by over 47 per cent since the end of 2010 – from Dh44.3bn at the end of December 2010 to Dh65.3 in October 2012.
Before this directive was issued, there was no official cap on the percentage of mortgage lending and each bank was free to decide the loan-to-value ratio that they offered.
Under the new guidelines, however, UAE nationals seeking mortgages must pay 30 per cent of the property value as a first instalment for the first unit and 40 per cent for the other units, ‘Emarat Al Youm’ daily said, citing the Central Bank circular to banks.
The new rules are expected to directly impact speculators, who might be targeting a resurgent property market in the UAE in general and Dubai in particular.
These new rules will make ‘flipping’ of properties much more difficult and ensure that a property bubble is not created.
The report said the new rules stipulated that banks would pay a maximum 70 per cent for the first property and 60 per cent for the remaining units for each Emirati customer.
“This means that banks must pay a maximum 60 per cent of the property value for expatriates receiving a mortgage loan,” the report said.
The new rules come amidst a steady recovery in the real estate sector in the second largest Arab economy, with the shares of most property firms rising in 2012.
The UAE has said it is considering joining Saudi Arabia, the largest Arab economy, in enacting a mortgage law to regulate the real estate sector, which was severely jolted in the wake of the 2008 global fiscal distress.