For the UAE’s larger property companies, huge levels of debt and underperforming investment property portfolios appear commonplace. The financial troubles at several major developers and the banks’ reluctance to expose their balance sheets to this under-regulated and overdeveloped market have continually delayed the arrival of fresh capital.
Property developers such as Tamweel PJSC and Amlak were the engines of Dubai’s six-year residential property boom, writing the largest number of home loans of any lenders in the emirate. The Shariah compliant lenders relied on short-term borrowing to fund long-term loans. This mismatch between the companies’ long-term assets and short-term liabilities was exposed when the red-hot property market fizzled towards the end of 2008, and the credit crunch closed access to new funding.
Authorities are hoping that a swathe of new regulations will stimulate the market. However, identifying new demand sources is crucial to stimulate the sector. It is demand-side issues that are holding the property sector back, and that is dependent on external factors such as the global economic outlook, housing demand and the willingness of lenders to jumpstart the mortgage market.
According to the MENA Mortgage and Affordable Housing Congress, the MENA mortgage market is set for double digit growth. “The MENA population is growing at a rate of 2.1%, which is comparatively higher than overall population growth; and with approximately 60% of the population under 25 years of age, home ownership demand is huge.
Despite this market growth potential, major challenges continue to restrict development. A lack of adequate regulations, underdeveloped capital markets, lack of synergy between pension funds, insurance companies and mortgage providers are all serious challenges to the industry.
The market still awaits clarification of new laws and regulations that it is hoped will lead to greater investor interest. Analysts warn that more clarity on real estate laws and regulations is crucial, especially as the number of residential properties expected to enter the market is only going to increase.
As a result the UAE’s banks are preferentially electing to restructure mortgages for defaulting homeowners rather than repossessing in a bid to cut their losses on bad property assets. Dubai introduced a repossession law in 2008, in the wake of a property collapse that saw house prices slump 60% from their peak. But few banks have pursued foreclosure proceedings to recover properties, preferring instead to renegotiate payments terms with owners and avoid writing down further provisions. Options include payment breaks or reductions to monthly installments of home loans. Banks are accommodating and agreeing to the rescheduling of mortgages, and only going to court as a last resort.
Barclays Bank in May 2011 became the first lender to sell a first repossessed property at an auction held by the Dubai Land Department. The lender was also the first to repossess a home in January 2010, clearing the way for lenders holding about US$16 billion of homes loans to attempt to recover their losses. However, the sale failed to prompt the expected flood of repossessed homes onto an already strained housing market.
Mortgage advisory firm Independent Finance said that banks remained reluctant to repossess and auction off properties, in part because of the lengthy foreclosure process and the still sliding value of real estate in Dubai. A number of lenders are also holding back properties in the hope of a recovery in prices.
A lack of clarity over foreclosure proceedings may also deter banks from attempting to offload properties. Banks would rather avoid foreclosure, as the laws and processes are still unclear. Restructuring loans to assist clients in financial difficulty is the preferred option for all banks.
“This region needs to lead the rest of the world in showing how Islamic home finance is done. The largest Islamic mortgage financiers operate in this region and what is really required is an adequate property law and regulations that are compatible with, and develop, Islamic finance,” according to Oliver Agha, a partner at Agha & Co.
Some conventional and Islamic banks in the UAE have started filing cases against mortgagors of foreclosed properties in order to recoup their losses. According to Mazen Boustany, the head of banking and finance at Habib Al Mulla & Co, the crisis affecting the real estate sector in the UAE is leading to an increase in mortgage enforcement.“Banks, conventional and Islamic, have started to file cases to recover their losses from mortgagors if the losses are huge and they are certain that the mortgagor has assets that can be attached.”
But analysts remain concerned that the estimated 33,000 new homes scheduled to hit Dubai’s market by the end of 2012 could cause fresh declines in rental and sale prices – a situation that could worsen if a high number of repossessed homes are released to market.
Andrew Goodwin, the director of real estate consultancy DTZ, said the auctioning of repossessed homes could further knock market confidence by revealing the true picture of the industry’s price decline. “Traditionally mortgage repossessions are liquidated in auctions and while there have been a few, there is a concern that this is inherently a transparent process and could unsettle the market and have a knock-on effect to the remaining lenders,” said Goodwin. This is no different from what we see in more mature international markets, such as the UK, where banks are working with clients to hold assets until the market can sustain a sale. It’s a practical approach. — SW