Friday, January 04, 2013

New mortgage law in UAE comes as a shocker for expats

The new mortgage rule in the UAE bans expatriates from borrowing more than 50% of the value of properties. According to analysts, this is likely to endanger the real estate market recovery in the UAE.
The latest circular issued by the UAE Central Bank states that maximum loan-to-value ratio has been set up for expatriates at 50% for their first homes, while UAE nationals can borrow up to 70% of the value for their first homes.
The limits also include 40% loan-to-value cap on second home of expatriates and 60% cap for nationals on second home.
If all banks are required to adhere to this rule, then this will serve as major blow on the UAE real estate market, particularly in Dubai, say analysts.
The property prices in Dubai indicated a recovery last year, with confidence having returned and the country benefitting from its status as a ‘safe haven’ amidst social unrest elsewhere in the Middle East. The real estate market in Dubai had been badly hit following the global financial crisis in 2008, with prices having dropped by more than 60% in some areas.
The Chief Executive of Colliers Middle East, John Davis, said that there will be less property transactions, as all of a sudden there is significant section of the market taken away. 
Earlier there was no loan-to-value cap and mortgage loans ranging from 75% to 90% of property value were common. The central bank circular is yet to specify a date from which this new rule is likely to get effective, but, has emphasized that all banks and financial institutions will have to comply with this notice.
According to an analyst at VTB Capital in Dubai, the restrictions could reduce transactions in Dubai by as much as 60%.  He said that as it is very damaging, and comes as shocking news to banks and expats, the central bank may offer some reprieve. 
Such a decision by the Central Bank is thought to have been taken in a bid to strengthen the financial sector of the country following the 2008 global financial distress, and the regional debt default crisis, which has jolted several local banks. Further, the new rule is thought to keep speculators at bay, who may be targeting a resurgent property market in the UAE, and Dubai in particular. 
The new rule comes amidst steady recovery in the real estate sector in the second largest Arab economy with shares of most real estate firms rising in 2012. The UAE aims to join Saudi Arabia, the largest Arab economy, in implementing a mortgage law in the real estate sector, which was severely jolted in the wake of 2008 global fiscal distress.

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