Authorities should consider raising age limits for mortgage borrowers
Since its last peak in mid-2014, the UAE real estate sector has been in a corrective phase with prices and rentals plummeting by 25-33 per cent (in nominal terms). The slump in oil prices, oversupply of housing and introduction of mortgage cap significantly weighed on property demand in the region.
As a result, investors maintained the wait-and-watch stance despite positive initiatives taken by the government and developers. Analysts believe that the real estate market is at the fag end of this corrective phase and should stabilise by 2020-21.
This presents an opportune moment for all stakeholders to strengthen industry fundamentals before embarking on a revival journey.
Realising the need of the hour, the UAE government initiated a 10-year residency visa programme for foreign investors and expats in specific industries along with five-year retiree visas. A pickup in longer-term residency is likely to fuel demand for real estate investment, as expats seek to put down roots.
Abu Dhabi amended its laws to permit freehold ownership by foreign investors for the first time in certain free zones, while the UAE authorities are planning to reduce government fees such as those required to register new properties and sales transactions, in addition to relaxing regulations on foreign ownership.
Simultaneously, developers such as Azizi, Emaar and Nakheel, among others, have realised the importance of stimulating demand through creative strategies, and are aggressively pursuing competitive offerings in the form of multi-layer plans, sale-and-leaseback models, rent-to-own schemes, post-handover payments, and arranging bank finance for initial down payment.
Some of the offerings comprise of generous 10-year plans that allow for the bulk of payments to be made on or after completion, and some providing guaranteed returns or rental income. These initiatives come on the heels of Saudi Arabia ensuing reformist agenda by opening up new sectors for foreign ownership to attract long-term investments, which are being lauded by the investor community.
Recently, the Kingdom also approved a permanent residency scheme for highly skilled expatriates and owners of capital funds, permitting them to own real estate assets and reside, without a Saudi sponsor.
While the measures taken by government agencies and developers are likely to spur demand going forward, a dearth of financing options remains a major obstacle in full-scale recovery. The sector remains heavily dependent on government funding and banks for lending requirements and is in a desperate need for alternative financing options along with innovative mortgage products.
Encouraging the formation of new Real Estate Investment Trusts (REITs) could serve as an alternative financing channel for developers who typically raise funds through off-plan launches, which are susceptible to market conditions. While Dubai already has a handful of REITs, they are largely focused on commercial sector and their extension into residential market could produce immediate benefits for the overall sector. Similarly, the formation of a government-sponsored entity, similar to Saudi Arabia’s Public Investment Fund-backed Saudi Real Estate Refinance Company (SRC), could boost the secondary mortgage market. Launched in 2017, the SRC partnered with several financial institutions to provide long-term (15-20 years) mortgage solutions to home buyers.
Such solutions can reduce the borrowers’ exposure to rising global interest rates, which has skyrocketed in recent years due to increases in US Fed rates and dirham’s peg to the dollar.
Several economies, such as the US, have successfully foiled real estate market crashes and the UAE government could consider borrowing a few chapters from their playbook. For instance, the government can consider the formation of a US-style Resolution Trust Corporation (RTC) structure, where it could take all of the customer/contractual and bank liabilities of stalled projects into one entity, thereby ensuring swift recovery.
Offloading liabilities of stalled projects will encourage developers to bid for these assets, as well as allow them to approach banks for fresh funding. Similarly, the introduction of innovative mortgage solutions such as the interest-only plans in Europe and the US, should be encouraged.
Interest-only mortgages allow for interest-only monthly payments for the initial part of the mortgage term, thereby holding off principal payments until the interest period ends, with an optionality clause on prepaying principal amounts or making balloon payments at the end of the term. The low initial burden allows affordable financing to be obtained with ease, by UAE nationals as well as expatriates.
One of the most contentious issues in the UAE real estate market is the mortgage cap or loan-to-value (LTV) limit which was introduced in 2013 by the Central Bank of the UAE to curtail speculative buying. As per the LTV limits, Emiratis and expats are required to pay anywhere between 20-50 per cent in down payments, depending on the type and value of property.
Consequently, many industry stakeholders consider the mortgage cap as the biggest contributor to real estate price drops and often demand changes to LTV to facilitate borrowing. However, it should be noted that such regulatory changes has long-term implications.
Amendments to LTV limits (if any) should be able to balance the market needs in the long term. Moreover, the Central Bank could explore easing the age restrictions for mortgage eligibility from the current levels of 70 years for UAE nationals and 65 years for non-nationals to 80 years as sanctioned in the UK or even abolish an age limit similar to the norms in the US.
Amending such limits to base mortgage eligibility on the borrower’s capacity to repay their obligations should also boost demand.
It is clear that the measures taken by the government and developers will assist in stabilising the real estate market in the near term. However, it is equally important to revitalise the financing avenues to strengthen the industry fundamentals and sustain demand in the long term.