Dubai’s New Mortgage Law to Bring More Flexibility, Financing Options

Published April 23rd, 2018 - 06:22 GMT
Dubai’s proposed 'Mortgage Law' intends to create greater depth in the property marketplace. (Shutterstock)
Dubai’s proposed 'Mortgage Law' intends to create greater depth in the property marketplace. (Shutterstock)

Dubai’s proposed “Mortgage Law” intends to create greater depth in the property marketplace, in particular by making it easier for specialised funds to come in and take up exposures.

Another target of the law would be create “alternative financing methods” over and above what is offered via direct bank finance.

These proposals and the follow-through will be the responsibility of the Dubai Land Department. It follows a set of stimulus measures announced by the Dubai Government last week, with the real estate sector identified as being key to the process.

The Land Department’s initiatives have been presented to His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai. The Executive Council will implement the initiatives with the concerned entities based on these directives.

As per one proposal, the Land Department will partner public entities to encourage the creation of possible alternative ways to finance home purchases. This would enable “investors to diversify their investments in the sector [and] catering to investors with small and medium-sized portfolios”.

Bringing in more “real estate investment trusts” (Reit) will be one of the alternatives. Dubai already has a handful of them, either having launched operations or working their ways towards it. Just last week, Dubai Investments (DI) said it was awaiting final regulatory approvals before listing its Dh3 billion Reit, with a mix of DI-owned properties and those belonging to third-parties. The Reit would have a DFM (Dubai Financial Market) listing and eventually grow to hold assets of Dh10 billion, according to Khalid Kalban, Managing Director and CEO.

More Reits would mean less pressure on developers to see funds through off-plan launches, which are always impacted by market situations. (Reits take up equity positions in properties or developments, typically projects that are complete or have gone through sizeable sales or leasing operations. These funds thus become available to the project developers for their subsequent needs.) The Reits so far have targeted Dubai’s commercial sector, typically office properties or buildings for education and health care needs. Any extension of Reits’ into the residential space would have immediate benefits for the wider industry.

Smart resources

In a statement, Sultan Butti Bin Mejren, Director-General of Land Department, said: “By developing Dubai’s Mortgage Law, we will help real estate organisations to operate in perfect harmony and enhance their smart resources to provide the best possible services to customers and create strong new investment tributaries.”

Interestingly, the Land Department says one of the main objectives from the Law would be to “attract” foreign investors and public listed entities. Market sources say this could mean the setting up new home financing operations, beyond those provided by banks and the likes of dedicated mortgage institutions such as Amlak.

The proposed Law does not make any mention of possible changes to loan-to-value (LTV) exposures that mortgage lenders need to maintain. Currently, on off-plan purchases, buyers need to put up 50 per cent as equity, while on ready, it would be 30 per cent. (These have been in effect since 2013.) As it is, there has been a “surge” in transactional activity for ready properties in Dubai over the last 12 months, according to the latest report from GCP-Reidin. “Mortgage activity as a percentage of overall sales has continued to ratchet higher,” it adds. “This is a combination of new homeowners taking advantage of mortgages, and existing homeowners refinancing their current homes.

“As expected, mortgage activity now predominates, and as it continues to do so price volatility is expected to dampen further.”

When news of the new Mortgage Law being drafted broke, there were many who thought it would immediately mean that banks could go back to offering higher loan percentages (of the property value). It would have meant developers would not have had to keep offering extended post-handover payment plans as inducements to get people buying.

But Murray Strang, who heads Cluttons’ Dubai operations, does not believe that changes to LTV to make borrowing easier is the best option. “Any regulatory change needs to balance the needs of the market now with what it means five or 10 years from now,” he added. “Easier loans would lead to more buyers … but at the same time cause spikes in speculative buying. For the greater good of the Dubai property market in the longer term, that would not be good.

“It was for a reason that the UAE Central Bank tightened mortgages and later the Land Department itself doubled registration charges [from 2 to 4 per cent]. These were meant to curb speculation and has worked well.”

Factbox: What Dubai’s Mortgage Law plans to achieve

* A main objective would be to create the conditions for higher foreign property investment portfolios to be allocated to Dubai’s real estate market. A mortgage law creates more depth and brings in more end-users to take part in the transactions. As of now, Dubai’s property buying is still dominated by investors who want to place the units in the rental market and get steady yields out of it.

* In a statement, the Dubai Land Department said that “issuing a real estate legislation package will have a positive impact in supporting the development of the sector”. It will also strengthen partnerships between the public and private sectors to develop mortgage finance systems. “This strategy will be fruitful in the near future,” said Sultan Butti Bin Mejren, Director-General. “The economy will have multiple sectors to ensure its sustainability.”

By Manoj Nair

© Al Nisr Publishing LLC 2022. All rights reserved.

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