Mortgage trend in Dubai set to continue

There has been a very pleasing trend that has developed during 2016 which is yet another demonstration of the development and maturation of Dubai’s Real Estate industry.
The marked increase in the utilization of mortgages to purchase properties in the emirate demonstrates a market that has undergone a structural shift to supply more affordable properties and the maturation of buyers in structuring their financial affairs to obtain a mortgage and buy the home of their dreams. For the first t.

Historically, mortgages have represented no more than 30%-35% of property sales in the emirate. This ration has now climbed to over 50% during 2016 and, in some months, levels of 60+% were achieved.

This is great news for several reasons.

First, while this trend highlights confidence of lenders in the marketplace it also highlights the increasing confidence of consumers, mostly owner occupiers, in the market to the extent that they are prepared to take on the risks associated with committing to a mortgage for the sake of purchasing some property.

This is very important to the development of long term sustainable growth for the industry as the bedrock of any property industry is its owner occupiers.  They represent the core of the industry as it is they who view property as an investment in life, not just a way to make a quick buck. And yet, historically, they have attracted focus in a market still undergoing the maturation process which is falling short and not proportionate to their importance.

Owner occupiers see Real Estate in a different light. For them, it’s about creating a lifestyle. It’s about creating a home which will provide an environment that is safe and secure within which the individual, couple or family can grow and develop in all aspects whether physical, emotional, social and, of course, financial. In this respect, they have a lot more at stake than those investors with financial interests only.

Typically, they form the core of society, not overly wealthy, who are concerned with providing the family with a future. For some, the purchase of the first family home is the first step towards creating a legacy which hopefully, for the more romantically minded, will turn into a dynasty. These are the dreams which make owning their own home the most important decision they are likely to make. They are in it for the long term; there is a lot at stake, which is why availability of finance through mortgages is critical.

The second reason why this is such good news is because we are witnessing, in real time, the market adapting to legislative changes that were made in early 2014. There is no doubt that the implementation of the mortgage caps earlier in 2014 had affected the demand for many first home buyers who were relying on a mortgage to acquire their dream home.  I remember writing an article at the time of the legislative change and observing the following …

“At Harbor, we see 62% of our clients who were considering buying a property prior to the mortgage caps delay their purchase until they can accumulate the down-payment differential while 38% have settled (or compromised) for a cheaper property to get an initial foothold in the market.”

As predicted, “… the new mortgage caps have certainly produced a definite lag in demand as clients adjust to the new financial realities and many of these clients are planning to participate within the next three years.”

 I am pleased to say, that these observations have essentially been proven correct. The legislative change made by authorities was implemented to help cool what was then, a rampant market. The desired effect was achieved but buyers didn’t simply disappear, they modified their purchasing behavior, another sign of an increasingly resilient and maturing market.

Finally, a growing number of mortgages are being undertaken for properties that are purchased in the more affordable areas of Dubai, which further demonstrates the systemic shift to affordable housing in the Dubai property market is becoming even further entrenched as a long-term characteristic.

A natural occurrence within any economy that is growing rapidly and is formally recognized as maturing and transitioning from being a “frontier” to “emerging” market as Dubai did back in 2013, is that its middle and lower-middle income segments will expand to support the rapid rise in commercial activities and economic initiatives being instigated by entrepreneurs and corporate or government entities. This expansion is unavoidable if the economy is to grow and providing affordable housing to enable this expansion is a critical element to the future growth of Dubai and the development of the Real Estate industry into a mature model that can efficiently cater for a broad and diverse set of people with different incomes, tastes, preferences and requirements.

And demand is set to grow very rapidly. A case in point … the World Expo is predicted by independent analysts to create over 270,000 jobs. The vast majority of these jobs will not be for people occupying senior executive positions. They will be for people in middle management or lower positions, many with families, who will be seeking affordable accommodation.

The importance of maintaining affordability for the average buyer is critical and the availability of affordable finance in the form of mortgages is vital to enable many to gain access this lucrative market going forward.

Why are Mortgages Key to Growth?

By Mohanad Alwadiya
CEO, Harbor Real Estate
Senior Advisor & Instructor, Dubai Real Estate Institute (DREI)

I read a very pleasing article over my morning coffee.

The article revealed that mortgage transactions, including refinancing, have represented approximately 50 per cent of all apartment sales September last year to date with some months achieving over 60 per cent. This is in stark contrast to what has historically been the case in Dubai, as mortgages rarely represented more than 30 per cent to 35 per cent of property sales for most of the prior decade.

This is great news for several reasons.

First, while this trend highlights the confidence of lenders in the marketplace it also highlights the increasing confidence of consumers, mostly owner occupiers, in the market to the extent that they are prepared to take on the risks associated with committing to a mortgage for the sake of purchasing some property.

This is very important to the development of long term sustainable growth for the industry as the bedrock of any property industry is its owner occupiers.  They represent the core of the industry as it is they who view property as an investment in life, not just a way to make a quick buck. And yet, historically, they have attracted focus in a market still undergoing the maturation process which is falling short and not proportionate to their importance.

Owner-occupiers see real estate in a different light. For them, it’s about creating a lifestyle. It’s about creating a home which will provide an environment that is safe and secure within which the individual, couple or family can grow and develop in all aspects whether physical, emotional, social and, of course, financial. In this respect, they have a lot more at stake than those investors with financial interests only.

Typically, they form the core of society, not overly wealthy, who are concerned with providing the family with a future. For some, the purchase of the first family home is the first step towards creating a legacy which hopefully, for the more romantically minded, will turn into a dynasty. These are the dreams which make owning their own home the most important decision they are likely to make. They are in it for the long term; there is a lot at stake, which is why availability of finance through mortgages is critical.

The second reason why this is such good news is because we are witnessing, in real time, the market adapting to legislative changes that were made in early 2014. There is no doubt that the implementation of the mortgage caps earlier in 2014 had affected the demand for many first home buyers who were relying on a mortgage to acquire their dream home.  I remember writing an article at the time of the legislative change and observing the following …

“At Harbor, we see 62% of our clients who were considering buying a property prior to the mortgage caps delay their purchase until they can accumulate the down-payment differential while 38% have settled (or compromised) for a cheaper property to get an initial foothold in the market.”

As predicted, “… the new mortgage caps have certainly produced a definite lag in demand as clients adjust to the new financial realities and many of these clients are planning to participate within the next three years.”

I am pleased to say that these observations have essentially been proven correct. The legislative change made by authorities was implemented to help cool what was then, a rampant market. The desired effect was achieved but buyers didn’t simply disappear, they modified their purchasing behavior, another sign of an increasingly resilient and maturing market.

Finally, a growing number of mortgages are being undertaken for properties that are purchased in the more affordable areas of Dubai, which further demonstrates the systemic shift to affordable housing in the Dubai property market is becoming even further entrenched as a long-term characteristic.

A natural occurrence within any economy that is growing rapidly and is formally recognized as maturing and transitioning from being a “frontier” to “emerging” market as Dubai did back in 2013, is that its middle and lower-middle income segments will expand to support the rapid rise in commercial activities and economic initiatives being instigated by entrepreneurs and corporate or government entities. This expansion is unavoidable if the economy is to grow and providing affordable housing to enable this expansion is a critical element to the future growth of Dubai and the development of the Real Estate industry into a mature model that can efficiently cater for a broad and diverse set of people with different incomes, tastes, preferences and requirements.

And demand is set to grow very rapidly. A case in point… the World Expo is predicted by independent analysts to create over 270,000 jobs. The vast majority of these jobs will not be for people occupying senior executive positions. They will be for people in middle management or lower positions, many with families, who will be seeking affordable accommodation.

The importance of maintaining affordability for the average buyer is critical and the availability of affordable finance in the form of mortgages is vital to enable many to gain access to this lucrative market going forward.

mohanad_propertyweekly

Property Weekly

July 2015: Where are we?

For the past six months, headlines have been making many and varied references to a real estate correction in Dubai. This is not surprising as indeed Dubai’s real estate industry is in the midst of one. Many view the term correction with suspicion and trepidation, particularly those with a more tactical and less strategic short-term point of view.

Those who take a long-term perspective look at a correction with anticipation as it refers to the elimination of systemic issues and making the necessary adjustments to deal with impacts of external issues on the efficient operation of the real estate market.

There is no doubt that a correction was overdue. The year 2013 will be remembered as Dubai’s comeback year as the total value of real estate transactions reached Dh234 billion, a 52 per cent increase on 2012, which was clearly unsustainable as witnessed when the correction began last year when Dh218 billion worth of real estate assets were sold, a reduction of over Dh16 billion on the previous year. At the time of writing, just over Dh63 billion worth of transactions has taken place this year, indicating that the market is well and truly entered its correctional phase.

Changing cash flows

The market definitely benefited from high levels of liquidity during 2012 and 2013. Capital inflows seeking safe haven from regional conflicts were strong. However, they were sure to weaken and have. Geopolitical events such as the Ukraine conflict and subsequent economic sanctions imposed on Russia by the West sent the rouble rapidly declining in value, making investing in Dubai an increasingly expensive proposition for Russians, who historically have been prevalent in the investing community.

In addition, changes to mortgage laws also dampened the availability of capital for investors wishing to use leverage to capitalise on attractive property valuations and the promise of high and sustainable rental yields.

Vying for investment

A slew of new projects being launched as a result of renewed developer optimism also placed pressure on liquidity levels and, eventually, prices market wide. Initially, launches were made with prices for off plan units consistent and supportive to prices for completed units.

However, with each additional launch, competition for the investor money intensified, leading to a gradual reduction in prices for off plan units and making the risk reward equation more palatable for off plan units versus completed units.

In addition, the shift of developer focus in response to the call for more affordable housing also meant that investors gravitated towards this – perhaps the most important structural correction in the market to date.

The number of new launches has been impressive, leaving many to question whether over – exuberance on behalf of developers will result in a significant oversupply. Calculating optimal supply levels, especially when emerging from a recessionary period, is particularly challenging. It depends on an accurate estimation of demand for real estate assets that will emanate from Dubai’s population growth, which will be largely driven by overall economic growth. In addition, supply needs to factor in a lag effect from the time that conditions conducive to development are identified by developers and when properties are completed and are released on to the market.

We at Harbor take a minimum five year view when looking at equilibrium or imbalances in the market. When taking into account the nature of its resurgence, the strong growth in fundamental economic drivers such as tourism and trade, the levels of investment into infrastructure and initiatives and stakeholder commitment to sustainable growth, we believe that while inventory levels may spike in the interim, they will not be excessive at the end of our five year forecast period.

Steady supply

There will be about 11,000 villas, 7,500 town houses and 35,000 apartments delivered between now and 2020. While this may seem a lot, remember that we are entering a period where demand for property – particularly those that are affordable is expected to rise significantly and given average occupation rates are currently about 80-85 per cent, there is not much margin for error in terms of satisfying expected demand.

Put simply, Dubai needs people to support an economy that is expected to grow at an estimated 5 per cent annually for the remainder of the decade and to deliver initiatives such as the World Expo 2020. The expo alone is expected to generate an additional 270,000 jobs and drive demand for housing and commercial facilities that don’t exist.

Much of the city’s planning estimates the number of people living in the emir ate to grow to 3.4 million by 2020 – a 7 per cent annual increase from today’s population of 2.25 million.

Expo led growth

There is no doubt that a stabilised real estate market will provide a much better launch pad for what will be a period of significant economic and commercial activity over the next five to seven years. The structural shift towards more affordable housing will not only accommodate the expected rapid population growth associated with the Expo 2020, but is also an important factor in the development of Dubai’s economy. Every emerging market needs to develop a strong middle class, whose expansion is critical to growing a sustainable economy and developing resilience in the face of external financial and economic shocks.

In addition, for Dubai to compete effectively in the region and globally, it needs to ensure that the cost of doing business in the emirate does not position it as an outlier when entrepreneurs or corporations are considering alternative locations for their operations.

When taking this perspective, the correction could not have come at a better time.