Growth

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.

Beyond promises, Dubai brings trangible benefits

The emirate has a lot going for it that make it attractive to investors from India and other countries

I was reading with interest an online article recently that underlined the top reasons why Dubai’s property was so popular with Indian nationals. The reasons offered are not really surprising and essentially summarize why investing in property in the emirate has had significant appeal for not just Indian investors, but those from every corner of the world.

Dubai is easy

Compared to many countries in the world, investing in Dubai’s real estate sector is relatively easy. Enlist a reputable brokerage, select your desired property, negotiate a price, write the necessary cheques and the property will be yours. Bureaucracy, which makes investing in other countries a pain, is virtually nonexistent and, as long as you follow procedural requirements, your property transaction will be processed efficiently and without undue delay.

Dubai provides superior value for money

When compared to the major Indian cities or big cities around the world, Dubai offers increasingly better value. A modern infrastructure that is continually being developed, a renewed focus on affordable housing, world-leading rental yields and finance rates that have been at historic lows for some time now, the value that is inherent in Dubai property is hard to beat in India or any other country in the world.

Dubai provides superior, tax-free rental yields

put simply, there are not many real estate markets in the world where an investor can enjoy an average 7 percent yield Without paying any local taxes. So, net of service charges, maintenance costs and property management fees, the rent that you charge your tenants goes straight into your wallet without the taxman taking his share. And with the cost of finance remaining at near historic lows, the interest on any borrowings you may have is easily covered by the rent that is being yielded by your property, leaving more free cash flow to pay down your principal.

Dubai doesn’t impose a capital gains tax

In addition, capital gains are not taxed upon disposal of the asset, which makes investing in Dubai property a very lucrative addition to any investment portfolio – when taken with a long-term view, a Dubai property investment will provide handsome returns. So from a total return point of view, there are few real estate investments that are better than Dubai.

World-best infrastructure and security

Many times, investments that provide such lucrative returns are normally associated vvith excessive risks or poor infrastructure. This is not the case in Dubai. Dubai’s focus has been on developing a World-leading infrastructure for the benefit of commerce, trade, tourism and habitation. The remarkable improvement that has been made in opening Dubai up for business, implementing the physical, digital and logistical infrastructures, legal framework and economic policies in the post—recession period

has been impressive. There is no doubt that Dubai’s future is looking very bright and investors globally continue to monitor its progress very closely.

Dubai’s brand value has never been stronger

There is no doubt that Dubai has captured the imagination of the world and there is no better barometer of this than its burgeoning tourism industry. Investments in revenue-generating sectors such as entertainment and hospitality have ensured that Dubai is increasingly being included on travellers’ bucket lists all over the world.

Dubai excels at economic entrepreneurialism

Dubai is excelling in an area I call economic entrepreneurialism. Already known for conducting world renowned exhibitions, there is no greater example than the upcoming World Expo, which Dubai will be hosting in 2020. Dubai is committed to making it the best ever.

Dubai is close to India and many countries

There is no doubt that Dubai is well placed geographically. With one-third of the world’s population within a four-hour flight and two-thirds within an eight-hour flight, existing emerging, economies such as Russia, India and China, and soon-to-be emerging economies on the African and South Asian continents will soon all share Dubai as a central hub. No wonder investors are so excited about the emirates prospects.

A multicultural and cosmopolitan society

Long a haven for expats that fulfilled employment contracts of limited duration, more and more people have decided to settle down and call Dubai home. This change in outlook has had a dramatic effect on the stability of the property market and the development of a society that, while incredibly diverse, is also less transient and more committed to developing the emirate as a long-term lifestyle solution. As a result, while there has always been a vibrant and strong Indian community; communities representing other nationalities are developing rapidly making it easier for new expats to make a decision to make Dubai their new home. History has proven that strong nations were built upon such diversity.