Qatari banks seeking to build their home loan portfolios have faced a challenging environment in recent years. According to the IMF, Qatar’s real estate price index fell by 11% in 2017, reversing a positive trend that had seen a 53% cumulative increase between 2013 and 2016. The market continued to decline in 2018, with the transacted value of real estate deals falling by 32% in the first nine months of the year, according to the Kuwait-based investment company KAMCO.
This muted performance was part of a broader regional trend which saw the value of real estate sale transactions in the GCC (excluding Bahrain) decline by 30.7% in the first nine months of 2018, from $85.6bn to $59.3bn. The number of transactions fell by 8.4% over the same period, as the effects of lower energy prices and government spending cuts were felt throughout the region.
The decline in house prices has implications for the banking sector. Consumers faced with a reduction in the value of their property have a tendency to cut their spending and increase their saving, particularly those trapped in negative equity – when the current value of their house is worth less than they paid for it. Falling consumer confidence leads to lower rates of lending by banks, and the economic downturn that declining house prices can signal raises the risk of default on home loans. The “negative wealth” effect of a housing market slowdown, therefore, is likely to be a prominent trend in banks’ risk assessments in 2019.
Over the longer term, however, banks have a proven ability to secure margin in the real estate sector and are likely to retain it. Comparable mortgage data for the region is scarce, but a 2011 housing report from the World Bank gave Qatar’s mortgage penetration rate as 20.4%, compared to 5% in Bahrain, 16.1% in Saudi Arabia, 18.5% in Oman, 23% in the UAE and 23.5% in Kuwait. As is the case in most of the region, the legislative framework for mortgage activity in Qatar is relatively undeveloped, particularly in areas such as loan foreclosures. Nevertheless, banks have rolled out mortgage products that look increasingly like their counterparts in developed markets.
Local lenders typically offer mortgages on completed freehold and leasehold properties, as well as homes under construction. Terms tend to be flexible, with most institutions offering online mortgage calculators with which prospective customers can determine their eligibility and customise their mortgage by adjusting the loan amount, down payment and the tenure of the facility within their maximum eligibility. Repayment periods of up to 20 years are now available in the Qatari market, with loan-tovalue limits of 70% of the property’s value.
Banks compete with each other on mortgage interest rates as well as attempting to gain market share by providing other incentives. These benefits might include a waiver of administration fees for loans taken against salary, flexible monthly payments, mortgage plans for self-employed customers, and personal and property insurance products at preferential rates. Additionally, some larger banks operate subsidiaries, which can help them to build their real estate loan books. Masraf Al Rayan, for example, wholly owns Doha-based Al Rayan Partners, a real estate consulting firm.
The central role the sharia-compliant financial sector plays in the economy means that much of the country’s home lending is carried out according to the Islamic model. The asset-backed nature of Islamic banking makes them a good fit for the mortgage market, and over recent years sharia-compliant lenders across the GCC have been developing flexible and affordable mortgage products. All four Islamic banks – Barwa Bank, Masraf Al Rayan, Qatar Islamic Bank and Qatar International Islamic Bank – currently offer a range of sharia-compliant home loans for both nationals and expats. A typical sharia-compliant mortgage in Qatar is based on the Islamic principles of co-ownership – known as diminishing musharaka (joint venture) – and ijara (leasing), and features a financing-to-value ratio of between 60% and 80%. Monthly payments are usually made up of two elements: an acquisition payment that incrementally increases the share of the property owned by the customer, and a rental payment to the bank for the use of the portion of the property it still owns. When payments to the full value of the mortgage have been completed, ownership of the property is transferred to the client.
Although domestic banks have succeeded in developing attractive mortgage offerings and growing their home loan portfolios, there are a number of barriers to future expansion. The country’s population reached around 2.7m people at the close of 2018, according to the Planning and Statistics Authority, more than 80% of which were foreign workers. The pool of mortgage prospects is therefore limited in this degree.
In addition, the prominent role the government plays limits the ability of banks to penetrate the real estate market. Citizens of Qatar are entitled to apply for a home purchase loan of up to QR1.2m ($329,600), according to the regulations of the Housing Department in the Ministry of Administrative Development, Labour and Social Affairs. Applying for the facility is a relatively straightforward and inexpensive process. Customers can download an application form directly from the government’s e-portal, and then submit the application to Qatar Development Bank, accompanied by a number of basic documents such as the title deed of the property and a certificate of building completion. A one-off administrative fee of QR210,500 ($57,800) applies to each loan, and thereafter the customer pays a monthly instalment of QR3365 ($924) for a period of up to 35 years. There are, however, a number of limitations as to what properties are eligible for the government’s home loan scheme. The total area of the building, for example, must not be less than 329 sq metres, and the building must not be older than 10 years based on the date mentioned in the construction completion certificate.
Given Qatar’s small citizenry, the ability to sell mortgages to non-Qataris is essential to ensure the growth of the banking sector’s aggregate home loan portfolio. A legislative change in 2004 allowed expatriates to purchase freehold properties in a number of designated areas, the principal locations being Pearl Qatar, West Bay Lagoon and Al Khor Resort. These large and modern projects contain a mix of commercial properties, apartment blocks and villas, and are attractive to expatriates not only due to their infrastructure and entertainment facilities, but also because property owners are now automatically entitled to a residency visa for themselves and their families. Expatriates are also permitted to buy 99-year leasehold properties in designated areas in other parts of the country, which also entitles them to a residency visa.
The recent downturn in the housing market has persuaded the government to liberalise this framework even further. A draft law for foreign real estate ownership was published in 2018, which aims to increase the number of areas where non-Qataris are able to purchase residential real estate, a development that will help to make the country more attractive for foreign businesses seeking a regional base. It may also serve to liberalise an area of the market that has hitherto shown a degree of rigidity; some of the larger developers have established tieups with banks, compelling purchasers to deal with specific mortgage providers.
Local banks have also sought to expand their home loan portfolios by selling mortgage products to Qataris purchasing properties abroad. The Qatar National Bank (QNB) cross-border mortgage service, for example, allows Qataris to by property in five foreign markets: the UK, France, Lebanon, Turkey and Jordan.
In addition to funding new homes, holiday properties and real estate investments, larger banks such as QNB also offer advisory services by teaming up with global real estate firms capable of offering assistance in areas such as property search, purchase, management or legal counsel. QNB reported in 2018 that it had seen an increase in customers wishing to buy properties abroad, particularly in the UK, France and Turkey, a trend that helped it to increase its number of cross-border accounts by 38% year-on-year. With personal wealth in Qatar expected to grow at a compound annual growth rate of 8% through to 2022, the cross-border mortgage segment in Qatar is likely to be of considerable interest to domestic institutions for some years to come.
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