As demand for homes in Abu Dhabi continues to skyrocket, the emirate is wondering how the current international financial crisis will affect the nascent real estate market.
Due to the global erosion in credit confidence, home financiers in the United Arab Emirates (UAE) are re-examining their lending strategies at the same time as they consider increasing the minimum down payment required to get a mortgage. The combination of a potential global recession combined with local liquidity issues and changes to the minimum deposit rules may make life harder for homebuyers.
Presently, mortgage providers can offer as much as 90-95% of the cost of the property, and in some cases even the value. However, amidst tightening credit lines, it was reported last week that the Abu Dhabi-based UAE central bank has approached all banks and finance institutions with regard to potentially reducing this amount to 70-75%. To date, the banks have not given their feedback on the idea. Were this policy to come into practice, it would make it harder for homebuyers without significant deposits to get a mortgage.
The news comes as a perennial shortage of housing units has been steadily pushing up property and rental prices in Abu Dhabi. In a concerted effort to tackle the problem, the government has been working with developers to bridge the housing gap, with a slew of new projects expected to come on line starting at the end of 2009. But as more and more people flock to the UAE capital, demand continues to outstrip supply. Now many industry insiders believe high percentage financing will become a thing of the past.
Michael Wilde, general manager of Manazel Real Estate, told OBG, "In the future it could become more difficult to find 90-95% financing, as the banks and finance houses reassess their lending policies."
Another risk factor for financiers is the increase in local funding costs. The recent uncertainty hanging over the international financial system caused lines of credit to global banks to evaporate last week. This sparked concerns that local financial institutions would encounter difficulties in raising funds on the international market. These anxieties were also linked to the acute growth in lending, which is up 57% in the 12 months to the end of June, and which has outpaced growth in deposits, of course exacerbating the liquidity crunch.
The UAE central bank has been assessing the situation carefully, deciding early last week to fund the interbank market with a $13.6bn pool of credit. The move is seen as an effort by the central bank to help local institutions navigate through the choppy seas of the global economic slowdown. It is hoped that pumping liquidity into the local interbank market will further buttress the financial system and prevent domestic liquidity shortages.
The move illustrates that the UAE is beginning to feel the affects of the international financial crisis, while industry insiders wonder whether the credit crunch will mean a harder time for potential homebuyers in Abu Dhabi.
In response, Nabil Abu Alwan, the head of marketing and product development at Tamweel, the UAE's largest real estate finance provider, told local press, "We welcome the central bank's move. It will help increase the market confidence."
With a bevy of new projects on the way, ranging from the high-end Shams Abu Dhabi on Reem Island to Manazel's mid-range Al Reef Villas, home financing plays a pivotal role in the real estate market in Abu Dhabi. The prospect of it being in jeopardy is worrying for investors.
However, the reality, according to Wilde, is not so fatalistic. He believes housing finance in Abu Dhabi is linked more to asset values. Given that asset values in Abu Dhabi are still on the rise, banks will have little cause for worry.
"Abu Dhabi is still on the up in terms of increasing asset values, whereas Dubai seems to be reaching an affordability plateau, by virtue of timing in terms of supply and demand balance," Wilde told OBG.
He went on to say, "In Abu Dhabi there is a fundamental physical demand for property, which will remain over the coming years, hence continuing to push increasing values."
Recent nervousness about the global economic crisis aside, Abu Dhabi's real estate market appears to still be on sound footing.
In an Abu Dhabi online briefing on September 18, 2008, we stated that the Chrysler Building had been bought by Mubadala. In fact, the purchase was made by the Abu Dhabi Investment Council - Our apologies for the error.