Chris Taylor, the chief executive of Abu Dhabi Finance, is finding it tough to compete with banks that keep bringing home financing rates lower and lower amid what he describes as a “feeding frenzy”. He is also worried that the property bull market is pricing too many end users out – the kind of buyers that are needed for long-term stability. What those people are saying is that I can afford the repayment but I don’t have the cash available for the deposit,” Mr Taylor said. “They say ‘I still want real estate, so what I will do is buy an apartment as an investment and I am going to rent a villa to live in’. “From our perspective, I don’t think that is necessarily good because there’s a danger that it turns people into investors and that the high-end, very good customer is not able to buy the actual property that is right for him. It’s not a good consequence. From an affordability point of view it’s making it tough for people who want to buy a home to live in.”
So instead of following the herd, Mr Taylor has raised the interest rates he charges customers seeking loans for residential homes and is focusing on non-resident and commercial real estate mortgages – segments he said are underbanked and show the greatest potential ahead of Expo 2020 in Dubai. The margins that ADF can get on non-resident and commercial real estate are higher than those on local residential – starting from 6.69 per cent on commercial mortgages compared to 4.5 per cent on home mortgages for UAE residents.
The lowest residential mortgage in the UAE starts at 3.5 per cent, he said. “My view of the Expo 2020 is that it’s a driver for commercial growth,” Mr Taylor said. “The infrastructure spend filters down to smaller business. If you look at valuations on commercial property, they are in much better shape. There’s still a lot of upside. Our view is that the commercial space is a strong place to be. It’s a sector that is not as well banked and well supported.”
The UAE is no stranger to real estate boom and bust cycles. Home prices dropped by as much as 65 per cent following the outbreak of Dubai’s debt crisis in 2009. That followed a massive boom in the preceding years. But as the country’s economy improved in the past year-and-a-half, boosted by increased government spending on infrastructure and a revival in trade and tourism, property prices erased the losses of years following 2009. Stock prices have also shot back up again. This time, however, many bankers, including Tirad Al Mahmoud, the chief executive of Abu Dhabi Islamic Bank, say the property boom is different because it has been driven by end users and buffers have been put in place, such as higher transaction fees and higher down payments on mortgages, to discourage speculators from making short-term bets.
Others such as John Lomax, the global emerging market strategist at HSBC in London, are worried that an economy overheating amid low interest rates may set the UAE up for another boom and bust cycle.
At government-backed ADF, which specialises in mortgages, Mr Taylor is not interested in aggressively pursuing residential homebuyers at the moment because he thinks banks are underpricing the risk. He conducts rigorous stress tests for his potential clients to see if they could withstand inevitable interest rate rises from current record lows. On the bright side, however, he said many prospective clients appear to have learnt lessons from the past crisis and credit is not as easy to get hold of any more. There are no reliable statistics on the mortgage market, so he places a bigger premium on anecdotal evidence.
“Credit doesn’t feel as easy to get hold of as it was five, six years ago,” Mr Taylor said. “Anecdotally, I think a good way to gauge is how many telephone calls, SMS, emails you get from banks asking if you have been preapproved for a loan. That’s definitely started in the past 12 months but not to the extent that it did in 2007. I think the Central Bank has enhanced controls over that but it’s something that needs to be watched carefully.”
Courtesy of The National