A study of the nascent UAE mortgage market has just been publicized by EFG Hermes, whereas points to a ten-fold growth from $4.4bn at the present day to $44bn by 2012. The scheme for the growth of the real estate markets in the Emirates are huge at the same time in terms of deepening the market and selling price.
Report says, possibly over the next 5 years approximately population will increase of 1.4 million people, involving transactions of $187bn.
'Assuming that 21 per cent of this is financed (30 per cent of properties mortgaged with an average loan-to-value ratio of 70 per cent) this indicates a market size of $44bn, up from the estimated existing market size of only $4.4bn.'
The study concludes that the existing local mortgage market leaders, Amlak Finance and Tamweel, are likely to lose mortgage market share to other local and international banks, although both companies clearly have huge scope to expand their business in the five year period.
Mortgage impact
Commentators also note that lax mortgage lending is one of the reasons why rental yields have fallen to record lows in developed real estate markets in recent years. It is therefore to be expected that as the mortgage market develops in the UAE the increased availability of finance will tend to push prices higher and rental yields lower.
In truth the gap between rental yields and deposit account interest rates is something of a demonstration of the efficiency of the local mortgage market in providing finance to the real estate sector; and as a mortgage industry expands and competitive pressures emerge then more finance will become available to drive prices higher.
Another side to this process is the likely emergence of specific mortgage laws in the UAE which will clarify the rights of both parties and again promote borrowing for property investments.
Equity finance
Up until today, as the EFG Hermes study underlines, the vast bulk of property deals in the UAE have been equity financed, and the mortgage borrowing usually associated with property in more mature markets has just not been present.
For the banks mortgage lending in a rapidly growing economy like the UAE is a tremendous business opportunity, and the global players can lever their massive balance sheets to take advantage of this new market while local banks are generally highly capitalised and looking for new lending opportunities.
Thus the scene is set for a creation of an upward spiral in property values with banks lending more and more money and driving prices steadily upwards.
It has long been noted that real estate prices in the Emirates lag along way behind many developed markets. A recent HSBC study said Abu Dhabi and Dubai had among the cheapest real estate compared to per capita GDP on a global basis; and the development of a world-class mortgage market will be one of the main factors in correcting this anomaly in price levels.
