Buying Investment Property in Dubai Foreclosures Might Be The Answer

Thinking of buying investment property in Dubai?  Look at the foreclosures when they start happening. The amount of loan defaults across the UAE continues climbing and the banks are considering repossessions as a way of balancing their books. With property prices in Dubai down as much as 70%, and thousands more new properties still entering the market place one would have expected a few bargains to be had. But - lacklustre auctions and developers holding vast stocks are keeping prices from properly correcting.

Having said that, the suggestion that banks in the UAE will begin repossessing properties soon brings with it the possibility that when this begins, there might be a few bargains to be had. According to 24/7:

"I am sure some banks are indeed looking to repossess properties to rebalance their books for those borrowers who have defaulted. For the procedure involved you would have to check with the banks themselves," said Tim Searle, CEO, Globaleye.

Speaking to Emirates Business, Searle called for banks to make their debt-service ratios more robust. "Banks should be making their debt-service ratios more robust. They have already taken a lot of high-risk finance so expanding that further would be fiscal suicide.

"The credit committees of banks set their own debt-service ratios (DSR) with a view to balancing the need to locate secure borrowers (those who are unlikely to default) and remaining competitive in the market. If their DSR regime is too strict then they will not get any business. This is their problem," said Searle.

In an e-mailed response to Emirates Business, Abdulfattah Sharaf, CEO, Personal Financial Services Middle East, HSBC Bank Middle East, said: "We have always been a prudent lender and used robust lending criteria, which has left us with a strong mortgage book.

"We will no doubt see stress in mortgage portfolios emerging, and there are players that are in trouble because of falling property prices. However, we've made no repossessions to date."

Sharaf said in the UAE the courts will oversee the matter in case of any repossessions. He said HSBC's debt-service ratio was in line with market realities and is a function of prevailing economic condition.

"Credit assessment of the applicants is a robust process, and of course the global financial scenario and local implications are assessed before taking decisions."

Abu Dhabi Finance (ADF) too said the company had not recorded any defaults.

"The fundamentals in Abu Dhabi are strong and there is much more demand for properties than supply. It is likely to last for the next four to five years," said Phillip Ward, CEO, ADF.

"Maybe at some point in the future there will be some repossessions, but Abu Dhabi will never see large-scale repossessions," he said.

The ADF CEO called for real estate and mortgage regulations in Abu Dhabi as early as possible.

"It frightens me sometimes on the quality of advice given on mortgages by people. Our approach, however, is that all of our mortgage staff go through an intensive training programme. They are given a test and only at the end of it are they allowed to sell mortgages," said Ward. "It is important that customers are given correct information."

Meanwhile, HSBC said the bank is levying penalties for payment defaults. "There is a penalty for defaulting on payments. We continually urge our customers to contact us should they have difficulties making payments. Early contact is always best. We have a special department that helps customers who are in those circumstances. We have a wide range of solutions to help people and the emphasis is to find a solution that best suits each customer and to implement that as soon as possible to avoid additional fees or distress," said Sharaf.

"We have for some time now offered free debt counselling service, whereby customers can call confidentially for advice about money worries. Dedicated staff members are here to listen to any problems customers may be experiencing and direct them towards finding solutions," he said.

Searle said: "Late payment fees are standard just like with any other kind of loan. They could even change the interest rate if the loan becomes unstructured from its original contract terms."

"Lending should never be about jobs and salaries in the first instance. The bank should be carrying out proper due diligence to determine whether they have the means to service debt over the period chosen given certain variables. One could be earning Dh10,000 per month, but if he is spending the same then he is not a viable candidate for a loan. Moreover, any capital required when determining the LTV should also come from free funds [savings] when, again in recent past, people were borrowing capital as a down-payment and failing to disclose this to the lender," said Searle.

Searle said there is a renewed interest in reviving the credit reference agency in the UAE.

At the same time, the announcement from Dubai Properties Group that they will deliver more than 7,000 units over the next few months and claiming that "mature investors," were now entering the market, one has to wonder how much pressure this will put on prices. Quite where these "mature investors," are coming from is anyone's guess. Thin air seems to be the most likely answer.