Dubai real estate NOT affected by negative equity problems

Dubai real estate NOT affected by negative equity problems

The full scope of the real estate meltdown in Dubai is not clear and will be evident only after a few months.  The Gowealthy Research Team evaluated the Negative Equity Problem in detail and has noted that it has not affected the Dubai real estate market. The term Negative Equity implies a condition in which the value of the asset used to secure the loan slides below the outstanding balance of the loan. High interest rates and a drop in the property prices have forced small-time speculators to undersell their properties in Dubai. But after evaluating prices at the various freehold clusters, we have observed that although there has been a price correction of 30 to 40 per cent at Palm Jumeirah, Business Bay and Dubai Waterfront as well as several high-yield zones, Dubai does not face negative equity problems. Our study reveals that the Dubai Property Bubble has ended; property developers are either scaling back their new projects or discussing mergers/ take overs to grapple with the situation.

Currently expatriate buyers in Dubai are guaranteed mortgages of up to 65% of the total value of the property and national buyers over 80%. Property buyers cannot avail of full mortgage options. It is only recently, in 2007 to be precise, that home financiers and lending institutions started issuing flexible loan packages. Under such circumstances, the issue of negative equity does not arise because buyers are not allowed the total price of the asset as mortgage. 

Following the global liquidity crunch, banks and financial institutions in the country have tightened their lending policies and raised interest rates despite government reassurances. A majority of such agencies have even stopped issuing mortgages. Why has this happened? Primarily because, the mortgage crisis-induced credit collapse has restricted banks and financiers from lending money to one another. To overcome the situation, the Government has come up with a 'rescue' plan and announced the merger of the country's top financiers, Amlak and Tamweel into the federally administered Real Estate Bank.

The abrupt disruptions in credit flow have affected both real estate developers and investors, resulting in a general slowdown of the sector. Yet, in stark contrast to reports that failure of risk and recovery models adopted by the region's banks and financing institutions led to the current credit crisis, we note that the bulk of funds were used to finance investment assets like shares and bonds.

ASSETS 31 March-2008 (AED '000 Unaudited) 31,Dec-2007 (AED '000) Bank balances and cash 778,291 189,761 Advances, prepayments and other receivables 634,632 647,055 Properties held for sale 1,424,275 2,308,694 Investment properties 45,301 45,301 Other investments 66,753 70,338 Islamic financeing and investing assets 6,635,280 5,216,539 Property and equipment 42,241 36,040 TOTAL ASSETS 9,626,773 8,513,728 LIABILITIES     Zakat payable 32,129 27,682 Accounts payable, accruals and other liabilities 792,059 808,749 Financing obligations 6,736,202 5,631,329 Total Liabilities 7,560,390 6,467,760 Total Liabilities and Equity 9,626,773 8,513,728   ASSETS 31,March-2008 (AED '000) 31,Dec-2007 (AED '000) Cash and deposits with banks 309,930 495,843 Properties held for sale 3,642,409 2,030,335 Financing and investing assets 6,931,177 6,227,400 Investments in associates 206,484 155,134 Available for sale investments 454,352 371,049 Other assets 616,441 165,185 Furniture, fixtures and office equipment 20,262 18,665 TOTAL assets 12,181,055 9,463,611 LIABILITIES     Sukuk payable 612,000 734,400 Investment deposits 7,867,122 5,265,543 Payable for properties held for sale 1,344,517 1,208,872 Accured Zakat 12,801 14,793 Employees' end of service benefits 2,526 1,825 Dividend payable 150,000   Other liabilities 102,374 94,509 Total liabilities 10,091,340 7,319,942 TOTAL EQUITY AND LIABILITIES 12,181,055 9,463,611

(Source: Amlak and Tamweel)

The above tables provide an unambiguous picture of the assets and financial liabilities of Amlak and Tamweel, which were hitherto the leading mortgage providers in the UAE. A close inspection would reveal that a sizable portion of funds from these two institutions financed investment assets rather than properties. 

Meanwhile house prices in the western markets are continuing to decline. In the US, the slide was over 6 per cent in the first quarter of 2008, according to the IMF. The house price crash was worst in Denmark where prices have slumped by as much as 12 per cent during Jan-March this year. The UK property market shows a price drop of 7.6 per cent for the same period.

The situation in Dubai is quite different. Even though, property prices in Dubai are undergoing correction, we don't foresee any change in the basic selling prices. They are bound to remain steady, as there is no sign of demand for properties abating. The present lull in the property industry is mostly a fall-out of the global recession and is more or less a ‘passing phase'. Though the pace has slackened temporarily, the UAE's developmental has not stalled unlike the West where economic growth is at a standstill. The market here is capable of attracting genuine investors provided the much-needed confidence is established.