The most common question I get asked in my day to day life is; will mortgage loan to value (LTV) ratios be increased in the UAE?
This of course, is the million-dollar question..
Before I attempt to answer, we first should consider the history. How did we get to where we are now?
Back in 2014, the Central Bank capped the LTV ratios at 75% for first mortgages for properties valued up to AED5 Million, and 65% LTV for properties valued over AED5 Million. Second mortgages were restricted to 60% LTV. UAE nationals would be eligible for an additional 5% for both first and subsequent mortgages. For properties under construction, LTV ratios were restricted to 50% (with the final 50% being financed). What some people may not remember is, the Central Bank announced a reduction to 50% LTV across the board only 12 months earlier. This was amended to the current levels after a period of consultation and the view that it was a greater restriction than required. There were also other measures implemented around debt servicing ratios and the charges related to the mortgages as well as an increase in the transfer fees by the Dubai Land Department. For the purposes of this article I will just concentrate on the LTV ratios.
Why was this done?
Primarily to cool a property market which was starting to look like a runaway train. Post the 2008 crash and after a short period of correction, the market had increased very quickly back towards 2007 levels. In 2013 alone, increases of over 30% were reported across the market and particularly in Dubai.
With the UAE’s long-term vision, these moves were taken to cool the property market and stop the cost of living further increasing and becoming too expensive. This was important in making sure the UAE remained competitive to foreign companies and investors.
To a greater extent this has had the desired impact. Property values are reported to be down somewhere in the region of 25-40% since 2014 (varying dependent on area and report you read). Similarly, rents have also reduced by around 30-35% on average.
This leads us back to today and the question of whether the LTV ratios will be increased. Along with most mortgage professionals, real estate agents, existing owners and anyone with an interest in the asset values of real estate in the UAE, I certainly hope so. However, should this be done and when will this be done is another question.
If the main goal in reducing property values was to increase attractiveness to foreign investors and companies, it is important to remember the 35% – 40% decline in property values have been offset by the increase in the value of US$ against most other currencies during the same period. Also, we don’t know for sure if lenders in the UAE will be willing or able to increase their risk in the market given the decline in the value of existing properties on their books.
I do believe the Central Bank will relax or change the LTV rules at some point in the near future to help support the recovery in the real estate market values. Realistically this could happen during the next 12 – 18 months, however speculating exactly when is not something I have found very productive. There are also other options available to stimulate a recovery in the market. For example, currently taking mortgage security against real estate assets is limited to licensed banks and lenders in the UAE. Opening the market to non-traditional lenders and allowing different methods of leverage would certainly help longer term growth and stability. These factors combined with the possible decrease in US$ could be key in the next period of growth within the UAE property market.
In summary, many think that further declines are likely over the short term. This will continue to create an opportunity for those who have the means and believe in the longer-term outlook of Dubai. For those who take this opportunity to purchase now, this may prove to be a unique window to maximise gains in the next growth cycle.