Cash Investors Rule Over Dubai’s Real Estate Market

According to many Dubai-based real estate agents, the local market is now dominated by cash investors. There are many examples of Indian, Pakistani and Iranian home buyers with suitcases full of money. Most of them don’t bother to use bank checks since they want to deposit their assets quick and maybe without a trace.

Nearly 70% of home purchases in Dubai, in 2012 alone, reportedly were made in cash by buyers from India, Pakistan, Iran, Russia, Turkey and Greece. The percentage is up from the 49% recorded in 2007. Most property investors prefer paying cash, because they avoid mortgages and the additional charges related to all kinds of financial products.

Some say the growing tendency for use of cash restricts the power of UAE regulators to prevent another real estate bubble. In 2008, we have already seen what happens when such bubble bursts. Prices skydived! But how a bubble could look if investors pay cash?

Back in January, UAE legislators proposed barring foreigners from taking out a mortgage worth more than half the value of a home. Yet, this is something that doesn’t concern cash buyers at all. The effect of the restriction would cause insignificant effect to a real estate market dominated by cash buyers. The risk associated with lending that banks undertake by providing mortgages would be eliminated.

To counter-fight the Central Banks’ proposal for mortgage restrictions, the Emirate Banks Association proposed a weaker mortgage cap of 75% for foreign buyers. At present, it is not clear if mortgage regulation will be changed soon.

However, a lending barrier could hurt the reviving real estate market in Dubai. Less wealthy Dubai residents will have no place in the market if mortgage size is effectively reduced.

The majority of property purchases are being made by seriously spending foreign buyers. These restrictions will give them the power to raise prices further more. It is estimated that one in four investors won’t be able to come up with the 50% down payment.

In the third quarter of 2012, the residential and commercial mortgages jumped by 24% to 1.19 billion dirhams on a year over year basis. That is about 3 times lower than the value for the same period in 2008.

Now the rising mortgages are bringing back the concern that real estate speculation are once again dangerous. In 2012 the apartment prices in few areas of the city jumped by 10%, while villa prices advanced slightly more aggressive.

On the other hand, there is a growing tension among real estate sellers. That is because investors see the property sector recovery as a firm indicator that prices will grow further in 2013.

The caps maybe won’t affect price increases so mush. But lenders claim that caps will hurt the recovering UAE credit market. That is because credit markets depend mostly on real estate. By the end of 2011, the property sector accounted for 22% of loans.

In 2012 Dubai registered positive economic growth of 4.3%. According to statistics, best performer was the hospitality sector which climbed up by 16% in the same period.

The Central Bank governor said that the Emirates are going to give start to the new mortgage regulations in the coming 6 to 9 months. At present, mortgage interest rates are incredibly low and many expats are tempted to buy homes in Dubai.

However, the property market will be even more favorable to cash due to the harder lending rules. Single-family homes will be affected the most since these properties are top choice for foreign buyers.