Mortgage market is yet to pick up momentum

Dubai will see increased stability and help mature mortgage market

The demand for properties in Dubai is high but the mortgage market has yet to pick up momentum as majority of buyers and investors prefer cash payments, according to a senior banker.

Arshad Rana, head of Secured Assets at Noor Bank, said the mortgage market will take some time to shape up and yield good business to banks facing stiff competition in this segment despite growing property transactions.

“Dubai is a cash-rich economy and unlike mature property markets about 80 per cent of buyers prefer to buy on cash and only 20 per cent secure mortgage deals. The mortgage market will take another two to three years to show maturity in line with stable property business,” Rana told Khaleej Times during an interview.

Rana said high rents have led people to consider buying property rather than renting and this trend is expected to benefit the mortgage market in coming years. Excerpts from the interview:

Is it a good time to buy property?

The short answer is yes. However, whether it is a good time to buy a property or not depends on the individual’s need. For instance, if it is for your own use, it’s a good time to purchase as rents have been rising steadily. Instead of paying high rent, you could start building equity in your property.

Then, there are those who want to buy property as an investment. We have seen in the last two to three years after the [global financial] crisis, the Dubai property market has stabilised. Additionally, rent yields are rapidly climbing with the increase in expats who need housing and will make it a profit-yielding asset. For investors, it is indeed a good time to buy.

Different periods during the year can offer challenges and opportunities. For example, almost immediately after the announcement of [Dubai winning] World Expo 2020 in November, there was a sudden demand for properties that led to an artificial ballooning of prices, which then stabilised towards the end of the second quarter of this year.

In the mortgage market, about 80 per cent of buyers prefer to buy on cash and 20 per cent secure mortgages. This is the reverse of mature property markets. Dubai is a cash-rich economy; also, non-residents who come in from various parts of the world invest heavily in the property market, but are not often looking for mortgages. The salaried or self-employed individuals and their families residing in the UAE, as well as UAE nationals, are looking for home financing. There is also a segment of non-resident investors who opt for mortgages. We have products to cater to all these segments.

Have you been aided by the fact that rents have spiralled so high that people have been considering about buying properties (and so opting for mortgages) rather than renting?

True, high rents have led people to consider buying property rather than renting. This is a universal truth in the industry. Though, there are more investors and owner residents, there is still a vibrant rental market that continues to benefit investors. Also, some affordable housing has been announced that will benefit buyers, particularly end-users.

How is the mortgage market shaping up in light of the recent regulations from the Central Bank of the UAE?

When the regulations came into effect in early January, there were different views in the industry. Some were of the opinion that the new laws would impact mortgage volumes as fewer people would be able to afford it. According to others, the laws would have much lesser impact. Even for property prices, some experts voiced the view that property prices will come down because fewer people would be taking mortgages and vice-versa.

The mortgage market is hardly growing. What are the reasons?

First, with so many cash buyers out there, the mortgage book is growing at a very small pace.

Second, the law on exit penalties has caused many clients to settle their financing and sell their property.

Also, a part of this attrition is contributed by buy-out transactions between banks. When there are internal buyouts with banks, it means that there are no new mortgage customers. It means that banks are trying to get each other’s existing mortgage customers and therefore, the mortgage is moving from one bank to another. As a result, the overall mortgage book is not increasing. In fact. all banks are on a war footing chasing their competitors’ customers.

Finally, the higher downpayment and a doubling of transfer charges on a sale to four per cent have helped curb the speculative buying frenzy of 2006-07. In today’s market a customer needs eight per cent above the downpayment to buy a property due to these additional charges.

How do you see the mortgage industry shaping up in the next one to two years?

It is a market that matures every day. When the mortgage market came into play in 2002-03, it was very naive. People didn’t know much about [home] financing. Banks, especially the local ones, were new to the concept. It is getting better. You now see a big role for mortgage brokers, which is definitely a sign of an evolving market. Banks are now opening up new distribution channels, as well as becoming more technology- and broker-friendly.

The overall Dubai economy, of course, drives the real estate market. With Expo 2020 coming closer every day, we expect that prices and products will get better. We understand that there will be a large influx of people ahead of Expo 2020 and further development of infrastructure. Dubai will see increased stability and the mortgage market will develop. Within a span of another two to three years, we will see a very mature market that understands the opportunities and challenges, and also will be well-regulated.

Has speculative activity stopped completely? Do we still see investors/brokers paying downpayment and putting up the property for sale within a few months, especially on off-plan properties of well-known developers, such as Emaar Properties?

The scale of speculative activity has drastically reduced. I am not saying it has gone away completely. Emaar has stood tall compared to other developers and it is due to their high credibility that they were amongst the first to bring off-plan properties back into the market.

However, two factors have taken a good deal of speculation out of the market: more stringent Real Estate Regulatory Agency regulations and Emaar’s own internal regulations on the off-plan buy-and-sell of their properties.

Please give us a profile of your customers. And who are you chasing — anyone outside the UAE — non-residents?

Residents and locals of the UAE are our key customers. Among the expatriates, the top three segments are Indian, Pakistani and British nationals. The majority are in the 35-to-45 age group with a mix of salaried and self-employed.

We have also renewed focus on the GCC and G-20 nationals, as we see high interest in UAE properties. As a company, we have always stood for the vision of Dubai. We support brand Dubai in all earnest. In our focus on clients beyond the UAE, we are also seeking to promote the Dubai brand.

How competitive are Noor Bank’s mortgage rates in the market?

One very positive impact of the central bank regulation has been the creation of a level playing field for all banks catering to the mortgage market. Now, there are mainly two differentiators: one is how competitive the rate is, and the second is standard of service.

From a rate perspective, we can confidently say that we are competitive. If you look at the entire banking industry, you won’t see a difference of more than 25 to 75 basis points. What actually differentiates is the level of service; offering premier service is exactly what Noor has identified as its key differentiator. No bank currently occupies that space.

Throughout the UAE, the common refrain is that the service in the banking industry is poor. We see this as an opportunity and want to deliver an overall experience. Based on that experience, customers will be loyal to us, and recommend us to their friends and families.

So are you thinking of introducing of incentives for customers who bring you new business?

We don’t have such a tool at the moment. It is on our list, however, as we plan more innovations in our home financing segment, such as rewarding loyalty and business introduction. It will be a significant part of the overall Noor Bank experience.

What’s the tenure of financing?

It will be 25 years for residents and 15 years for non-residents. This timeframe is pretty common for all banks.

What differentiates Noor Bank from other players in the home financing space?

It is not about having one or two unique selling propositions [USPs]. It is about offering a bundle of USPs to your customers.

For instance, we can provide financing up to Dh20 million to any customer, but other banks can say the same. However, when we show our rates are linked with the Emirates Interbank Offered Rate, it demonstrates that we are transparent. The combination of these two features becomes powerful. It is the service that matters. We are creating and building wow factors within our entire process so that we can give truly deliver that experience.

How do you plan to bring in that “wow” factor? What about the role of mortgage advisors?

The role of advisors is very critical as they are the face of Noor Bank. And we have one of the best teams in the market. Having said this, equal responsibility lies with the support teams, starting from those who develop the products to those who process the transaction.

How would you say that for home financing a Shariah-compliant institution such as Noor Bank is a safer and more ethical option for customers shopping for home mortgage when compared to your conventional counterparts? What is the edge of Islamic banks in this regard?

We are a young Islamic bank that is coming of age. We have one of the most experienced Shariah boards in the industry, which approves our products, processes and policies.

From a volume perspective, we are among the top three conventional or Islamic banks in the country when it comes to new mortgages being written. We see conventional banks as well as Islamic banks as our competition. I think our products are innovative and fine enough to stand up against any other offering in the market.

How do you reach out to UAE nationals and expats in convincing them to take mortgages from Noor Bank?

It is a product that sells best through referrals, so residents are targeted through regular marketing campaigns. If you get one good customer and provide great service, you’ll get a minimum of three referrals from that customer. This has been the dynamic of our home financing product.

We also reach out to and finance UAE nationals through partnerships with a number of government agencies. This also supports our brand promise and highlights the bank’s keenness to back the vision of Dubai and the local population.

Do you have tie-ups with developers?

We have special tie-ups with Emaar and Meraas, as well as other smaller developers. We offer off-plan financing on all of Emaar and Meraas projects, and not just select ones. Moreover, we are the only bank offering finance not only to UAE citizens and residents, but also GCC and G-20 nationals for select off-plan projects.

What kind of products do you have now and what are in the pipeline?

We have a full basket of mortgage products today available for new purchase, top-ups, buy-outs, buyouts plus equity release. We have the entire product range covered. However, we are also working on some innovative products. They will be announced in the near future.

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