Banks urged to restart lending to encourage home owners

Survey reveals end-user demand for affordable homes suffering from

 rigid bank lending criteria

A leading United Arab Emirates property developer today (28 February 2009) urged banks to relax their lending criteria for prospective mid-range home owners in order to "get the economy moving again."

Mohammed Nimer, CEO of MAG Group Property Development, which is involved in AED3 billion of developments in the UAE, said prospective owner occupiers in the mid-price range make up the backbone of the workforce but most are unable to raise mortgages at affordable entry levels in the current restricted credit market.

"These aspiring home owners constitute thousands of white collar workers in both public and private sectors and if they feel that they don’t have a long-term future in the country, they may well not be around when the upturn arrives,” he added.

A recent snap survey conducted on behalf of MAG Group underlined the problem caused by restricting credit to potential home-owners revealing that in some cases it would be cheaper to buy than rent property.

The survey of major real estate players in Dubai found the average annual rental price for a two-bedroom apartment in Dubai Marina at approximately AED185,000 per annum. The purchase price of a similar apartment was AED 2.3 million, - the equivalent of AED 176,000 per annum on a 90% interest-only, 20 year mortgage at 8.5% a year.

"There are increasingly clear advantages to buying as opposed to renting – if only people could obtain the finance," Nimer said. "The problem is that most of the main mortgage providers are demanding excessive deposits up front even though property prices have softened considerably already. In most cases a minimum of 50% of the purchase price is required – which means a prospective buyer needs to find in excess of AED1 million in cash as a deposit. That is a virtual impossibility for most.

"If banks continue their reluctance to relax lending criteria, potential owner occupiers will remain as tenants, paying more money to their landlords than they would to loan providers. The problem will be compounded in the short to medium term as supplies begin tightening in the rental market while new property built for sale may sit empty.

“Given the billions of dirhams that have been made available to UAE banks, we have to seriously question why they are not restarting lending? The Eibor rate is at 3.1% but mortgages are at 8.5%. Surely with these rates banks can make a reasonable profit while offering affordable finance for end user, owner occupiers? 

"What people are looking for is affordability, quality and a pleasant home to live in and bring up their families and we are willing to provide them but the banks and finance houses must play their part.

"My message to them is quite simple: you have sufficient capital, so start lending to prospective home owners and get the real estate market, not to mention the wider economy, moving again.”