What Can We Learn From The Dubai Collapse?

There are some interesting ways that the Dubai market  had been coping with their own crash,which I thought I would comment on here.
Dubai’s housing crisis sent prices down by 52 % in the past year which meant that some homeowners have upped sticks and simply abandoned their cars and mortgage payments to flee the country. Not one received a repossession notice.
However, Barclays Plc. has now won the sheikdom’s first repossession cases in court. This could set a new precedent for lenders (holding about $16 billion of Dubai home loans) to finally take action when borrowers don’t pay. Islamic lender Tamweel PJSC, the emirate’s biggest mortgage bank, has several of its own repossession claims pending and estimates about 3 percent of its mortgages are in default.

Speculation

Those speculators who were in it for a fast buck and had fueled price increases, left the market. This meant that 12 percent of the 27,000 residential mortgages in the sheikdom would default within 12 to 18 months.

Dubai’s population which is made up of about 90 percent expatriate was estimated to drop  by 8 percent in 2009 and a further2 percent in 2010. This can be largely blamed on the hoards of foreign workers who are deserting their properties as the financial crisis bites deeper.Workers have one month to leave the country after their work visas are canceled.

Dubai first allowed foreigners to own property in 2002. That led property prices to quadruple in the following six years. The U.A.E. last year scrapped a rule that automatically qualified homeowners in Dubai for a permanent residency visa. Owners of properties valued at 1 million dirhams or more are now required to renew residency visas every six months.

Co-operation

Both lenders and developers in the United Arab Emirates have tried to stem rising defaults through out-of-court settlements with distressed customers after falling prices left buyers with mortgages worth more than their properties. That has helped minimize the amount of bad debt on their balance sheets and kept repossessed houses off a market that’s already suffering from too much supply.

As alternatives to repossession, lenders in Dubai have extended payment periods and developers allowed customers with several properties to return some of them. The absence of mortgage securitization with U.A.E. lenders makes it easier for lenders to restructure loans than their counterparts in the U.S., where mortgage debt was often sold on to investors.

While auctioning a few properties “will be easy,” hundreds or even thousands of repossession sales may draw buyers away from new and secondhand properties, Masud said.
“It’s a slippery slope, mass auctions may reprice the property market in a meaningful way as investors prefer to pick real bargains in auctions.”

A cultural stigma attached to forcing people out of their homes has also deterred repossessions. That may not protect speculative investors, who, helped drive prices up by buying several properties with the aim of selling at a profit soon after. So far, no properties have been auctioned, according to Mohammed Sultan Thani, assistant director general at the Dubai Land Department. Requests may start pouring in this year as banks give up on other alternatives, he said.

“Amicable solutions are hard to reach when a buyer lost his job,” or when a property is worth less than the amount owed on it, Thani said.The biggest risks to banks come from loans underwritten after 2007, which are “most probably in deep negative equity by now,” Moody’s Yacoub said. Also at risk are Islamic Istisna’ mortgages where a buyer doesn’t make any payments until the property is delivered, he said.

Our Comment

What is interesting about this whole scenario is the difference in attitude from our own banks and governing body to the ones serving Dubai. The willingness of Dubai to look for other solutions to help the borrower rather than to just close up shop or stand around and wait to be told what to do like our own ruling bodies and regulators. Or by adding a further pile of debt, to the debt we already have via “Quantative Easing.” Banks in Dubai are working with the ruling power to find solutions-not working predominantly their own interest.

Where there is heavy speculation in a single market there will at some point usually be a crash, the same has happened a bit nearer to home in places such as Bulgaria. A lot could be learned from the approach of using out of court settlements, working with the borrowers and a desire to help the mortgagees rather than a blanket approach that we have taken in this country.The big thing to note from Dubai is that they did not indulge in the ‘selling on’ of debt, unlike most other countries, which will probably leave them in a much stronger position. ( Not to mention being rescued by their oil rich neighbors!)

I wonder if the same huge amount of developments would have happened in the UK if the developer were to take the risk and have to carry the development until the property was delivered/ finished. I suspect  not. As the law in this country is firmly on the side of the developer not the buyer. Once you sign the contract here, you are legally obliged to complete, no matter what happens to the market in between.

Do you have any further insight to the Dubai market to share with our readers? Please feel free to comment below.

sources: Bloomberg / http://www.businessweek.com/

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