Economists say the rise in real estate interest rates in the United Arab Emirates in the past two years will have serious implications for real estate companies, but analysts do not expect it to affect the volume of lending offered by banks to investors.
Bankers announced higher interest rates for real estate finance in the UAE ranging between 7% and 11% compared with 4% and 5% in 2009.
Alaa Eraikat, CEO of Abu Dhabi Commercial Bank, told the UAE newspaper Al-Ittihad recently that mortgages constituted the bulk of bank loan portfolios for years, but the global recession forced banks to diversify their portfolios and adopt a more conservative approach to mortgage lending.
He pointed out that most banks now thoroughly scrutinize financing options and potential customers, factoring in real estate market conditions and investors' backgrounds. He estimates that mortgage rates currently charged by banks are between 7% and 11%.
Fahd Saleh of the Bunyan Real Estate Company, told Al-Shorfa that banks finance between 40% and 80% of the value of the property, stressing that the most important indicator that banks rely upon in granting loans is their level of confidence in the borrower's ability to repay the loan.
"Interest rates rose during 2009 and 2010 with the emergence of many non-UAE national foreign borrowers," Saleh said.
He said the rise in mortgage rates has serious implications for real estate companies, adding that these companies incur increased losses due to erosion of profits caused by the accrual of interest expense and the effects of the fluctuation in interest rates.
Kamran Butt, a banking expert in Dubai, told Al-Shorfa that real estate loans are granted for the purpose of buying real estate, whether for housing or commerce or investment, and are secured by the real property bought or built with those loans.
Butt highlighted the latest data issued by the UAE Central Bank showing an improvement in liquidity levels. He also noted a retraction of the "LIBOR", the interest rate that banks charge other banks, a figure which continues to drop and is currently 73% below the lowest level recorded in 2008. Butt said the drop in the LIBOR is attributable to high bank liquidity and improved investment opportunities for bank funds.
"With the continued decline in LIBOR over the last seven months, there was a noticeable rise in bank loans, which may continue to rise at the same pace. It is possible that bank loans could improve at an accelerated pace even with the high interest rates on mortgage lending," Butt said.
Diaa Abdel-Al, an economic journalist, attributed the rise in mortgage rates to the end of the real estate boom and the fact that interest rates began to exceed the rise in the inflation rate, prompting mortgage banks to raise interest rates on older existing loans, which led to higher monthly installments for borrowers.
"The rise in mortgage interest rates is considered the biggest obstacle to recovery in the sector. Over the past two years, mortgage rates have risen steadily, exacerbating the situation for borrowers," he said. "However, the increase in interest rates curbed inflation and the rise in real estate prices which helped maintain purchasing power in the UAE. In view of that, mortgage rates must be adjusted to return the sector to its previous levels."