Central Bank committed to boosting UAE realty sector

Wed, 18 Mar, 2020
Central Bank committed to boosting UAE realty sector

The UAE has always been a progressive economy, with the right set of ingredients for growth across sectors. The nation's wise leadership, robust regulatory frameworks, open economy, and diverse demographics make for a resilient and sustainable economy. 

The country's real estate sector has been a foundational pillar of the UAE's non-oil economy, and policymakers have always employed a proactive approach to boosting investments in the sector.

Due to market conditions and oversupply, prices have declined in the past couple of years, offering investors and buyers the perfect conditions to own their piece of one of the most coveted real estate landscapes in the world. To overcome softer market conditions, the government provided a further boost to investors' sentiment and confidence by introducing reforms such as long-term visas for investors and skilled professionals, 100 per cent foreign ownership of businesses, and the establishment of the Higher Committee for Real Estate.

To top it off, in October 2019, the Central Bank of the UAE announced a cut in key interest rates to boost the economy by making borrowing cheaper. The governing body cut interest rates on both the issuance of Certificates of Deposits and the repo rate for borrowing short-term liquidity by 25 basis points.

Implications of the rate cut

The rate cut will lower the debt burden for borrowers and encourage people to investing in Dubai real estate, among other sectors. In addition 3and low prices, and lower Dubai mortgage rates could boost demand for real estate, which in turn, will help absorb the supply and activate other sectors of the economy.

The cumulative effect of market conditions and government initiatives can already be witnessed, with the Dubai Land Department recording over 5,000 transactions in November 2019, the highest in eleven years on a monthly basis. With the cost of borrowing reducing for new buyers, we could see a further boost in demand in the coming few months.

The cut in interest rates is also great news for existing homeowners with variable rate mortgages, as it will further reduce their debt burden. Affordability is one of the critical factors when it comes to making real estate decisions, and with the Central Bank lowering lending rates, buyers will see their affordability ratio become slightly higher.

Flexible lending for real estate

In 2018, the Central Bank removed the 20 per cent cap on real estate lending, which was determined by the total deposits of a bank. Over the past year, the governing body consulted with lenders in the country to propose a framework which will help control the banking industry's exposure to the real estate sector, thus providing a backstop to flexible lending.

As per the framework, banks lending more than 20 per cent will incur a capital charge and hence will need to determine the risk-return ratio of making these decisions. This move will bring more flexibility for banks to lend while ensuring that it is done responsibly. This prudent approach by the Central Bank of the UAE has inspired investors' confidence in the properties market.

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Other key Initiatives

In 2019, the Central Bank of the UAE reduced the three per cent early settlement fee for mortgages, bringing it down to one per cent, or Dh10,000, whichever is less.

The move came as part of a slew of initiatives aimed at simplifying lending for real estate. The new early settlement fee of one per cent will make it easier for homebuyers to move to another lender that's offering lower exchange rates.

The Central Bank also scrapped the maximum age requirement, which required that borrowers must be under 70 years of age at the time of their last repayment. As per the reform, banks can now directly set age requirements for loans based on their risk management policies.

The Central Bank of the UAE has taken a prudent and guarded approach to boost investments in the real estate sector. While the imbalance between supply and demand remains one of the biggest challenges for the market, pro-investment initiatives by the government and regulators will go a long way in aiding the real estate sector's recovery.