Dubai real estate agent Laura Adams won’t soon forget one Iranian home buyer. “He literally put a suitcase on my desk, opened it up, and it was full of 1,000-dirham notes,” says the Carlton Real Estate managing director. “I asked him to go across the road to Western Union (WU) and get it exchanged for a manager’s check, half a million dirhams ($136,000).” It wasn’t the first cash-stuffed suitcase she’d seen. One customer told Adams he had the money with him because he’d just completed a diamond deal and didn’t want to stop by the bank, she says. A Russian buyer walked in with €250,000 in cash ($334,000) as the down payment on a two-bedroom apartment in the Burj Khalifa, the world’s tallest tower, and paid the rest with a single check.
With the emirate’s property market rebounding, buyers from Iran to Russia to Greece paid cash and avoided mortgages in as many as 70 percent of Dubai home purchases last year, up from 49 percent in 2007, says researcher Reidin.com. The widespread use of cash limits the power of United Arab Emirates regulators to avoid another real estate bubble like the one that burst in 2008, sending prices down as much as 65 percent. Last month the U.A.E. proposed barring foreigners from taking out a mortgage worth more than half the value of a home, a move that would not affect those paying in cash. “The overall level of impact on the market, which is overwhelmingly dominated by cash buyers, is going to be relatively small,” says Nicholas Maclean, Middle East managing director for commercial real estate giant CBRE Group (CBG). The Emirate Banks Association is proposing a looser mortgage cap of 75 percent for foreigners, Chairman Abdul Aziz Abdulla Al Ghurair told reporters last month.
Restricting lending may even work against efforts to stabilize Dubai’s property market, says Craig Plumb, regional head of research at broker Jones Lang LaSalle (JLL). Plumb says shrinking mortgage size will effectively lock less wealthy Dubai citizens out of the market, while big-spending foreign buyers, who account for the majority of home purchases, will have free rein to further heat up prices. Ryan Mahoney, managing director of property broker Better Homes, estimates that as many as one in four buyers won’t be able to come up with the 50 percent down payment.
Residential and commercial mortgages jumped 24 percent to 1.19 billion dirhams in the third quarter from a year earlier, according to Reidin.com. Although that’s a third lower than the same period in 2008, when Dubai’s property market began to slump, rising home values and signs of greater competition among lenders sparked concern that real estate speculation was back. Apartment prices increased 19 percent and home prices rose 24 percent last year, Jones Lang reports. Carlton Real Estate’s Adams says sellers “were becoming unrealistic with their expectations, and buyers aimed to ride the recovery wave in some areas, expecting prices to jump 25 percent in a few months.”
While caps may do little to curb price increases, lenders say they’ll hamper efforts to revive the emirate’s real-estate-dependent credit markets. Real estate accounted for just 22 percent of loans at the end of 2011, Digvijay Singh, an analyst at VTB Capital in Dubai, said in a Dec. 31 report. Dubai’s 4.3 percent economic growth last year didn’t extend to construction, which shrank 2.5 percent from a year earlier, according to preliminary estimates. Most growth was concentrated in earnings from hotels and restaurants, which increased 16 percent.
The U.A.E. plans to issue the regulations governing the mortgage market in six to nine months, Sultan Bin Nasser Al Suwaidi, governor of the Central Bank, said on Jan. 21 in an interview with state-owned newspaper Al-Ittihad. Stricter lending rules that make the market even more favorable to cash will largely affect single-family homes, Adams says, because the properties are popular with expatriate families and prices have increased sharply. “Buyers who have to put down a large sum of money will now be aggressive in negotiating prices,” she says. “It’s not the same when you are buying with someone else’s money.”