Property market went from world’s best in 2008 to the worst

DUBAI: Dubai’s housing rout sent prices down 52% in the past year, prompting some homeowners to abandon their cars and mortgage payments and flee the country. Not one received a foreclosure notice.

Barclays Plc won the sheikdom’s first foreclosure cases in court, clearing the way for lenders holding about US$16bil of Dubai home loans to take action when borrowers don’t pay. Islamic lender Tamweel PJSC, the emirate’s biggest mortgage bank, has several of its own foreclosure claims pending and estimates about 3% of its mortgages are in default.

“Banks will be more aggressive in pursuing legal action if they see the process is efficient,” said Antoine Yacoub, a banking analyst at Moody’s Investors Service Inc. “They were trying to avoid the courts and restructure most of their loans, but once they see a precedent has been set, they will be encouraged to push more cases through.”

The successful foreclosures by Barclays may open the floodgates in Dubai’s property market, which went from the world’s best in 2008 to the worst after credit dried up and speculators who had fuelled price increases left the market, according to Deutsche Bank AG. Moody’s estimated in September that 12% of the 27,000 residential mortgages in the sheikdom would default within 12 to 18 months.

Banks and developers until now have avoided the process of reclaiming homes through the courts, barred by tradition and an arcane legal process that few understood. The Barclays and Tamweel cases may change that, because they show that a 2008 mortgage law – setting out rules for default, foreclosure and repossession – is working.

The law requires lenders to give homeowners 30-day notice of their intent to pursue a foreclosure, said Jody Waugh, a partner at law firm Al Tamimi & Co in Dubai. Courts then review the case and can issue a debt judgment that turns the property over to Dubai’s Land Department for auction. Waugh estimates the process may take two to four months.

Barclays, Britain’s second-largest bank, said in an e-mailed reply to questions that it won the foreclosure orders, without providing details of the cases. The ruling showed that Dubai’s market was “evolving and is poised to come at par with other mature markets of the world,” the bank said.

Both lenders and developers in the United Arab Emirates have tried to stem rising defaults through out-ofcourt settlements with distressed customers after falling prices left buyers with mortgages worth more than their properties. That has helped minimise the amount of bad debt on their balance sheets and kept repossessed houses off a market that’s already suffering from too much supply. Provisions for bad loans in the UAE surged 68% by to 32 billion dirhams (US$8.7bil) as of November, compared with a year earlier. Before the mortgage law was passed, lenders and builders could resort to the courts to enforce contracts, though they didn’t have the right to foreclose.

Tamweel’s pending cases, filed almost two months ago, involve homes abandoned by owners who left Dubai at the onset of the global financial crisis, chief executive officer Wasim Saifi said. Tamweel’s default rate has been “hovering between 2.5% and 4% for the past six months,” he said.

As alternatives to foreclosures, lenders in Dubai have extended payment periods and developers allowed customers with several properties to return some of them.

By Bloomberg