Whereas in many parts of the world properties have been traded for centuries, in the United Arab Emirates the concept is still fairly novel. Just a few decades ago the UAE as a nation did not exist, and the majority of people living in the areas that are now the Emirates were nomadic Bedouin who took their tents with them as they roamed in search of grazing. The exceptions were the coastal settlements, such as Abu Dhabi and Dubai, where merchant families and artisans put down more permanent foundations on land often ‘gifted’ to them by their local sheikh. The sheikh was repaying tribal loyalty with land and a protected place to live, and to sell that gift to a third party would have been unthinkable.

Different perspective


About 30 years of rapid economic and social development following the formation of the federal UAE in 1971 has today put the value of land assets into a very different perspective. The abundant oil wealth of Abu Dhabi, which trickles down to the other six emirates through a system of grants, has provided the government with the fiscal means to reinvent what was once barren desert offering few employment opportunities and even fewer luxuries. The construction of roads, schools, hospitals and irrigated gardens is now funded by the public purse without need for the state to impose personal or corporate taxes.

Housing problem

The problem, however, is that there are not enough Emiratis to meet the labour needs of the domestic economy. Of the national population of around 4.5 million, less than 20% are UAE citizens. The state is happy to authorise land ownership and provide housing to its minority citizens, but then is faced with what to do about the housing requirements of expatriates of enormously diverse socio-economic backgrounds, from a relatively low-paid Indian office administrator to an affluent US investment banker.

Historically, the solution has been leasing, whereby expatriates rent villas or apartments built for investment purposes by UAE nationals. Foreigners were forbidden from buying property, and so mortgages were not required. The only foreigners technically excluded from the ownership ban were nationals of other Gulf

Co-operation Council states, such as Bahrain, Qatar and Saudi Arabia. People from these states have the right to register land in their names under reciprocal terms agreed by all council member states. But now that several emirates are seeking to integrate expatriates into the local economy to meet long-term development goals, the issue of wider foreign ownership has come very much alive.

Mortgage market

The history of the UAE mortgage market effectively began in May 2002, when the Crown Prince of Dubai, Sheikh Mohammed bin Rashid al Maktoum, announced his decision to permit foreign nationals to own residential property within the borders of his emirate. His goals were quite clear: to increase FDI, and to cement relationships between expatriates and the government in a country that has so far proved unwilling to share citizenship with non-ethnic Emiratis.

By allowing foreigners who are wealthy enough to buy a home to do so, the logic is that existing or incoming workers of value to the economy will feel more economically and emotionally bound to Dubai. By offering legal residency status to these foreigners once they have completed repayments on their home, the government hopes to attract affluent retirees and holiday home buyers too. While the latter two categories of resident may not bring skills into the local workforce, they will nonetheless spend money when in Dubai, to the benefit of local businesses such as retailers and restaurants.

Legal changes

Under the terms of legal changes that resulted from Sheikh Mohammed’s decision, foreigners were permitted to own residential property in designated new projects built by three fully or partly government-owned developers: Emaar, Nakheel and Jumeirah Beach Residence, a 40-tower, $1.4bn development that was taken over recently by Dubai Properties. In some cases these companies construct every building within the boundaries of the project they are working on, and in others they sell on portions of the project’s land to private developers that build their own apartment towers or villas.

But there was, and remains, a key problem. Under the terms of the federal constitution by which all seven emirates are bound, each emirate may determine its own land laws and regulations provided that they do not conflict with federal legislation. Abu Dhabi, the federal capital and custodian of federal legislation, has yet to grant any freehold rights to non-GCC citizens. Admittedly, the international profile of Dubai’s flagship real estate developments leaves few in doubt that federal ratification will be granted, and this autumn Abu Dhabi is widely expected to allow foreigners to start buying into new projects, but for the moment, investors and lenders are largely working on trust.

The temporary solution that the Dubai government has hit upon is to allow its three major developers to issue sale agreements with the expectation that they will be converted into freehold property title deeds by the Dubai Land Department once the necessary federal decree is issued. Other private developers, such as Union Properties, have decided that long-term leases of up to 99 years are their best approach to working in a legislative vacuum. Whatever eventually happens, it looks likely that the land on which freehold properties are built will remain UAE-owned.

Another problem is a lack of foreclosure legislation, which historically was not needed in a mortgage-free market. The law is understandably a little unclear on a lender’s foreclosure rights as far as foreigners go, but it is illegal to repossess a UAE national’s family home, even if they have borrowed against it as collateral. As a result, although nearly 50 banks operate in the Emirates, only a few have so far felt confident enough to launch into the brave new world of mortgage lending.

Finance companies

The market leaders in UAE mortgages are not banks but dedicated home finance companies linked to the two largest Dubai-based developers, Emaar and Nakheel. Amlak Finance is a subsidiary of Emaar, and Tamweel is a joint venture between Dubai Islamic Bank (DIB) and the state Istithmar investment holding group that is affiliated to Nakheel. It is estimated that together they control about 85% of the market, largely because they enjoy two distinct advantages over the competition:

  • They are closely linked to their parent companies’ construction arms and are government-backed. Not only do they enjoy excellent access to information on new properties as they are released (most primary market purchases are still made off-plan) but they need worry less than a third-party lender about the developer’s actions should a borrower default on a loan.


  • As UAE-owned financial institutions, they can own land whereas foreign banks cannot. The law stipulates that companies may own land, but that a company must be 100% owned by UAE nationals to be eligible to do so.


Islamic financiers

Because they can buy properties confidently, and in response to the increasing popularity of Sharia-compliant financial services in the Gulf, both Amlak and Tamweel operate as Islamic home financiers. This means they provide capital to customers using structures that do not involve interest, which is proscribed by Islamic Sharia principles.

Three of the most commonly used Islamic financing structures are ijarah, murabaha and istisna’a. The latter mainly applies to the financing of actual construction before building work begins, and so is unlikely to be suitable for the majority of foreign investors.

Murabaha, on the other hand, is essentially a purchase and resale contract, whereby the financier buys the property chosen by the customer and then resells it to the customer on a deferred basis. Built into that resale price is a profit margin that is pre-agreed with the customer. This can either be a flat rate applied to the monthly instalments of a reducing balance, or a floating rate that is usually set as a percentage over the six month Emirates Interbank Offered Rate (EIBOR).

Ijarah works like a conventional lease, involving the financier buying a property and renting it to the customer at a prescribed rate and term. Once the term is complete and all the capital repaid, the financier transfers ownership of the property to the customer.

Lending rates

Tamweel will lend up to 80% of a property’s value for a maximum 15-year term on a fixed rate package, or 25 years for a floating rate agreement. Property and life insurance cover are mandatory, but non-residents are allowed to buy if they can prove their income for the past five years.

Amlak’s ijarah profit rates are contingent upon the size of the downpayment. Although non-residents will be asked to pay a flat rate of 7.5%, residents putting down 10% of the property’s value will pay 7.25%, decreasing in stages to 6.75% for downpayments in excess of 30%. Murabaha rates are slightly higher, beginning at around 8%, and rates are contingent upon the tenor of the loan.

Both companies will finance properties bought from a list of approved builders that includes, but is not restricted to, members of their parent group. Again, profit rates will vary with the lender’s risk assessment on each development.

In November 2004, Amlak launched an extended home finance package to expand its business into the secondary property trading market. At the time, the norm was to lend only against the developer-set primary market price, meaning that those who tried to mortgage a property, having bought it second hand, were faced with several problems. Not only were property prices rising fast, thus creating a gap between primary and secondary prices that many lenders refused to recognise, but also because formal surveys or valuations were uncommon a buyer could never really be sure what the right price of his target property should be. Amlak’s solution was to strike a deal with UK-based chartered surveyors Cluttons, which for Dh3000 ($817) will now provide a value assessment on a property that is recognised by the lender.

“We’re facilitating secondary market transactions so that sellers can realise a premium when their property has risen in value and so that buyers can obtain finance to include that premium,” says Mohammed al Hashimi, Amlak chief executive. “We’re also working with Cluttons, and other valuers in the future, to harmonise secondary market prices. We’ve seen cases where one person sells at a 15% premium and his neighbour sells at 10%, meaning valuations weren’t clear. Now a benchmark is being set so that buyers and sellers know the proper value of properties.”

With a brand new segment of the market to lend to, the UAE’s commercial banks were never going to shun the mortgage market – federal ratification or not. Real estate has long been a popular investment option, given the small scale of the domestic capital markets, but funds were usually channelled overseas into markets such as the UK. Now record low interest rates resulting from the UAE dirham’s peg to the US dollar, coupled with high levels of liquidity in the region seeking assets, have enabled commercial banks to launch residential real estate lending portfolios aggressively.

Bank deals

Like Tamweel and Amlak, several international and local banks have negotiated bilateral agreements with selected developers to give their internal risk managers sufficient comfort to offer mortgage products.

HSBC, for example, publishes a list on its UAE website of the projects in Dubai and Ras al Khaimah for which it will lend money to resident and non-resident borrowers. It will lend up to 70% of the list price of a Dubai property and 60% for Ras al Khaimah. As fDi went to press, its monthly interest rate was 6.25%. Lloyds TSB charges a higher monthly rate of 7% on Emaar, Nakheel and Jumeirah Beach Residence properties, but says that it charges no penalties for early and lump sum repayments.

Of the local banks, Mashreqbank will extend finance to a wide range of Dubai developments and charges floating interest rates benchmarked against the local interbank offered rate. The National Bank of Dubai entered the mortgage market in February. As it prepares for launch of freehold in Abu Dhabi, Abu Dhabi Commercial Bank is testing the water by offering to lend at fixed, variable or capped rates on all Nakheel and Damac properties in Dubai, plus the Rose Tower development in Sharjah.

Financial floodgates

When the federal ratification of freehold comes, it is anticipated that the financial floodgates will open as new mortgage lenders rush in, but also that foreigners who had previously sat on the fence will want to buy and will thus push prices up. Assuming these two things happen it will be good news for investors who got in early.

New investors should be wary, however. Not only have transfer fees for the resale of a property within two years of purchase been increased by developers to up to 2% of the property’s value to discourage speculators, but it is a criminal rather than civil offence to default on a loan in the UAE. By all means consider investment, but bear in mind that the consensus opinion of local estate agents is that in Dubai at least the market has probably now outgrown its first flush of spectacular speculator-driven returns.