Should off-plan credit schemes ring alarm bells?

The Dubai residential property market is dominated by two areas – secondary and off-plan. The secondary market, fully regulated with mortgage caps in place, reduces the inherent risk in the property market. Strict guidelines imposed by banks decide if the borrower is credit-worthy, protecting both the bank and the borrower (so they don’t overextend their credit limits).

Therefore, we have a combination of banks and mortgage regulations making for sensible levels of risk, avoiding a situation seen in the global financial crisis of 2008/2009, with so much unstable debt in the market leading to an inevitable slowdown.

Now look at the off-plan side of the Dubai real estate market. By not having a regulation in this market, are we allowing the buyer to put themselves in harm’s way? Are we laying the foundation of unwanted risk in this side of the market if the borrowers may not have the ability to make the payment installments post handover?

Perhaps it would be a prudent measure to take a cautious approach to the extension of what is essentially unknown credit in the system, and take heed of early warning alarm bells, considering objectively if this is really the right way to go.

If this continues without regulation, are we sleepwalking into the unknown further down the line? By not fully assessing at the outset the financial worthiness of the borrower and introducing aggressive incentive schemes in order to keep up with the competition, are developers putting themselves at risk?

In addition, it doesn’t really create a level playing field for secondary market sellers. To some extent, and in some cases, the sellers are competing against a market that offers such incredible post payment plans that they struggle to attract buyers unless they are dropping prices or have unique upgraded units.

Regardless of whether we use the terms shadow banking with its negative connotations (maybe not in the traditional sense of the word here) or market-based finance and non-bank credit intermediation, it should not distract from the real risks associated with the unregulated sources of financing, and the unintended consequences that may pose a risk to the market.

It’s also not about favouring or replacing one sector over another, be it banks or “shadow banking” – the purpose should be to complement and diversify choices. And to strike a balance between the development of long-term market financing schemes and the management of financial risks to protect the borrower and the economy.

If we have a more balanced regulatory oversight for both sides of the market and are aware of the growing non-bank finance activities which may pose a risk for financial stability, then we can hope for a more flexible, positive stimulus in the industry.