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Dubai floodgates open

As Barclays wins its first foreclosure cases in court, the way is now clear for lenders holding about €11bn worth of Dubai home loans to take legal action against defaulting borrowers in the world's worst property market.

Zainab Fattah reports

Dubai's ruler, Sheikh Mohammed bin Rashid Al Maktoum

Tamweel's head office in Dubai

The opening of the world tallest building, the 200-storey Burj Khalifa building on 4 January

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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. Until now.

Barclays last week won the sheikdom's first foreclosure cases in court, clearing the way for lenders holding about €11bn 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 Dubai-based Antoine Yacoub, a banking analyst at Moody's. "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 London-based 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 fueled price increases left the market, according to Deutsche Bank. 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 days' 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.

The ruling shows that Dubai's market is "evolving and is poised to come at par with other mature markets of the world," Barclays said.

Both lenders and developers in the United Arab Emirates have tried to stem rising defaults through out-of-court 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% 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 Wasim Saifi said. Tamweel's default rate has been "hovering between 2.5% and 4% for the past six months", he said.

The biggest risks to banks come from loans underwritten after 2007, which are "most probably in deep negative equity by now," Moody's Yacoub said. Also at risk are Islamic Istisna' mortgages where a buyer doesn't make any payments until the property is delivered, he said.

Bloomberg