Real estate finance | what is it and what are its main systems?

Real estate finance

What is real estate finance? Real estate finance is an operation dealt with a bank or financial firm that allows the benefactor to acquire a property by paying its value on many payments like installments.

The real estate finance system aims providing suitable residence for benefactors through payment facilities which suit his income rate.

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Real estate finance by the turn of the 20th century

By electing Franklin Roosevelt and the start of the American economic boom the U.S government tended to bolster consumerism to invigorate the market performance by facilitating purchase operations.

So in 1934 the Federal Housing Administration (FDA) was established to be the first official institution to guarantee mortgages. The FDA was created to insure lenders and act as the first official entity to operate real estate finance operations in the world.

Franklin Roosevelt

The organized mortgages principle started to burst around the globe starting from Canada which reformed the national housing act to enable banks provide real estate finance services in 1954. European countries came successively adapting the same though then other international regions followed.

The second half of the last century witnessed the formation of numerous real estate finance entities due to liquidity affordability, the exponential population growth, in addition to the comprehensive economic growth in many countries around the globe.

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Real estate finance in the Middle East

By the 60s and the 70s after the success of liberation movements in most Islamic countries thoughts crystallized in creating a banking system compatible with Islamic sharia law to offer all known financial services to individuals including real estate finance.

The first Islamic bank was established in Egypt in 1964, however, the first financial institution to apply Islamic financial services known nowadays was Dubai Islamic bank established in 1975.

Number of Islamic started to proliferate since then to reach around 50 banks today. Islamic banks reached in the 80s many European and Western countries.

Islamic banks in Gulf introduced financial operations similar to those offered in international banks aims supporting citizens and facilitating property purchase but in accordance sharia law jurisdiction including real estate finance service.

Types of real estate finance

Real estate finance operations has many types including:

Murabaha

One of real estate finance systems which complies with Islamic sharia. In this system the bank or the financing company sells the real estate unit to the benefactor to bear his name. The sale deal is conditioned by mortgaging the unit to the bank until its agreed cost is all paid.

The executive regulations which organize this operations sponsor the rights of both mortgagor and mortgagee. Certain procedures take place on default, usually the financer auctions the unit, however, the owner has the right to attend the auction and bid on his property only if he has enough cash for direct purchase.

Ijarah

Or as known as Islamic lease. In this system the unit will remain possessed by the bank or the company and the benefactor acts only as a tenant. After a certain agreed period of time the benefactor holds the full possession of the unit.

Diminishing Musharaka

One of the real estate finance systems. In this system both the benefactor and the financer whatever it is partner in buying a property, the financer bears in the beginning all or the biggest share of the property value.

The benefactor buys the financer’s share gradually on long time until the property totally accrues to his full possession, meanwhile, the benefactor rents the financer’s share in order to live in the apartment, the rent value decrements gradually as long as the benefactor share in the property increases as it gets revalued every 6 months in most cases.

The three latter systems are considered the most significant in Gulf areas, however, still there are other sorts adapted in Banks and finance companies.

The value of real estate finance is constantly growing. Statistics referred that the value of financed real estate deals in KSA for example reached 12.4 billion dollars last year and expected to reach 32 billion dollars. Also 6% of real estate deals in Bahrain were covered by finance systems.

The current value of real estate finance in addition to experts’ predictions refer to prospective exponential growth to meet the European and Western rates which exceed 90% but only on condition of liquidity availability and government support.