FalconZ Articles

Legislation in response to concerns arising is the normal way in emerging marketssuch as the UAE, say Steven Henderson and Brett Scrymgeour of Clifford Chance.

The recognition of the need to diversify their economies and attract foreign investment led the governments of Abu Dhabi and Dubai to introduce a legal framework for property ownership in 2005 and 2006 respectively. For foreign investors and developers, these laws created greater confidence in their legal ownership rights in a market that is experiencing unprecedented growth in the real estate sector.

In Dubai, foreign interest in real estate ownership began early, in fact even before formal property laws were introduced. Foreign investors’ entry into the market followed the issue of a decree in May 2002, by the then Crown Prince of Dubai, Shaikh Mohammad Bin Rashid Al Maktoum, to allow foreigners to buy and own freehold property in specified areas of Dubai. Until Dubai’s property law was introduced four years later, however, the nature of such ownership rights was uncertain. Foreign purchasers essentially obtained a series of contractual rights from developers to obtain title at some stage in the future, which is a long way from the state-backed ‘guarantee’ of title more familiar to many foreign investors.

The law has been constantly evolving since the introduction of Dubai’s property law. In most instances, the laws have been introduced to address a concern that has arisen in the real estate market, which is expected in an emerging market.

For example, the introduction of the foreign ownership laws saw the entry into the real estate market of a number of developers looking to ‘cash in’ on what continues to be one of the best markets for real estate in the world. Because there was initially little regulation or ‘checks’ in place, buyers were left with no guarantees that instalments of the purchase price made by them to developers were being used to undertake construction of the property. This becomes a real issue when there are delays to the development, which have been reasonably common in Dubai over the last few years. Incidents like this can have severe consequences on an otherwise strong real estate market because of the negative impact on consumer confidence. This highlighted the need for regulation both to complement and complete the existing property laws. The government of Dubai, in recognition of this need, has introduced a number of new laws aimed at increasing consumer confidence, including:

- Escrow Law — the escrow law introduced by the Dubai government in 2007 requires developers (when they sell units off the plan) to set up escrow accounts. The law requires developers to pay any money received from buyers into the escrow account (i.e. the purchase price is no longer paid directly to the developer) where it is held subject to release in stages as the development is constructed. Even after the development is completed, a portion is retained as further security.

- RERA — the Real Estate Regulatory Authority known as RERA was established in July 2007. RERA has been given wide-ranging powers including licensing all real estate activities in Dubai, and it is now a legal requirement to be registered on RERA’s Developers Register for any party undertaking developments in Dubai. RERA has also imposed certain rules in relation to registered developments, one of which requires that all developments must commence construction within six months of launching sales in relation to the development to the market.

- Strata Title Law — the strata title law in Dubai came into effect earlier this year. It seeks to give certainty to owners of units in apartment buildings of their rights to ownership (i.e. it confirms that they may sell, lease or mortgage their unit). One of the fundamental features of an apartment building where various different parties own units is a common set of rules for all of the owners to follow (such rules deal with a number of issues, including the payment of expenses for the maintenance of common-use areas within the development). In recognition of the importance of these rules, the strata title law includes a requirement for owners to comply with the rules for their particular development. However, the key feature in terms of consumer confidence is the introduction of a requirement for an owner’s society to manage the development. Each owner of a unit in the development will be a member of the owner’s society and have voting rights that gives owners some comfort over the management of the development.

In Abu Dhabi, the property ownership laws evolved differently. Unlike Dubai, there was no decree with regard to the right of foreigners to own property and no right for foreigners to own property until 2005. However, to attract and retain foreign interest and growth in the real estate sector, Abu Dhabi had as much need for the introduction of property ownership laws as Dubai. Since the introduction of a legal framework for the ownership of property in the emirate in 2005, foreign interest in the real estate sector has been ‘red-hot’, so much so that phases of particular developments have sold out within hours of their release.

The appetite for real estate in the UAE and in particular in Dubai and Abu Dhabi has been unmatched anywhere in the world. To sustain the growth in the real estate sector, and to keep the current momentum going in the current global environment, the governments of both Dubai and Abu Dhabi need to maintain consumer confidence and expand investment, including foreign investment.

The government of Dubai has already taken active steps to increase consumer confidence with the introduction of the escrow law and the strata title laws, as well as the establishment of RERA. The laws passed to date and the establishment of RERA provide a solid legal framework that protects all players in the real estate market — but more laws (and the regulations contemplated in the current laws) still need to be enacted. The government of Abu Dhabi will need to follow suit and take steps similar to those already taken in Dubai if it wishes to maintain the foreign interest in its real estate market.

The Real Estate Regulatory Agency (Rera) has assured investors and buyers in the market that the recently
announced Law No 13 “Regulating Initial Property Registration in Dubai” will not see buyers selling rampantly
to avoid the off-plan registration fee.

Speaking to Emirates Business, Mohammed Sultan Al Thani, Assistant Director-General of the Dubai Land Department said: “Developers today are making a return-on-investment (RoI) in the average of 10 to 15 percent. Why would they want to sell their property just to avoid the one per cent off-plan registration fee?”
“There has been a lot of talk on the real estate market in Dubai, rest assured, Rera’s intentions is only to stabilise market conditions and set a good framework in place,” he said.

The new law is currently in draft form; it is yet to be published in the Official Gazette.

Dubai-based law firms DLA Piper Middle East and Clyde & Co confirmed the draft for Law No 13 does not
restrict property re-sale and whether a property could be ‘flipped’ remains subject to the terms of the sales
contract and the consent and payment of any fees to the developer.

“The new draft says that developers may no longer charge transfer fees on off-plan sales. Developers will be
allowed to charge an ‘administration fee’, which is pre-approved by the Land Department. We understand the
administration fee will be no more than Dh5,000 however this is yet to be announced or confirmed by the
Dubai Land Department,” said Tom O’Grady, Partner, Head of Real Estate, DLA Piper Middle East.

Dubai Land Department’s Thani further said under the pre-registration law, if a buyer breaches an off-plan
sales contract with a developer, under the new law the onus will be on the developer to advise Rera of the
breach. Rera will then issue a notice to the buyer granting a 30-day grace period for the buyer to comply with its contractual obligations (or rectify its breach). If the breach is not rectified within the 30-day period, the developer may terminate the contract and return 70 per cent of the money paid by the buyer.

The Law No. 14 of August 2008 or the Mortgage Law as it is more popularly called, signals a strong commitment by the Government of Dubai to better standardize its real estate sector and, safeguard the rights of lenders as well as buyers. The move is being perceived as a step in the right direction to clean up the system, bestowing more credibility and sustainability to the property market and home finance industry. It, in fact, augurs well for serious investors on the lookout for credible short-term as well as long-term gains, effectively ending myopic investment patterns and trends initiated by speculators.

How does Law No. 14 protect investors?

The new law requires mortgages taken out on properties in Dubai to be sold by registered financial institutions, and be insured. For an investor this provision offers protection against general risk.

How does Law No. 14 operate?

Mortgages, like real estate transfers become effective when they are registered at the Land Department, because then, they can be properly regulated and recorded. Law No. 14 stipulates that mortgage contracts be registered with the Dubai Land Department, specifying the following details:
• Value of the property
• Amount of debt
• Term or duration of mortgage
• Names and addresses of the mortgager-borrower and
mortgage-lender

A “mortgagee annotation” is then made to the letter and forms part of the Land Department Register.

“If the borrower defaults on his mortgage, the lender must serve him a notarized notice before proceeding to sell the property, by way of public auction after making an application to the execution judge.”

Benefits

1) A major advantage of the Mortgage Law is that henceforth real estate borrowing activity will be secure and transparent. Mortgage lenders would obtain priority over unsecured lenders in the case of enforcement.

2) The borrower could delay an enforcement process for a maximum of 60 days if he/she can convince the execution judge that they can discharge the debt within that period and that a sale of the property causes serious damage to the borrower. Both of these conditions must be met to the satisfaction of the execution judge. This protects both lenders, providing them with the power to act quickly on defaulting debt besides
offering a safety net for borrowers.

We anticipate similar laws by Dubai government in the near future to strengthen its property legal framework. The high fuel prices and resultant GDP growth have generated impressive developmental activity in the region leading to an increased inflow of foreign workers. According to a report by Dubai World’s Statistics Department, Dubai’s direct foreign trade in 2008 recorded a first-half jump by Dh104.4 billion (around $28.4 billion), to reach Dh296.6 billion (around $80.8 billion), compared to Dh192.2 billion ($52.3 billion) achieved last year during the same period.

To accommodate overseas workers, sectors like real estate and construction have to evolve and develop continually; the recent corruption investigations into the operations of leading property developers in the region and the bolstering of immigration rules are a clear indication that the Government is indeed serious about raising standards of legal transparency and residents’ rights in the region.

Property Factbox

Documents required for registering properties purchased from developers in Dubai:

Individuals:

» Original ownership OR THE CONTRACT certificate issued for the developer

» A copy of attested contract between the developer and purchaser, to be attached with a copy of master
community declaration, and articles of association of landlords’ societies (if any)

» A letter issued from the developer, to register the property in the name of purchaser stating his full name
as in identifications

» A copy of valid passport and a copy of national id card for local nationals

» In case of submitting the application through agent, a copy of a duly attested power of attorney stating
clearly the powers conferred on the attorney to purchase/sell the property and register the same at the
department in the name of the purchaser, should be attached to the said application

Local companies:

» Original ownership certificate issued for the developer

» An attested copy of contract performed between the developer and the purchaser to be attached with a
copy of master community declaration and articles of association of landlords’ societies (if any)

» A letter issued from the developer, to register the property in the name of the company

» A copy of the trade license

» Duly attested copies of the memorandum of association and articles of association of the company

» A copy of a decision issued from the competent administrative authority in the company concerning purchase sale of the property

» A duly attested power of attorney performed by company granting clearly the attorney full powers to
purchase/sell the property and register the same at department of lands and properties in the name of the company

» A certificate including names of partners, their nationalities and their shares in the company’s capital

» Copies of partners’ passports along with the copies of national id card for local nationals
(Source: RERA)

Dubai Department of Finance has issued Notice No2 of 2008 that starts the process for drawing up the budget for 2009. It is expected that more than 33 per cent of Dubai’s budget expenditure in 2009 will be earmarked for infrastructure projects.

In 2008, budget surplus touched AED 11.4 billion compared to AED 5.1 billion in 2007. The revenues for fiscal year 2008 in Dubai are expectedly pegged at AED 135 billion, while planned spending is estimated at AED
123.6 billion. In the UAE federal budget for 2008, 24.2 per cent was earmarked infrastructural projects.

His Highness Sheikh Mohammed Bin Rashid Al Maktoum, UAE Prime Minister and Vice President and Ruler of Dubai has said that Dubai’s economy had exceeded all expectations as the targets set out till 2010 has been achieved in half the time. Sheikh Mohammed said, “In the year 2000, the plan was to increase GNP to $30 billion by 2010. In 2005 that figure was exceeded, with GNP reaching 37 billion US dollars. The plan also included an increase in income per capita to $23,000 by the year 2010. In 2005 the average income per capita reached $31,000.”

Telecommunications: Telecommunications across all platforms in the UAE are fast and effective with fixed-line, internet and mobile connectivity amongst the best in the world. The 2007 Global Information Technology Report (GITR), commissioned by the World Economic Forum(WEF) in cooperation with Insead Business School, puts the UAE at the top of the ‘Net-worked Readiness Index’ in the Middle East and North Africa (MENA) region and ranks the UAE in 29th position worldwide out of 122 countries, beating many European nations. Etisalat, formed in 1976, have 6.3 million customers on its mobile phone network, 1 million active users of 3.5G and 3G data services, 1.3 million subscribers to the fixed line network, 800,000 subscribers and over 2.5 million internet users. When du’s 1 million mobile customers are included, the telecom sector’s penetration rate is the highest in the region and comparable to the best in the world.

Airports: UAE alone account for 60 percent of all airport investment in the Gulf. Geographically, the country’s reach is considerable, sweeping through Africa and the Middle East and linking these regions to Europe, Asia, Australia and the Americas. Over AED 77.5 billion (US$28.4 billion) is being spent to develop 7 airports in the UAE.

Road Network: The Dubai Government has come up with a plan to enhance and integrate the existing road network with the public transport system. This strategic plan will cater to the existing and future road development requirements in Dubai until 2020. The government has allocated a budget of AED 44 billion to develop road infrastructure that will add 500 km of new roads in the emirate.

According to a study by the International Monetary Fund (IMF), inflation in the UAE, estimated
at 11 per cent in 2007, is set to drop to 9 per cent in 2008. The IMF’s forecast of an easing of
inflation came as economists warned of a 3 per cent surge in inflation across the GCC in 2008.
The rising inflation in the UAE is mainly due to a weakening US Dollar to which the UAE Dirham
is pegged against. A Dirham-Dollar peg means the region has limited ways to control inflation
as central banks follow the monetary policy of the United States, where the Federal Reserve
has slashed interest rates since the global credit bubble popped last year.
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Will falling off-plan sales boost completed Dubai property prices this autumn? The Cityscape Dubai
exhibition, the largest property show in the world, is almost upon us. But hardly a day goes by in Dubai
without another scandal hitting the real estate sector or the banks related to it.

You might think that this would be denting the confidence of some would-be buyers. But is it not realistic
to propose that the main impact will be to deflect some of the people who would have bought off-plan
back into the completed property market, and that this additional demand could actually raise completed
prices to even higher levels?

It is a feature of markets that they do not always act in an entirely rational manner. You would think, for
example, that the series of scandals might dampen demand across the board and slow the whole market.
But that ignores the obvious truth that the Dubai economy is booming this autumn and that large numbers
of new expatriates are arriving in town who need to find accommodation. Many, too, have arrived with an
eye to buy in Dubai, and to avoid paying the super high rents of the city, if not now then at least at some
stage in the future by buying an off-plan property.

In the recent past this demand was satisfied by a seemingly endless procession of off-plan projects to
meet whatever the budget or requirement of the buyer. Those who could not find what they wanted
immediately seemed happy to accept a promise from a developer to deliver a suitable property at some
date in the future.
Now the off-plan market is facing a lot of awkward questions and a number of senior executives are in
custody as investigations into alleged irregularities and real estate market misconduct are undertaken. So
even if they are not immediately turning their back on off-plan purchases, buyers are far more wary about
whom they are doing business with and some of the promises that are being made, or at least they
should be.

It is an unfortunate fact of life that all economic booms attract conmen and cheats. Partly this is because
an economic boom induces a false sense of security and makes people more sensible to their charms.
Partly this is because pools of money invite the unscrupulous to take advantage, and people are gullible.
However, most owners of completed property in Dubai have actually bought off-plan and are very content
with the experience. The sale of real estate to foreigners only started in 2002, and so the market was all
off-plan to begin with and this is how it has developed with remarkable success since then. The original
off-plan buyers have been extremely happy with their financial success, even if their property was not
always delivered on time or quite as they expected. Thus it would be irrational for the off-plan market to
be dismissed as wholly unreliable because of the scandals. It has delivered, if not on time or quite to
specification. On the other hand, a concentration of activity back into the hands of proven developers,
perhaps with government backing, looks inevitable.

This will create a new shortage in supply as there will only be so much of the off-plan market that can fulfil
this qualification, and that suggests prices will rise. At the same time there will be buyers who reject offplan
entirely as just too risky, and decide instead to buy completed property. This will increase demand
for the already limited supply of completed property this autumn, and increase prices. But the important
point to note is that this narrowing of the supply of property due to the scandals now besetting the sector
will come at the very moment that demand is really taking off, with the autumn influx of new expatriates.
That might appear a little strange but the scandals are not really affecting the basic argument for buying a
home in Dubai.

Simply put this boils down to it being more economical to buy than rent with mortgage rates falling, the
UAE offering an excellent economic outlook for career development during a difficult period for the global
economy and not wanting to be left out in what appears to be a solid way to accumulate capital while
working here.

House prices have already witnessed some remarkable increases over the past year, and may be the
best globally in 2008. But it may well be that prices stretch still higher, as by certain global yardsticks they
are not yet in the upper quartile, let alone among the highest in the world.

Rental yield is the usual method of determining whether house prices are too high or too low. In Dubai
villas carry a rental return of about five per cent, while small apartments are the best performers with an
eight per cent average yield. By contrast in Central London rental yields fell to two to three per cent in
recent years, signalling real estate prices were high, and indeed they are now falling back.

Given that salary levels in Dubai are not going to increase by more than inflation we can see that rental
prices probably cannot be pushed up by much. But on the other hand, capital values certainly could rise –
assuming that mortgage costs continue to fall and make home ownership more affordable – and that is
what you would expect in a booming real estate market: a gradual squeeze on rental yields as more and
more buyers enter the market.
Moreover, around the world it is becoming more and more difficult to buy assets with a real rate of return,
and so it is logical to suggest that even more money will be attracted into completed Dubai property and
so gradually raise the capital cost and squeeze down the rental yield.
These comments are primarily directed at the residential property market in Dubai but also apply to the
commercial real estate sector, and perhaps even more acutely so as the availability of space is incredibly
tight. If we are going to see less property available in the future because of the scandals then the value of
the property that remains is going to be higher than it would have been.

Perhaps there is only one scenario under which I could see property scandals really impacting on house
prices negatively, and that would be if the problem grew so large that it imperiled the whole reputation of
Dubai as a place to do business. But Dubai has a record of successful expansion and growth of its
business, trade and financial sectors second to no city in the modern world, so that hardly seems
probable.

My conclusion is that home buyers who allow themselves to be dissuaded from buying in Dubai by recent
scandals are likely to regret it as prices still have some room to rise, and the removal of additional supply
by the emergence of scandals and investigations is only going to make prices rise even higher. Only
when the Third Great Oil Boom subsides will property undergo a real correction but that could be many
years away.