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.

Buying Off Plan

Most purchasers choose to buy off–plan by paying a deposit and then by structured payments through to completion.
Payment schedules can range from increments of 10% up to 20%. It is at the discretion of the developer how they structure it.

The benefit of buying off-plan is that re-sales command relatively high premiums therefore reducing any profit margin in the investment considerably.

Who Can Buy?

Any investor, overseas or resident, can purchase in Dubai’s luxury property developments.

Home Financing

If you are looking for home financing options in Dubai, most developers offer finance packages. However, Tamweel is certainly one of the best options. Tamweel offer a wide range of products for you to choose from. Tamweel finance properties that are ready to move into, as well as those that are under construction. They will even pre-approve your loan before you start looking so that you will know exactly what your budget is. In addition, Tamweel offer you the option of owning the property outright, or leasing it from them with an unconditional offer to own it at the end of the lease period - whatever suits you better. All of their products have been designed keeping your individual needs in view, especially the need for stability and peace of mind, and that is what makes us sure that they have a solution that is just right for you.

Payment Terms

In general, a deposit representing 10% of the buying price is required at the contract-signing stage for all new development properties. This is followed by what are known as stage payments that are made at regular intervals through to completion. Contact us for project-specific details.

Bank Accounts

Buyers do not need a local bank account to arrange purchases, though these can easily be arranged through our partners in Dubai.

Appreciation

Property prices in Dubai have experienced considerable growth, and are forecast to remain this way for some time. This can be clearly seen if comparing current prices with those of 6 months ago. Like all investments, however, property prices can go down as well as up.

To Buy on the Secondary Market or the Resale Market:

If during the construction stage of a property a second party wishes to purchase the property from the owner then the process is straight forward.

1. The buyer pays the owner an agreed sum which includes those payments the owner has already made to the developer and any premium applied by the owner.

2. Exchange of contracts with owner at the developers head office usually within two week period.

3. The developer will then charge a percentage of the original price of the property (typically between 2% to 7%) to reissue the PSA with a new name on it and update their title records. This must be done either in person or with the buyer’s authorised representative. The whole process takes a matter of minutes.

4. Contract re-issued in buyers name - there is no legal representation for either party or any stamp duty implications.

5. The buyer will then continue to pay the remaining instalments to the developer as laid out in the PSA.

6. Commission, typically 2 to 3% is paid to the agent.

The transfer fee is paid by the purchaser.

What exactly is freehold in Dubai?

Purchasing a freehold property in Dubai now means that you own the property forever or until you decide to sell it. You are allowed to pass this property to your family for example, and they enjoy the same level of ownership as you do.

Most important for investors, your resale rights are guaranteed, as is your freedom to rent out your property to a third party, though some restrictions apply to individual developments.

You should note that although these are freehold properties, some conditions on their owners apply, because they are "private community" developments. These conditions will restrict what owners can do with their properties, and oblige them to maintain their properties to certain standards, according to the themes and quality of the communities.

When buying an apartment, the nature of ownership is different from that of a villa, because an apartment is a unit in a building. These are normally classed as "common hold". Sale agreements for apartments do, however, usually warrant effective full ownership of the unit, subject to restrictions applying to the building, such as renting out the unit, and making modifications.

Where can you buy freehold properties?

Most property developers in Dubai offer freehold, but so far most of the freehold developments have mostly been limited to the Sheikh Zayed Road, and the area of Jumeirah (including Palm Island). However, exceptions to this include the Arabian Ranches and Emaar Towers in downtown Diera. Other future developments include Nakheel’s International City project.

What about buying in other emirates?

So far, the UAE as a whole does not have laws regarding the sale of freehold property to non-GCC nationals. Each emirate makes its own property laws, as Dubai has done. Recently Abu Dhabi announced the availability of freehold, limited to "surface rights" for non-GCC nationals in the Al Raha beach area, outside the main city limits. Ras Al Khaimah, in the north, has created a similar development. The other emirates are expected to follow suit, but there have been no definitive announcements at the federal level yet.

Are property owners eligible for residence visas in the UAE?

Many developments give you the opportunity to gain a residency visa through purchase.

Property Law

The freehold property market in Dubai really started in 1998 when the Dubai Marina project was launched. At that time there was no freehold property law, and villas were sold "leasehold", on 99 year leases. In 2002 a decree was issued by the Dubai government granting freehold rights to non-GCC nationals (The GCC is the Gulf Cooperation Council, comprising Saudi Arabia, Kuwait, the UAE, Oman, Bahrain and Qatar.) This provided the impetus that has led to the size and dynamism of Dubai’s property market today.

Dubai Residency

The Government has stated that a special category of residence visa will be granted to people buying ‘foreigner’s’ properties. The visa will allow a purchaser to live, but not work in Dubai . The arrangements for granting, and the terms of the visa, are at this time unclear.

Only the Government of the UAE can grant these visas, not the developer or estate agent.