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The legal state of the Dubai property market

Brent Baldwin

1st February 2015

Written by Brent Baldwin, Partner and Georgina Chan, Senior Associate, of Hadef’s Dubai real estate team. Hadef & Partners is a full service independent law firm with offices in Dubai and Abu Dhabi and specialises in banking and finance, projects, general corporate, commercial and property, as well as related dispute resolution.

The third edition of Hadef’s survey regarding the legal state of the Dubai property market was issued in December 2014.  The survey results were set against a broad recovery in the Dubai real estate market generally, supported by the residential market ending 2013 with prices reportedly increasing 22% year on year, and rents improving 17% year on year, from the lows experienced post-2008.  This growth had continued into the first half of 2014, with the launching of many new off-plan projects and Dubai’s successful Expo bid.  It was also reported that Cityscape Global in Dubai 2014 was the biggest since 2008, with more than 280 exhibitors from 28 countries.  Anecdotally however, there are continuing suggestions that credit remains tight, and it remains to be seen what impact the sliding oil price and the general downward trend of the stock market will have on real estate in 2015.

Following is a summary of the survey’s key findings.

Off plan property concerns remain

Despite improved stability during 2014, the report shows a lingering lack of trust with respect to off-plan property.  An overwhelming majority of 84% of respondents favoured investing in completed real estate rather than off-plan, and typical comments from respondents highlighted the risk of developers failing to perform in accordance with agreed contractual terms and timeframes.

If respondents were to purchase off-plan property, there was a clear preference to purchase from government related master developers, rather than less well known sub-developers and new entrants. The responses also indicated that location had become particularly important in choosing where to buy, perhaps demonstrating why prices in the more established parts of Dubai had increased significantly faster than in new development areas.

For second and third tier developers that do not have the benefit of a preferential location, the responses showed a need to differentiate themselves by other means, such as better payment plans, lower prices and more balanced and less one-sided sales contracts.

Respondents also showed a preference for increased equity contributions from developers before launching their projects rather than relying on funding from purchasers. The majority of respondents wanted to see developers fund much more than the current RERA imposed 20% of the project cost from the developer’s own funds so as to ease reliance on third party purchaser funds, with respondents indicating they do not trust delivery times and do not want to be the financier for the developer.

Government intervention

Respondents were asked to give their opinion on the effectiveness of some of the steps taken by regulators to curb speculation and slow the rate of growth in the real estate sector, including the impact of the increase in land transfer fees and introduction of mortgage caps.

Only 33% of developers (for obvious reasons perhaps) supported the increase in land transfer fees from 2% to 4%, while 42% of respondents overall felt the increase had been detrimental to the market.  While those in support of the increases did feel it had helped stabilise the market and prevented it becoming overheated, others felt that it discouraged serious buyers who were end-users but not speculators.

The market is also divided on the effectiveness of the UAE Central Bank’s imposed loan-to-value ratio (LTV) restrictions on mortgage lending.  Although widely seen by respondents as a positive step, those respondents from a developer background felt the LTV ratios were unnecessary.  The actual effect of the LTV ratios is difficult to gauge objectively, as the Dubai market is dominated by cash buyers.  Figures released by the Dubai Land Department show that 80% of the value of residential transactions during the first half of 2013 (to the value of approximately Dh23.2 billion) were transacted in cash, with only 20% through mortgages.

It was also clear that developers are keen to consider obtaining development finance from sources other than UAE registered banks, although a barrier to this appears to be the absence of the ability for non-institutional lenders or non-UAE registered banks to secure their interest against the property at the Dubai Land Department.

The concerns highlighted above in relation to off-plan property (i.e. completion risks and too much reliance on end-users’ cash for construction) along with a general preference for investors to buy from master developers tends to suggest that encouraging alternative financiers into the market might provide a lift for the market especially as far as sub-developers are concerned. Given recent reports of cooling especially in the off-plan sector and the looming construction requirements for Expo 2020 and the supplemental real estate development planned to support that, now might be an opportune time for the regulators to consider offering options that encourage alternative financiers to enter the market.

Georgina Chan

Georgina Chan

Increasing support for existing Laws and Regulations

Previous surveys had shown a high degree of dissatisfaction from respondents regarding the operation of Dubai real estate laws, particularly the Escrow Law (Law No.8) and the Initial Real Estate Registration Law (Law No.13 (as amended)).

While in 2014 the Escrow Law was considered by respondents to have had the greatest positive impact on the market, concern remains over whether the Initial Real Estate Registration Law had had a beneficial impact.  The contrast in attitude to these two laws is interesting given that, as many investors realised during the aftermath of the global financial crisis, the Escrow Law does not generally make it easier to obtain a refund of the sums invested.  That said, it does provide investors with an assurance the funds invested have been spent only on the project for which the funds were paid.

The Landlord and Tenant Law (Law No.26 (as amended)) has also clearly helped clear up some uncertainty regarding the rights and obligations of landlords and tenants that often arise in relation to lease renewals and rent increases.  With such a high proportion of expatriates choosing to rent their accommodation in Dubai, and the perception of dramatically increasing rents in 2014, this law has received significant attention from those seeking to protect their legal position particularly in relation to residential tenancies.  The Landlord and Tenant Law appears to be working in terms of controlling rents and preventing unlawful termination of leases.  Its terms are, however, felt by some in the market to be unduly prescriptive for commercial tenancies.

On a more negative front, respondents indicated continuing concerns over the legal capacity of Owners Associations.  Full implementation of the Jointly Owned Property Law (Law No.27) will play an important role in creating a transparent structure for the management of commonly owned apartment and villa developments.  Current expectations are that the Dubai Land Department will very soon introduce new governance regulations for jointly owned property, which some anticipate could involve giving master developers in particular greater control over some developments.  In the face of calls for greater management controls in their communities from some respondents, it will be interesting to watch the reaction if this expectation is correct.

Inheritance and Estate Planning

Lastly, the survey responses showed there is a significant demand for greater flexibility in estate and inheritance planning, with over 90% of respondents supporting the recognition of family trusts in the UAE and more flexibility regarding vehicles for ownership of Dubai real estate assets.  The DIFC has taken cognisance of this and a new wills registry is expected to be established in the DIFC in 2015, which should go some way towards meeting this demand.  However we expect this area of the law to receive increasing attention in the coming years.