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Analysis: Dubai's legal property framework

Efforts to strengthen laws protecting investors in Dubai's property market have gone some way to boosting confidence, but many are still suspicious of off-plan deals

Danube Properties reported that its 300-unit Glitz project sold out in two hours
Danube Properties reported that its 300-unit Glitz project sold out in two hours

More than five years after the onset of the global financial crisis and the resulting crash which meant that many of Dubai’s flimsier property developments never got off the ground, there is still a lack of trust among buyers over off-plan property purchases, it seems.

A biennial survey recently published by Dubai-based law firm Hadef & Partners called The Legal State of The Dubai Property Market found that 84% of respondents (of which there were more than 1,000) said they favoured investing in completed schemes over off-plan sales, with only 15% expressing a preference for off-plan.

For those that were happy to invest off-plan, around 87% restricted their choice to a master developer, such as Emaar, Nakheel or Dubai Properties.

Brent Baldwin, a partner at the firm, told Construction Week that this was the third of these studies the firm had completed looking at the legal framework for Dubai’s property market.

“In the first and second surveys we did, which were still quite close to the global financial crisis and the crash in the market here, the responses were very negative in the sense of people feeling like they had been shafted, effectively... that the laws hadn’t protected them and developers were getting away with things that were either illegal or unethical.

“The results this year, although they’re positive in some areas, there’s definitely still that lingering lack of trust with off-plan property and people are obviously much more cautious.”

Nicholas Maclean, managing director of CBRE Middle East, said that both commercial and residential occupiers “are generally wary of buying off-plan”, largely as a result of developers underestimating construction timelines.

“Developers could do a lot better if they were more generous with their delivery dates,” he argues. “It would do a lot to bring back confidence in off-plan sales.”

For those residential buyers willing to invest in off-plan, “there has to be a discount, and they have to expect that the snagging period is going to be difficult”.

This again comes down to trust, and the legacy of some developers handing over apartments to investors that are different in dimensions than those they were sold – in extreme cases, with even a different number of rooms.

Although a number of rules were brought into force in the wake of the property collapse in order to give better protection to investors, these have had a mixed response.

For instance, 62% of those surveyed did not believe that the requirement for developers to pay all of their land costs and 20% of the construction costs (either in a bond, or through actually completing the work) offered enough protection to investors. Over 50% of respondents wanted the threshold raised to 50% of construction costs.

Despite this, however, off-plan sales remain popular. A report produced by MPM Properties for Abu Dhabi Investment Bank last month revealed that more than 50 off-plan projects were launched across Dubai last year which, when complete, will add over 13,000 units to the market.

Yet the volume of property transactions completed last year dropped by 30%, according to Dubai Land Department figures.

Baldwin said that he believed the requirement to have 100% of land prices and 20% of construction costs paid upfront benefitted the larger master developers, who had the resources to launch scores of new products during the first half of the year.

“Emaar seems to have had a lot of success with its launches. Even though they’re off-plan, they’ve sold out relatively quickly,” he said. “But then anecdotally, we’ve become aware of other second- and third-tier developers that haven’t had as much success with their off-plan sales in the second half of 2014.

“Some clients who operate in that market have said that sales are slow, and the suggestion from the results is that if they want to be attractive and the developments aren’t in key areas, they need to think of more innovative ways to get people signed up to buy from them.

“Things like better contractual terms, better payment plans, or – as we’ve seen with some developers – even  offering incentives like very expensive free gifts,” he said.

Danube Properties was one of those firms that was unveiling projects at the end of the year. In fact, the relatively new property arm of the building materials group owned by Rizwan Sajan, launched its first two schemes in the second half of the year and both sold out within hours.

Sajan argues that he decided to set up the business precisely because Dubai’s laws are robust.

He said that the two biggest cost components a developer faces are the land and construction costs, and adds that any proceeds from sales are then deposited in an escrow account to pay for construction.

“So very clearly, there remains absolutely no risk for the buyer and I don’t think in other mature markets internationally such security exists,” he argued.

Robert Blundell, a partner at law firm Holman Fenwick Willan, agreed. “20% probably is enough,” he said.

“It appears that this limit is adequate to remove ad-hoc developers from the market. It is already possible for established developers to secure construction finance at good rates, which will more than satisfy these limits.

“The 20% threshold acts as a sensible benchmark to demonstrate that those developers in the market have the ability to satisfy independent financiers of their standing, which in turn gives market confidence. Increasing the level from 20% would not give any greater security to purchasers, who really need confidence that their payments are secure and potentially refundable should a development not proceed – and this is a different matter.”

When asked about the effectiveness of recent decision taken by governments to make the market more secure, there were also differences of opinion.

The Dubai Land Department’s decision to double property transfer fees in a bid to prevent speculators “flipping” homes, was seen as having a negative impact on the market by 42% of respondents, while only 21% felt it was positive.

The UAE Central Bank’s decision to cap loan-to-value ratios on mortgages to 80% of values on properties below $1.36m (AED5m), or 75% for expats, was seen as positive by 63% of respondents. Understandably, it was more popular among financiers (72%) than developers (50%).

And although Dubai’s property market moved from fears of a bubble at the start of 2014 to consecutive quarterly price declines by the end of the year, Baldwin pointed out that it is difficult to judge exactly how much of an impact mortgage tightening rules have on a market where 80% of deals are done in cash.

CBRE’s Maclean believes the slowdown was as much due to a correction in market forces as it was to measures that are imposed.

He argued that Dubai is “almost a perfect market” in terms of supply and demand. Prices may have dropped towards the end of the year, but were up 13% on 2013. Given that Dubai’s economy, and more importantly, salaries, only grew by 5% then a correction towards the end of the year was likely.

“The growth wasn’t sustainable,” he said.

Baldwin said that other laws were seen by respondents as having an effect, despite reports to the contrary. Both the landlord and tenant law and the escrow law for holding customer payments were viewed by respondents as positive.

Indeed, he said 45% of survey respondents said their rent increase was in the 0-10% range, while a further 24% had no rent increase. Of those whose increases were above market rates, 65% didn’t bother to challenge, and 94% of those who had challenged did so directly with the landlord without having to go to the Rent Disputes Settlement Centre.

“That was a really interesting result because that had a lot of attention in 2014, but it seems that it was a lot of tenants whingeing without good grounds to do it. Maybe the media interest in that area has focused on extreme cases, but the bulk of the market seems largely satisfied with the way things work.”

Another consideration was financing property purchases, with UAE banks still generally seen to be reducing their exposure to the property market, and no other alternative sources easily available – only banks registered with the UAE Central Bank are able to register charges against land or property assets.

“There is a call for mortgage rules to be freed up a little bit so that there is greater flexibility for other banks to register mortgages – and not just banks, but people.

“Over 82% of people felt there should be more flexibility for alternative financiers to register interests against land,” he said.

Maclean said that changing the rules would allow for an influx of capital – particularly from investors in Asia and other markets who are keen on securing income-generating assets.

“There is capital available for development funding,” he said. “If you attract institutional money, it makes the market less dependant on retail buyers. To be so reliant on retail buyers is one of the reasons why the market found itself in difficulty in 2009.

“Banks still really don’t want to increase lending books to the retail market [so] it would be wise to encourage new streams of direct funding – although these would probably go to the developer rather than the buyers.”
However, Blundell argued that the mortgage market in Dubai is “still in a state of rapid and encouraging development” and should be allowed to flourish on its own.

“It is not a priority to open up the market to provide security for new categories of lenders at the moment. The market is still dominated by cash buyers, so this is probably not a pressing concern for most buyers, and of little additional stimulus to the market.”

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