Dubai tightens control on developers

source The National

BU DHABI // Faced with a cooling property market and stalled projects across Dubai, the Real Estate Regulatory Authority (RERA) and Dubai Land Department are expected to introduce regulations that will prevent the emirate’s economy from overheating in the future.

One of the regulations expected to be announced in coming weeks would require developers to tie payment plans for buyers with construction milestones, while the other would require developers to have completed 20 per cent of the building before sales could begin, according to lawyers briefed on the plans by the authorities.

“This is going to result in stronger developers,” said Lisa Dale, the head of the property department at the law firm Al Tamimi.

With the global credit crisis now having a sustained impact on property sales, many developers are facing a critical shortage of cash flow. Many have begun to shelve major projects and lay off staff.

Without a boost in the next several months, delayed projects could be cancelled altogether – a situation that would delay the -development of Dubai and further damage investor sentiment.

The new regulations, which are part of the wider maturing of markets in the UAE, would help protect the emirate against future similar problems, lawyers said.

Under the first planned regulation, the first 30 per cent of the sales price of a unit would be “up front” and not connected to construction, but the remaining 70 per cent would come due in instalments connected to construction stages. This would remedy a widespread situation in Dubai where a buyer may have paid a significant percentage of the price to the developer when construction has only just begun. Under most arrangements in the past, payment schedules were set without specific requirements of the developers.

The second planned regulation would make it harder to launch sales for a project by requiring a developer to fully own the plot of land and have finished 20 per cent of planned construction before it could begin sales, Ms Dale said.

This meant a developer would require a significant source of financing other than sales to launch a project.

“This will ensure only the most feasible projects go forward,” Ms Dale said. “In the past we have had people who have never been involved with property before that invent themselves as property developers in Dubai. This regulation would be a mechanism for determining who are the fittest.”

The regulation is similar in intent to another regulation announced by RERA on Dec 30, where a developer is restricted from collecting more than 20 per cent of payments until it has started construction. RERA has reportedly set up an 11-member real estate development trust account department to ensure enforcement of the regulation.

Analysts said the regulations would be notable for imposing a sharp clamp on the property market, which has been growing at breakneck speed for the past five years. But the regulations are not likely to help resolve a rash of disputes that have arisen between buyers and developers.

“There is a lot of concern in the market about existing contractual arrangements,” said Tom O’Grady, the head of the property group at DLA Piper, a law firm in Dubai. “Adding further regulations won’t really help those concerns at this stage. We need to get to a situation where people understand the law that is already in place.”

Many buyers – especially the speculators who bought with the intention of quickly reselling for a profit – are trying to cancel investments or refusing to pay further instalments until construction has progressed further. Developers, meanwhile, need cash to keep construction going and are threatening to cancel purchase agreements and take the properties back unless payments are made on time. With the Dubai courts and RERA inundated with requests and complaints, the process of mediating and settling these cases will be slow going over the early part of this year.

“These new regulations are all steps in the right direction,” said John Hermann, a property lawyer with Baker Botts in Dubai. “It would likely help a lot in the future, but at the same time, it’s difficult to go backwards and fix the past.”