As criticism of the Dubai authorities continues to grow they have today announced a major change in the way in which property developments and property developers will be monitored and financed in the future. The Real Estate and Regulatory Agency (RERA) seems to be taking a much firmer hold of the property development sector and property developers in particular. They have introduced a number of potentially significant changes which should improve the climate for property investors in the region.
The Dubai property market
In line with worldwide property markets there has been a significant decline in the Dubai property market although this difficult period appears to have revealed a number of significant regulatory weaknesses in the region. Authorities such as the RERA have come in for significant criticism with many people concerned about the lack of protection for investors and laws and regulations which appeared to side with property developers.
While the decline in the general property market in the region is bad enough the significant increase in suspicion and concern about the way the Dubai property market operates has caused further problems. However, the RERA has today announced significant changes which should offer a greater degree of protection for investors in the region.
Changes by the RERA
There have been some significant changes which include: –
Financing the land for off-plan developments
Historically a number of property developers have been in the habit of selling off-plan developments when in many cases they may not even own the land outright at the time of promoting the development. In many ways this allowed property developers to use property investors as “cash cows” to fund their future costs while letting property investors take on a greater degree of risk.
Today’s announcement from the RERA confirms that new property developers in Dubai will have to acquire any land outright before selling and promoting an off-plan development. Whether this will impact on the cost of plots in any new off-plan development remains to be seen but it will give new investors confidence that there is actually a backbone to the development, i.e. the land. This will also force property developers to use their own funding prior to promoting a property, increasing the likelihood that developments will be finished on time and increasing the chances of a development being successful.
Financing the construction phase of an off-plan development
As we mentioned above, historically many property developers have been promoting off-plan developments prior to the construction phase which effectively allowed them to use investor’s deposits to finance the initial construction phase which very much simplified their financial liabilities and again transferred the bulk of the risk to investors.
The RERA has again stepped in to tighten up this process with investor protection very much in mind. Future off-plan projects will need to inject a minimum of 20% of the perceived project value before the construction phase can begin. Slowly but surely the introduction of these two financial requirements ensures that there is more backbone to planned developments and the degree of risk to investors is reduced although not outright.
Future property payments
As with the above change to regulations, which will be implemented in March 2009, the RERA has also moved to ensure that future investor payments will need to be linked in some way to the construction phase. This will ensure that property developers who may be financially weakened are not able to obtain access to investor funding without ensuring it would be used in the appropriate manner, i.e. the construction phase. Slowly but surely investors should feel a little more secure that property developers are being forced to take on more of a risk than they have in the past.
Cooling off period
The RERA has postponed the introduction of official new sales agreements in the short term but has stepped in to implement a 15 day cooling off period as seen in many other investment markets. This 15 day cooling off period will allow investors the opportunity to reconsider their positions and their decision to invest with the option to cancel their agreement outright within the first 15 days. This should cut out the number of investors who have historically agreed to participate in new projects in the “heat of the moment”. It should also reduce the effects of so-called “hard selling”.
Monitoring of property developers
As from next week all RERA approved projects will be monitored on an ongoing basis with details and information made available on the agency’s website. This will ensure a greater degree of transparency than many markets around the world and hopefully encourage further property investment as and when markets recover. It will also eliminate the impact of rumours and scaremongering which have become commonplace in some areas of the Internet during the ongoing economic downturn.
It was also interesting to see that when the RERA was initially created there were 870 developers in the Dubai region although this has now been reduced to 427 developers through mergers, takeovers, extinct companies and those who have moved out of the property development industry.
Not all risks have been removed from the Dubai property market!
While the above changes in the regulatory framework and financing of future off-plan developments has been welcomed across the board it is also worth highlighting the fact that the RERA does not believe that all projects officially listed and sanctioned by the agency will be completed on time. At this moment in time the RERA expects 25% of projects to be cancelled, 25% to be consolidated, 25% to be rescheduled and a further 25% to be completed on time.
Slowly but surely we have seen significant changes in the Dubai property market with regards to the regulation of property developers and property investors. It is worth noting that the changes are very much on the side of property investors although the expectations of the RERA with regards to officially sanctioned projects offer a touch of reality, i.e. they will not all be completed.
Property investors will feel the major benefit of the above changes as and when the property market starts to recover although it is encouraging to see that the Dubai authorities are finally waking up to the potential loss of international investors unless their interests are taken seriously.