Author: afridi-angell

Off-plan sales: risks and rewards

Whether buyers are looking to expand their real estate portfolio or buyers are simply looking to find their ideal home, great deals can be found in Dubai’s off-plan real estate sector as developers face pressure to shift their inventory amid a concern that the market is over supplied.

 

However, it is critical that prospective buyers do their homework; work with a reputable broker and a reputable lawyer who understand the off-plan market in Dubai; and ensure that they purchase a quality off-plan investment.

 

This article discusses the risks and rewards of Dubai’s off-plan real estate sector, and the legal protections afforded to off-plan buyers.

 

Rewards

 

Over the last few years off-plan buyers have had the opportunity to invest and make returns with minimal capital outlay. Investors, in particular, have been able to spread their investments and hedge their purchases over several projects in order to maximize future gains. And while off-plan investors do not see the immediate rental return from those investing in the secondary market, buyers of units in some new communities have been able to attract tenants at the expense of some older communities, which has helped with occupancy rates and attractive yields. The affordable sector in particular has seen strong returns with yields exceeding 8% in the last year in communities such as Jumeirah Village Triangle, Jumeirah Village Circle and International City.

 

For the end user (as well as the attraction of living in a ‘box fresh’ home), low first payments and attractive payment plans have brought home ownership within reach of many residents previously priced out of the secondary market due to the 25% deposit requirement. This has been an important factor in enabling the younger generation to take that all important first step on to the property ladder and has further driven strong demand in the affordable sector.

 

Risks

 

While the Dubai Land Department (DLD) recorded that off-plan transactions were up 36% in 2017, there are signs in recent months that demand in the sector has softened with the pendulum slowly swinging back to the secondary market. A major concern for many is that recent off-plan demand has driven a surge in development, and the potential of significantly increased upcoming supply will have a negative impact on future values. Memories of the 2008/2009 market crash still loom large and the fear is that with 42,000 units under construction, where will the demand for these units come from?

 

It is clear that there is a large amount of supply in the pipeline, but delivery rates may not live up to expectations. Q1 of 2018 saw only approximately 3,500 units handed over, and while that will increase in the coming months, the supply of good quality projects may be more in line with future population projections. But while todays development may be catering for tomorrows population, there is a risk that in the short term poor quality projects may suffer loss in value and those buying off plan should choose their investment carefully.

 

Increased supply creates choice for end users both for the resale and rental of any off-plan investment and the savvy investor will have the requirements of the future occupier of the property firmly in mind when buying. Picking off-plan projects with attractive amenities and services such as schools, shops and recreational facilities, coupled with good transport links and infrastructure, will help future proof any off-plan investment. Build quality and the reputation of the developer are also important factors to consider, especially if you are hoping for the property to be handed over on time.

 

Legal Protections

 

Off-plan real estate investment in Dubai is governed by a set of real estate laws and regulations aimed at protecting buyers’ interests, the most important of which are discussed below.

 

The interim registration law (Law 13 of 2008 (as amended)) requires all sales (and all other disposals) of off-plan units to be registered on the interim real estate register maintained by the DLD. If a sale is not registered, it is considered null and void.

 

The interim registration law (Law 13 of 2008 (as amended)) also governs the developer’s right to terminate a sale contract for an off-plan unit in the event that the buyer falls into default, and sets out: (i) the termination procedure to be followed; and (ii) the monies that may be retained by the developer in the event of termination which is linked to the percentage of completion of the off-plan unit as follows:

 

• if the percentage of completion of the unit exceeds 80%, the developer may retain up to 40% of the price of the unit specified in the off-plan sale contract;

 

• if the percentage of completion of the unit is between 60% and 80%, the developer may retain up to 40% of the price of the unit specified in the off-plan sale contract;

 

• if the developer has commenced construction work on the project as per the designs approved by the competent authorities and the percentage of completion of the real estate unit is less than 60%, the developer may retain up to 25% of the price of the real estate unit specified in the off-plan sale contract; and

 

• if the developer has not commenced the execution of the project for reasons beyond his control and without negligence on his part, the developer may deduct not more than 30% of the amounts paid by the buyer.

 

Furthermore, the trust account law (Law 8 of 2007) protects buyers by requiring developers selling off-plan units to be registered with the Real Estate Regulatory Agency (RERA), and to deposit all amounts paid by purchasers into an escrow account with an escrow agent accredited by the DLD. The amounts deposited in the escrow account are exclusively allocated for the purposes of construction of the particular real estate project (and directly related activities) and may only be withdrawn by the developer on application to RERA in accordance with the law.

 

Finally, pursuant to the jointly owned property law (Law 27 of 2007) and the Directions released in 2010, developers must disclose all relevant information pertaining to their off-plan development in a “Disclosure Statement” to prospective buyers as well as have a jointly owned property declaration describing the common areas and the rules and regulations associated with them including the calculation of service charges.

 

Although off-plan buyers can take comfort in the protections afforded by the legislation described above, we recommend that purchasers check that:

 

• the real estate project is registered with RERA;

 

• there is an escrow account for the real estate project;

 

• the percentage of completion of the real estate project and the expected date of completion;

 

• the developer is registered with RERA;

 

• the developer owns the land or there is a development agreement between the owner and the developer; and

 

• the developer has the required permits and approvals from the DLD and RERA to sell units off-plan in that particular real estate project.

 

Conclusion

 

Dubai’s off-plan real estate laws and regulations serve to increase investor confidence and attract more foreign investment.

 

With respect to the market, there are some excellent deals to be had from developers in Dubai today and off-plan enquiries remain high. However, today’s off-plan buyers should not expect immediate gains, but should shop around and choose a quality product that will deliver long term sustainable returns, or provide a stable, affordable home for themselves and their family.

 

Dubai remains an attractive proposition for domestic and international investors alike with globally high rental yields and relatively low prices per square foot. Dubai itself continues to attract hard working and entrepreneurial people from across the world and the market place is maturing as more people choose to settle and raise families in the UAE. There is much to be positive about regarding the future of the Dubai property market and the off-plan sector will continue to play a big role in such market. ■

 

The new UAE Pledge Law – promulgation of regulations that make registration available

UAE Federal Law 20 of 2016 (Regarding the Pledge of Movables as Security for a Debt) (the Pledge Law) introduced a new regime for registering a pledge over moveable assets which are pledged as security for the repayment of a debt. We reported on this law in our inBrief of January 2017, New UAE Pledge Law Over Moveable Assets, and our Legal Alert of 19 February 2018, The New UAE Pledge Law – Security Registration.

 

The Emirates Development Bank has been appointed as the registrar, and the registry is known as the Emirates Movable Collateral Registry (the Registry).

 

The actual registration of pledges was subject to promulgation of the implementing regulations under the Pledge Law. The implementing regulations have now been issued by way of Cabinet Resolution 5 of 2018 dated 1 March 2018 (the Implementing Regulations). In addition, Ministerial Resolution 42 of 2018 dated 19 March 2018 provides detailed instructions relating to registration of security over movables (the Instructions).

 

We are examining the Implementing Regulations and the Instructions and will report separately on the contents of the same. In the meantime, we have made enquiries to the Emirates Development Bank concerning the new regulations, and we have been informed as follows:

 

• Registration establishes priority but is not required for the creation of a valid security interest.

 

• Any movable asset located in the UAE (other than the free zones) may be registered, including bank accounts, assignments of receivables and guarantees.

 

• Assets in the free zones are outside the coverage of the Registry.

 

• The holder of the security interest may be a UAE entity or a foreign entity.

 

• The security agreement need not be notarized and need not be in Arabic.

 

• When a security interest is registered, the holder of the security interest is required to notify the provider of the security, which party then has a fixed period of time to file its objections.

 

It was previously required that holders of security interests predating the Pledge Law would have to register their security interests under the Pledge Law by 15 March 2018. This deadline is no longer in effect. Instead, Emirates Development Bank expects to notify banks of the new deadline in the near future. ■

Part-time work

Now that the Ministry of Human Resources and Emiratisation has issued the new regulations addressing part-time employment, let us take a closer look at what this means.

 

The new measure is Ministerial Resolution 31 of 2018. It does not address part-time work as such, but rather part-time work for someone other than the employee’s regular employer. Before this new measure was promulgated, the Labour Law accommodated part-time work for an employee working for only a single employer. Nothing in the Labour Law prevented an employee from working, say, 6 hours in lieu of 8 hours a day, as long as the employer agreed.

 

But a problem arose when an employee sought another job outside normal working hours. The laws of the UAE require that a person may be employed only by the party that sponsors the employee’s labour permit. Working for a party other than the sponsor of one’s labour permit presents multiple violations, on the part of each of the two employers and on the part of the employee.

 

The Ministry had procedures for granting approvals on a case-by-case basis for this kind of part-time employment, provided that the employee’s “regular” employer issued a non-objection certificate. But now it appears that the Ministry will issue approvals on a more routine basis.

 

The new Resolution applies to an employee who is hired as a part-time employee, with working hours of less than 8 hours a day and 48 hours a week. (There is scope in the Resolution for a temporary increase up to 60 hours per week when necessary, provided that the Ministry consent to the same based on the employee’s request, and provided that employee be  given at least one day off per week.) The new Resolution applies only to employees at skill level 1 or skill level 2. Skill level 1 employees hold bachelor’s or master’s degrees and are employed in professional positions. Skill level 2 employees hold technical diplomas or certificates and are employed in technical or supervisory positions.

 

When an employer specifically hires an employee on such a part-time basis, the relationship is memorialized by a form of part-time employment contract promulgated by the Ministry. A part-time employee serving under such a contract may work on a part-time basis for a second employer, provided consent for the arrangement is obtained from the Ministry. Each employer remains responsible to pay to the employee the salary agreed in the applicable employment contract. The primary employer remains responsible for the employee’s statutory benefits such as annual leave and end of service gratuity.

 

An employer who hires an employee on this basis as a principal employer must therefore be aware that the employee will be able to seek other part-time employment with the consent only of the Ministry. The employer would not be able to prevent the employee from obtaining part-time employment elsewhere by imposing non-compete or confidentiality provisions. Accordingly, this would not be an appropriate employment relationship for an employee that had access to significant employer or client data or other intellectual property.

 

Although the new Resolution will only apply to a small portion of the workforce in the UAE, the additional flexibility that the Resolution introduces must be welcomed. ■

Public-private partnerships: the changing face of infrastructure finance

Over 30 years of heavy investment in infrastructure development has seen the emirate of Dubai transformed from an under-developed backwater into a hub for project finance which is often cited as the poster child for the type of metropolis that can be created through dedicated infrastructure investment. With the growing appetite for public private partnerships (PPPs) in the UAE, Rahat Dar analyzes the role Islamic finance will play in this new era.

The new UAE Pledge Law – security registration

UAE Federal Law 20 of 2016 (Regarding the pledge of moveables as a security for debts) (the Pledge Law) introduced a new regime for registering a pledge over moveable assets which are pledged as security for the repayment of a debt. We reported on this law in our inBrief of January 2017, New UAE Pledge Law Over Moveable Assets.

 

The actual registration of pledges was subject to establishment of a security register pursuant to the implementing regulations issued under the Pledge Law. This security register has now been established by the Emirates Development Bank and is known as the Emirates Movable Collateral Registry.

 

The Emirates Movable Collateral Registry allows:

 

1. free public searches of registered securities;

 

2. certified searches of registered securities;

 

3. registration of notices of security interests against assets of the primary obligors as well as third party security providers, including non-resident foreign persons (legal or natural) and UAE entities incorporated by federal decrees, for a minimal fee; and

 

4. registration of notices of termination of security interests (whether by mutual consent of the parties or by way of a court order) free of charge.

 

All parties holding pledges over moveables in the UAE by way of possession have until 15 March 2018 to register their precedence with the Emirates Movable Collateral Registry. To our knowledge, it is unlikely that an extension of time will be granted. Therefore, we recommend this is done as a priority. ■

Convertible Sukuk for funding social welfare in the modern era

As with other countries in the heavily oil-dependent Gulf region, the UAE has taken active steps in recent years to expand its revenue streams (including the implementation of value-added tax, effective the 1st January 2018). Afterall, relying on treasury reserves, albeit substantial, to plug spending gaps in the national budget was only going to be a short-term solution to the long-term problem of low oil prices.

UAE VAT designated zones defined

The UAE Ministry of Finance has released Cabinet decision No. 59 of 2017 specifying all Designated Zones to be effective from 1 January 2018 for the purposes of implementing the Designated Zone provisions in Federal Decree Law No 8 of 2017 on Value Added Tax.

 

The Cabinet has the authority to amend the list of Designated Zones as required.

 

A Designated Zone is required to be a specific fenced area with security measures and Customs controls in place to monitor entry and exit of individuals and the movement of goods to and from the area.

 

Concessional VAT treatment may be available for transactions involving the supply of physical goods within Designated Zones. No VAT concessions are available for transactions involving the supply of services within Designated Zones.

 

The list of Designated Zones for UAE VAT purposes are as follows:

 

No.  Designated Zones (Abu Dhabi)

 

1. Free Trade Zone of Khalifa Port

2. Abu Dhabi Airport Free Zone

3. Khalifa Industrial Zone

 

No.  Designated Zones (Dubai)

 

1. Jebel Ali Free Zone (North-South)

2. Dubai Cars and Automotive Zone (DUCAMZ)

3. Dubai Textile City

4. Free Zone Area in Al Quoz

5. Free Zone Area in Al Qusais

6. Dubai Aviation City

7. Dubai Airport Free Zone

 

No.  Designated Zones (Sharjah)

 

1. Hamriyah Free Zone

2. Sharjah Airport International Free Zone

 

No.  Designated Zones (Ajman)

 

1. Ajman Free Zone

 

No.  Designated Zones (Umm Al Quwain)

 

1. Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port

2. Umm Al Quwain Free Trade Zone on Sheikh Monhammed Bin Zayed Road

 

No.  Designated Zones (Ras Al Khaimah)

 

1. RAK Free Trade Zone

2. RAK Maritime City Free Zone

3. RAK Airport Free Zone

 

No.  Designated Zones (Fujairah)

 

1. Fujairah Free Zone

2. FOIZ (Fujairah Oil Industry Zone)

Certificate of good conduct required for all UAE employment visas

A new requirement will be introduced shortly that will affect all applications for employment visas. Beginning 4 February 2018, a Good Conduct and Behavior Certificate must be submitted along with the other supporting documents when an employer seeks to sponsor a residence visa for a new employee who is not a UAE national. It appears that the requirement will apply throughout the UAE, including the nation’s many free zones.

 

Like any other foreign document, the prospective employee’s Good Conduct and Behavior Certificate must be notarised in the country of origin and thereafter authenticated up to that country’s Ministry of Foreign Affairs, the UAE Embassy for that country, and finally by the UAE Ministry of Foreign Affairs and International Cooperation. This authentication process often consumes several weeks.

 

In many countries, a Good Conduct and Behavior Certificate may be obtained from the concerned national law enforcement authorities. Here in the UAE, the Ministry of Interior issues such Certificates in respect of UAE nationals and residents, pursuant to a formal and recognised application process. However, many countries do not have central law enforcement authorities. For example, in the United States, a Good Conduct and Behavior Certificate (or a “Police Clearance Certificate”) would be sought from the local municipal police.

 

The Certificate must be issued in the employee’s home country or the country where the employee resided for the five years prior to the application. The Certificate is required only in respect of an employment visa application. It is not required for visas for any of the employee’s dependent family members, nor is it required for other types of visas such as transit and visit visas. Presumably, the new requirement will not apply to visa applications that have already been approved by the authorities. It is not clear whether the new requirement will apply to pending applications that have not been approved. ■

 

Changes to law allowing developers to terminate off-plan sales contracts

On 16 November 2017, Law No. (19) of 2017 was gazzetted which amends the procedures contained in Law No. (13) of 2008 on Interim Property Registration in Dubai. This law stipulates the procedures which developers must follow if a buyer breaches an off-plan sales contract.

 

The new law is an important development in Dubai and will assist developers who are facing a difficult real estate market and increasing buyer default.

 

What’s the Key Change?

 

The new law has not drastically changed the existing procedures contained in Law No. (13) of 2008, but has rather built on them and provided timeframes within which a developer must return excess money to buyers who have defaulted.

 

Under the new law, if a buyer breaches its obligations under an off-plan sales contract:

 

a. the developer must notify the Land Department and the Land Department will serve a notice on the buyer giving it 30 days to fulfill its contractual obligations; and

 

b. if the buyer fails to fulfill its contractual obligations or reach an amicable settlement with the developer within the 30-day notice period, the Land Department may issue an official document stating that the developer has fulfilled his legal obligations and specifying the percentage of completion of the property; and

 

c. after the developer receives this document from the Land Department, the developer may take any of the following actions, without approaching the court or pursuing arbitration:

 

i. if the percentage of completion of the real estate unit exceeds 80%, the developer may:

 

1. continue with the performance of the contract concluded between the developer and the purchaser, retain the whole amounts paid and request the purchaser to pay the outstanding amount of the contract price;

 

2. request the Land Department to sell the real estate unit by public auction so that the developer may collect the outstanding balance payable to the developer by the purchaser; or

 

3. terminate the contract unilaterally, retain up to 40% of the price of the real estate unit specified in the off-plan sales contract and return any excess amount to the purchaser within one year of the date of termination of the contract or within (60) sixty days of the date of re-selling the real estate unit to another purchaser, whichever is earlier;

 

ii. if the percentage of completion of the real estate unit is between 60% and 80%, the developer may terminate the sale contract unilaterally, deduct not more than 40% of the price of the real estate unit specified in the off-plan sales contract and return any excess amount to the purchaser within one year of the date of termination of the contract or within (60) sixty days of the date of re-selling the real estate unit to another purchaser, whichever is earlier;

 

iii. if the developer has commenced construction work on the project as per the designs approved by the competent authorities and the percentage of completion of the real estate unit is less than 60%, the developer may terminate the contract unilaterally, retain up to 25% of the price of the real estate unit specified in the off-plan sales contract and return any excess amount to the purchaser within one year of the date of termination of the contract or within (60) sixty days of the date of re-selling the real estate unit to another purchaser, whichever is earlier; and

 

iv. if the developer has not commenced the execution of the real estate development project for reasons beyond his control and without negligence on his part, the developer may terminate the contract unilaterally, deduct not more than 30% of the amounts paid by the purchaser and return any excess amount to the purchaser within (60) days of the date of terminating the contract.

 

Additionally, where the development project is cancelled by the Real Estate Regulatory Agency, the real estate developer must refund all payments received from the purchaser, pursuant to the procedures and provisions stipulated in the said Law No. (8) of 2007.

 

What’s the commercial and practical impact?

 

Developers must follow the procedure set out in Law No. 19 of 2017 if they wish to recover from a buyer who has breached an off-plan sales contract.■