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Around eight years ago, when I was returning to Dubai from a business trip to London, the world was experiencing a severe downturn. Very soon, the effect of the crisis was spreading like an epidemic.
Financial markets, egged on by the collapse of the seemingly invincible Lehman Brothers, started reporting losses to the tune of trillions of dollars; CEOs were being kicked out of their lofty positions by jittery shareholders; and many well-established business groups saw their revenues nosedive faster than a rollercoaster.
The UAE was not insulated from the crisis and the sector that perhaps took the biggest brunt was real estate. It is a well-known fact that before the recession the sector witnessed a remarkable growth spurred on by imaginative projects and higher spending power.
Dubai clearly led the way and the trend saw many important freehold projects and lavish neighbourhoods being launched in quick succession. As freehold ownership became popular, foreign capital started pouring in.
Almost all projects attracted ready buyers — from Emiratis to expatriate residents and foreign investors — and the frenzy to meet the demand fed off associated business streams. Property investment and speculation became the in-thing.
But all good things must come to an end. The recession changed all those dynamics — homes were being sold at a third, or sometimes a fourth, of their boom-time prices. And it was not uncommon to read about rogue developers disappearing with investors’ money and banks hesitant to touch development projects.
It is to the UAE’s credit that while the rest of the world was exploring ways to overcome recessionary setbacks, the country’s authorities had already scrambled to check the real estate free fall. Dubai was one of the first to establish the framework to protect the investor and the ultimate buyer.
Even before recession struck, one of the first measures was taken in the form of the Real Estate Regulatory Authority (Rera), whose main job was to ensure that rules were in place to keep fly-by-night operators out.
First to be weeded out were unscrupulous developers who were announcing projects without prior approvals from the authorities or were diverting funds meant for one project to another for short-term gains. The next few months saw Rera expanding its profile among the developer community to deploy best global practices in protecting investments.
One of the first measures to be introduced was the setting up of the “Trust Law Account” or an escrow, which ensures that a buyer pays into the escrow and funds are released to the contractor only as per the status of the project’s construction.
Today, sales of off-plan properties are not allowed until the developer has paid fully for the land and has obtained all necessary permissions from the authorities concerned. Developers are also expected to complete 20 per cent of the project before they can commence sales. Moreover, the instalments from buyers is linked to construction progress by the developer.
Additionally, Rera has made it mandatory that each off-plan project is registered in an interim registry called “Oqood”. The developer cannot remove the name of the registered buyer from a contract unless the latter has defaulted on payment obligations. And unless the buyer has been served notices from the Land Department and given 30 days to rectify his defaulting payments.
But that’s not all. Even after the project is completed, not all the money is released to the developer for at least a year. After the project completion, the Land Department holds back 5 per cent of the property value for at least a year till all units are handed over to buyers and the title deeds are registered.
Dubai has now become a highly regulated real estate market and setting the benchmark for others to follow. Prices started going up in 2012 and 2013 and peaked in 2014. Investors regained their confidence that there is a genuine population growth leading to end-user demand.
Falling oil prices
The uptrend halted in 2015 and prices fell again. In view of falling oil prices and an ever appreciating dollar, speculators are speaking in hushed voices about another impending global recession. Prices have already corrected and may correct further.
The question is, “Will 2007 be repeated?” I believe this time around, the impact will not be as severe, thanks to all the safeguards put in place.
Source: Sailesh Jatania, Special to Gulf News
The writer is Chief Operating Officer of Dubai-based Gemini Property Developers.