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German Legal Expertise in the Middle East since 1981

Turning Point for Dubai’s Developer?!

Guiding Principle

The first owners associations got approved by RERA and announced to invite tenders for the maintenance, previously done by their developer.

I. Introduction

When the dream of infinite growth in Dubai collapsed in 2008, many investors were brought back to the harsh reality. No incredible returns, but lots of law suits and delays. In many cases the fully paid apartment or villa was not more than an empty patch of sand or a half complete ruin.

Who ever thought a trial would help him to retrieve his money from the developer was disappointed as, although there are a few positive examples, the majority of the cases brought nothing more than costs and the hope that the project might continue someday.

But even for those who got their homes delivered, it was a nasty surprise in the aftermath with drastically declining rents and skyrocketing service charges.

II. Improving Regulations

It did not take long and Dubai announced new laws and regulations in the wake of the crisis. While these changes required more time than expected to be implemented and truly effective, finally the first signs of a turning point are there. Firstly, courts are no longer willing to dismiss claims against developers so quickly by force majeure or to delay the law suit, so that a reasonable settlement is not possible. Second, RERA, the Dubai Real Estate Regulatory Authority, started to control the market more efficient. Beginning of 2012, all lease contracts have to be registered with RERA. This shall provide a realistic overview of the rental market in Dubai, help to provide safe and compliant tenancy agreements as well as push unregistered and low quality agents out of business.

In addition, RERA pushes the formation of Owners Associations (OAs) for most freehold zones (areas with permission for foreigners to own properties).

III. Owners Associations

Until now individual buyers were relatively helpless against developer, because even after the purchased apartment was handed over, the management of the building, and all related open areas and facilities continue to be served by the developers (or a related company). The service charges were non-transparent and the related fees hard to verify. Beside that there was no chance to get out of the contract as owners couldn’t change the service provider.

In some cases this led to services charges of AED 20,000 p.a. and more, consuming half of the rental income, if any. It has long been speculated, that this was a new way for developer to refinance themselves after the crash, but courts and RERA refused to review the charges in detail.

OAs could provide the solution to this problem. Owners Associations are formed by all owners of a specific building or compound. Together they can get registered with RERA and have the power to make most of the decisions for the building. The first OAs (until now 56) were interims associations, as they didn’t have the time to have a general assembly. However, in February 2012 RERA finally registered the first five OAs, therefore giving them full power. Interestingly this happened in the Palm Jumeirah Beach Residences, an area with heavy disputes between the developer Nakheel and the owners over service charges, access to house facilities and beach access. As a logically consequence of the registration with RERA, these OAs now invited tender for the maintenance of their buildings and stated, Nakheel would be out as fast as possible.

IV. Consequences for the Market

What looks like a small victory for a couple of apartment buildings at the first glance could become a knock-on effect. The management of the project was a reliable source of income after the completing for the big developers and meant a secured source of income for them in times where new developments were rare and law suits together with a lack of investors caused severe damages.

Should the new situation spread among developments in Dubai, allowing effectively all owners to control their property once again, the major developer like Nakheel, Emaar, Deyaar and Damac might have serious problems as they could be squeezed out of all their projects and in the end lose control over the market.

Basically there are only two ways out of this situation: Either the developers finally honour their duties towards the owners and tenants, increasing the quality of the maintenance and service drastically while reducing unnecessary costs, or they will back out and try to delay the changes as far as possible to stay in the game for as much longer as they can. It is hard to say what will happen and most likely there will be a mixture of both. In the end the changes can lead to a better environment for people in Dubai and more faith for potential new investors that investments in Dubai are no longer a pact with the devil.

April, 2012 Tobias Speer
  Meyer-Reumann & Partners, Dubai Office
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