Real Estates in the United Arab Emirates - Case Study Example

Running head: Real Estates in the United Arab Emirate (UAE) Name Course Institution Instructor DATE TABLE OF CONTENTS Executive summary 3 1.0 Introduction 4 Discussion 6 1.1 Legal aspect of owning a real estate property in UAE 6 1.2Financing options available for both commercial and residential properties and related costs 9 1.3 The role of regulatory and agencies services in the development of Real estate market 12 2.0 Conclusion 14 3.0 Bibliography 15 Executive summary The Real estate market is generally a complex entity that entails a number of aspects In this project, we will explain briefly the legal aspects of owning a real estate property in the two emirate countries for both UAE national and expatriates, the financing options available for both commercial and residential properties and related costs associated with financing and finally discus the role of regulating and agencies services in the development of real estate market as well as real estate profession in the UAE. The Lands department is the authority which can register real property rights. The foreigners have a right to purchase properties in determined areas, and purchased land will be registered in the name of the buyer with the Dubai land Department. The liberalized real estate and property laws have created new incentives for property development in Abu Dhabi and will generate unprecedented interest in the Real estate sector. Real estate financing plays a major role in supporting real estate developments, which comprises the construction of commercial and residential multi-storey buildings. Financing options available in real estate sector in the UAE includes; bank credit, regulations (bank credit), external commercial borrowing, private equity and convertible bonds. The regulatory agency is established to research and monitor the Dubai property market and to develop strategies which foster development in the market. 1.0 Introduction The Real estate sector boom is a Gulf Cooperation Council (GCC). With an ever increasing number of projects underway, the industry is attracting further investors who are shifting focus from stock markets to the real estate sector. The Real estate market is generally a complex entity that entails a number of aspects. The United Arab Emirates (UAE) Real estate market although very young, has quickly developed into a complex set of activities that resembles those of advanced real estate market. As in the case in other countries, the prospects and opportunities in the UAE real estate market are constantly affected by a number of factors. These factors include; legal procedures, financing and agencies services. Therefore these factors have had a significant contribution to the shaping of UAE real estate market (Oxford Business Group, 2007). In this project, we will explain briefly the legal aspects of owning a real estate property in the two emirate countries for both UAE national and expatriates, the financing options available for both commercial and residential properties and related costs associated with financing and finally discus the role of regulating and agencies services in the development of real estate market as well as real estate profession in the UAE. Keen understanding of supply and demand, sound valuation principles and the best methods to obtain and structure appropriate financing will drive the period of recovery and promote a robust future in the Arab world. The interplay between traditional property development and various applications of Islamic Law, to financing and deal-making, present unique challenges to most investors. Real estate market can be defined as the interaction of individuals who exchange real property rights for other assets such as money. Real estate market can be classified in several ways by geographical area, property type and scope of prospective market participants (Oxford Business Group, 2007). Real estate has special characteristics that distinguish it from other economic goods, these characteristics are namely; immobility, uniqueness, durability, large transaction size, long development or production period. Therefore the real estate market departs significantly from the ideal of a purely competitive market. Government plays a dominant role in encouraging or discouraging real estate development through the use of fiscal and monetary tools and by use of other controls such as zoning, environmental and health codes (Oxford Business Group, 2007). The prices are influenced by the interaction of supply and demand, however this interaction is not smooth; a lack of knowledge by either the buyer or seller can distort the prices paid. Real estate markets at the neighborhood, community, regional and national levels are subject to factors that affect demand and supply. The government has direct involvement in initiating real estate development, particularly in the case of low income housing (Oxford Business Group, 2010). Discussion 1.1 Legal aspect of owning a real estate property in UAE The Lands department is the authority which can register real property rights. Before buying property, check that all legal formalities are completed. Article 3 of law No.19 of 2005 provides that the right of ownership of real estate is restricted to nationals, persons deemed to the nationals and entities specified by the Executive council (Campbell, 2009). Foreign investors seeking to capitalize real estate development in the UAE face several legal challenges, both as to the nature of the legal entity to use and as to their ability to acquire freehold interests in real estate. There is currently no federal property law governing foreign ownership of the real estate in the UAE. Emirate has developed its own approach ranging from Fujairah, which does not currently allow foreign ownership of real property, to Dubai, where foreign ownership of freehold interest in real property is allowed (Campbell, 2008). The land Registration law of the Emirate of Dubai enacted clarified and confirmed the freehold ownership of land by UAE and GCC nationals as well as by non-GCC citizens in certain areas designated by the Ruler (Kritzer ,2002). UAE and GCC nationals can own real property throughout Dubai. However, article 4 of the Dubai property law limits the right of non-nationals persons and companies to only own a freehold interest or usufruct or leasehold right over real property for a period not to exceed 99 years in certain areas in Dubai designated by the Ruler (Campbell, 2009). Therefore leases in areas other than those designated by the Ruler are not registered by foreigners, although these leases are enforceable as personal contractual rights between the parties. Registration of a property owner’s interest in real property provides exclusive evidence of its ownership. Without registration, the third-party is enforceable only against the original owner personally through a claim for breach of contract (Kritzer , 2002). As a foreign investor in the UAE, owning or leasing a property needs to comply with laws and regulations that change from time to time. Each zone is a tax-free jurisdiction and has its own rules and regulations. For example, a company established in a free zone can be 100% owned by foreign nationals and may own freehold interests in real property within that zone (Campbell, 2008). Regulation (3) of 2006 identified designated areas in Dubai and these areas various Dubai properties, Emaar and Nakheel developments. There are no statutory rights of enforcement of mortgages or foreclosure remedies available under UAE law; hence any enforcement must be undertaken through the courts (Kritzer, 2002). The GCC need to issue modern laws and regulations so as to establish and organized and transparent real estate sector with a view to attract foreign investors. The emirate of Dubai was first to legalize the ownership of freehold property for expatriates (Campbell, 2009). The foreigners have a right to purchase properties in determined areas, and purchased land will be registered in the name of the buyer with the Dubai land Department. However each building located in the determined areas will be considered as a single property and will be granted a single title deed and also the mortgage conditions are left to the sole convenience of the banks and financial institutions (Campbell, 2008). The emirate of Abu Dhabi has permitted the ownership, development, leasing and mortgaging of land and property for non-UAE nationals in the investments zones. It recently established a Land Registration Department at both the Abu Dhabi and Al Ain Municipality Departments (Kritzer , 2002). However, the right of ownership of an apartment unit or floor in a building does not include by association, a right to a share in ownership of the underlying land on which the building is situated. Non- UAE and GCC nationals may acquire a right of usufruct for a period of up to 99 years and a right of musataha for a period of up to 50 years, both being renewable by mutual consent (Campbell, 2009). These ownership rights are principal rights and the Law recognizes that they are capable of being sold, mortgaged, pledged or assigned. However, with the new regulations of property ownership in the GCC countries, there are more material concerns in the legal and regulatory procedures such as government approvals, mortgage laws, mortgage regulation, deed title registration, residency issues and inheritance laws (Campbell, 2008). The liberalized real estate and property laws have created new incentives for property development in Abu Dhabi and will generate unprecedented interest in the Real estate sector. The promulgation of new property laws in the individual emirates, regulating the sale and lease of land and buildings to citizens and expatriates kick started the property doom (Kritzer , 2002). Major legal changes have come in 2007, such as Broker’s law, Escrow law and the creation of regulatory authorities; Real Estate Regulation Authority (RERA) in Dubai. General impression by the investors revealed that much focus has gone to protecting the supply side participants such as developers, consultants at the expense of demand side participants i.e. investors, financial institutions and end users (Campbell, 2009). The regulators in Dubai had a setback of having to rapidly introduce regulation to a previously unregulated market to address the real estate boom and thereafter to react to an economic collapse which was unprecedented in Dubai. Indeed there is need for enhanced transparency in the application of current laws and regulations, together with improved consultation before implementation of new initiatives (Campbell, 2008). Adoption of dispute resolution mechanisms that do not necessarily require parties to initiate formal court processes and which appropriately compensate an entitled party for costs of legal action. Incorrect and inappropriate legal structuring can be disastrous and results in litigation (Oxford Business Group, 2009). A buyer can request the courts to cancel a contract if the developer significantly changes the agreed specifications or refuses to deliver the unit without a good reason. In addition he can seek legal action if developers do not bind payments to approved construction based milestones or the unit is proved unstable due to major structural effects (Campbell, 2008). 1.2Financing options available for both commercial and residential properties and related costs The Real estate bank is General Government organization of Independent legal entity subsidiary to the Minister of finance, established by virtue of the Federal Law No (1) of 1981. It aims at facilitating real estate credit in the United Arab Emirates for UAE nationals, establishments, companies and cooperatives societies with capital owned by the Government or UAE nationals in whole. Dubai is considered to be the most desirable real estate opportunities in the world. It is growing fast with one-third of the cranes in the world currently being used to build a property. The rapid growth of real estate sector of the past three years has driven by benign economic conditions and the regulating reforms governing property ownership in the Abu Dhabi. Emirates nationals constitute 25% of the Abu Dhabi population and they enjoy 50% of the total disposable income (Eugene Cotran, University of London. Centre of Islamic and Middle Eastern Law, Martin Lau, and 2009). Existing National- Expatriate split expected to remain stable over the next two years. Proportion of expatriate population in Dubai, by contrast is expected to increase to 87%. The risk of oversupply offset by likely development delays and opportunity will widen the scope of foreign ownership framework. The primary determinants of real estate demand are population, income, buyers’ tastes and preference, price changes of other goods, the cost and availability of financing and the expectation of buyers about the future (Ciampi, 2009). On the other side, the primary determinants of real estate supply are the costs of production inputs, the cost of financing, advances in technological know-how and expectations regarding the future demand. The demand for real estate can be boasted by encouraging people to come to Dubai, whether as investors, business travelers, employees, tourists attending events and conferences. Dubai has witnessed a phenomenal growth in residential, commercial, industrial and service real estate being fuelled by the economic boom in the region which is mainly driven by the rising world oil prices (Cotran, et al) The real estate is dynamic and a driving force for Dubai economy during the last years. The availability and cost of financing is a significant determinant of supply. Real estate financing plays a major role in supporting real estate developments, which comprises the construction of commercial and residential multi-storey buildings. Commercials banks as source of finance offers their customers a wide of innovative finance products that are compliant with Sharia, i.e. Islamic law (Ciampi, 2009). Competition in the financial market has brought new facilities to the real estate developers in terms of low interest rates, long payments period and other payments facilities. The decision to allow non-Gulf citizens to purchase freehold property in certain areas has play an important role in increasing the demand and supply, thus the Dubai government hopes to attract more skilled professionals to stay in the Emirate (Cotran, et al) Players in the Dubai real estate financing market include a group of the specialized real estate mortgage financing companies such as Amlak and Tamweel and a group of commercials banks who engaged in mortgage financing by offering different mortgage financing products. The mortgage financing options are available for both UAE nationals and residents with loan maturity period up to 25 years and loan-to-value mortgage that can be up to 100% by some real estate financing companies. The mortgages rates are directly or indirectly linked to the US interest rate due to the fixed beg of the UAE Dirham to the US dollar and therefore UAE monitory policy follows closely that of the US (Ciampi, 2009). Further opening up and liberalization of mortgage financing market will promote competition in this market and hence bring more financial resources for lending and encourage more product innovation that cater for the different needs of the customers. Only a lender which has a valid trade license and UAE banking license may register itself as a secured creditor, there is substantial official costs involved in registering and de-registering mortgages and is often a major distinctive to the creation of this form of security (Cotran, et al) The financial structures in commercial real estate finance in Dubai reflect the legal environment applicable to the real estate sector. International banks are deterred by the inability to take mortgages without appointing a local agent and uncertainties in relation to taking and enforcing alternative forms of security (Ciampi, 2009). Other forms of security seen in the commercial real estate market in Dubai include; assignment of rights under leases, sales proceeds and insurance relating to the relevant property. Islamic financing structures are quite common in real estate finance sector in Dubai. In this structure the financier usually retains ownership of the property throughout the period of the Ijara and the title to the real estate may be provided to the lessee at the end of the Ijara (Ciampi, 2009). 1.3 The role of regulatory and agencies services in the development of Real estate market The real estate sector in the UAE has experienced records levels in the growth in past several years driven by economic growth, rising incomes, abundant liquidity, capital inflows by foreign inflows and a growing expatriate. More expatriate enter the country to take on more promising employment opportunities prompted by the economic boom (Jaffer, 2005). The decline for real estate was evident in the post crisis period triggered by the tight credit markets, collapse in asset prices worldwide, expatriate population growth and lack of funding as liquidity conditions tightened worldwide and investor confidence weakened. Abundant liquidity due to the relatively low impact of the subprime crisis and easy availability of mortgage has kept the demand for the real estate high. Also setting up of regulatory bodies and the introduction of investor-friendly foreign ownership in the UAE have boasted investor confidence in the sector (Noack, 2007). The dilemma for investors in the UAE real estate market is to assess the true demand for future housing supply and the reliability of planned supply. The present report illustrate that the demand for real estate in the UAE id greater than the available supply. This shortage of units in the residential and commercial segments is due to the unprecedented economic boom, high employment growth and huge inflow of expatriates (Jaffer, 2005). The demand drivers for real estate include; solid macroeconomic foundation, public expenditure and huge fiscal surplus and Dollar-dirham peg which has made UAE property cheaper for Europeans and Asians investors. The UAE’s real estate sector will continue to flourish amidst stubbornly high inflation as property is used as a hedge against inflation (Noack, 2007). The rising cost of cement and raw materials, shortage of foreign workers and coping with increases in the cost of labour, high mortgage rates by international standards have been the challenging for the real estate sector in the UAE. The real estate sector in the UAE is faced with threat such as ambiguities in legal structure, lack of statistics regarding availability and yields. Financing options available in real estate sector in the UAE includes; bank credit, regulations (bank credit), external commercial borrowing, private equity and convertible bonds. The regulatory agency such as Real Estate Regulatory Agency (RERA) established to research and monitor the Dubai property market and to develop strategies which foster development in the market (Noack, 2007). The agency carries out polls, offer training and publishes a wealth of information on its dedicated Dubai Real estate Community website. In addition it offers guide for landlords, tenants, investors and real estate professional by use of relevant documentation such as tenancy contracts, sales and purchase agreements. To increase transparency and trust in the real estate market RERA licenses and monitors every stakeholder involved in the property (Jaffer, 2005). It regulates the set up of homeowners association (HOAs) where necessary courses for board members and service fee approval are implemented by developers. Therefore RERA is an efficient and focus regulatory body that managed the real estate sector in a way that guarantees the interest for all of the concern parties (Noack, 2007). 2.0 Conclusion The demand for real estate can be enhanced if the availability and cost of real estate financing are further improved. Further opening and liberation of mortgage financing; the market is expected to promote competition hence more financial resources for lending. To create positive expectation that promotes demand for real estate, the government needs to boast its economic policy credibility such as inflation, employment and economic growth. Better communication and awareness of current laws and regulation will ensure greater enforcement of the existing legal framework. Lastly UAE is a great place to live and buy property; however careful research into laws and regulation in a timely manner is a prerequisite. 3.0 Bibliography Christian, Editor Campbell, (2008).Legal Aspects of Doing Business in the Middle East, Lulu.com. Dennis Campbell, Christian T. Campbell, (2009).Legal aspects of doing business in the Middle East, Yorkhill Law Publishing. Eugene Cotran, University of London. Centre of Islamic and Middle Eastern Law, Martin Lau, and (2009) .Yearbook of Islamic and Middle Eastern law, Brill Academic Publishers. Francesco Ciampi, (2009).Emerging Issues and Challenges in Business & Economics: Selected Contributions from the 8th Global Conference, Firenze University Press. Herbert M. Kritzer ,(2002).Legal systems of the world, ABC-CLIO. Oxford Business Group, (2007).The Report: Abu Dhabi 2007, Oxford Business Group. Oxford Business Group, (2009).The Report: Abu Dhabi 2009, Oxford Business Group. Oxford Business Group, (2010).The Report: Ras Al Khaimah 2010, Oxford Business Group Sascha Noack, (2007).Doing Business in Dubai and the United Arab Emirates, GRIN Verlag. Sohail Jaffer, (2005).Islamic retail banking and finance: global challenges and opportunities, Euromoney Books. Read More