29 Nov 2006
Dubai: Concerns over cowboy developers who secure loans and buyers' down-payments on property projects then flee the country are making it difficult for new and existing developers in the UAE to finance their proposals.
Barmak Besharaty, managing director at Dubai-based Almas Capital, which specialises in UAE real estate lending and construction loans, says banks and financial institutions are becoming increasingly wary of lending to new developers due to a stabilising property market and companies which complete their projects late or not at all.
He said the difficulties will worsen for developers when the Dubai Land Department introduces regulation on escrow (trust) accounts, whereby investors' payments are safeguarded by independent bodies. At the moment most payments are made directly to the developers, many of which use the money to finance construction.
Besharaty said it has created a situation where lenders favour a certain property developer, normally established names such as Nakheel and Emaar.
"Dubai is a new real estate market and there are a some private developers with no experience in the market," he said. "They may have been a cargo or trading company which see the potential of the real estate market, so they buy a piece of land, place an add in the media and collect a percentage of people's payment. Then they simply get on a plane and go back to where they came from.
"It's extremely rare that this happens because of the risks involved and the fact that developers can make more money by completing a project, but lenders are still very concerned," he added.
He said the situation is in fact extremely healthy for the Dubai property market as only developers with established credentials who propose sound projects manage to secure finance.
However, if developers cannot secure loans to meet construction costs and do not have sufficient personal finance, their only option is to use buyers' downpayments. Besharaty said this option is fraught with danger.
The Land Department has frequently outlined plans to introduce regulations on escrow accounts in Dubai, which would limit a developer's access to buyers' downpayments before construction is complete.
Billy Rautenbach, director of sales at Better Homes, said it must be made clear what percentage of investors' overall payment will be held in the accounts. She added that escrow accounts should be set up for real estate agencies as well as property developers. "Most agencies are handing over payments to the seller before transfer. That's a dangerous situation and it should be regulated," she said.
By Robert Ditcham
Gulf News 2006. All rights reserved.
