If Zawya was to travel back in time to Cityscape 2008, it would find an event that seemed to operate in a twilight era in which Dubai’s developers, in particular its booming off-plan property market, seemed to think they were immune to the growing storm clouds of the global economic crisis which had engulfed Lehman Brothers just a few weeks earlier.

A decade ago there was an air of confidence that the emirate could avoid the global banking troubles, which were labelled ‘a western problem’ related to sub-prime mortgages and mortgage securities in the United States.

But the cracks soon began to show and an industry which was renowned for its gold rush atmosphere, speculation and flipping of off-plan properties, came crashing down. The 2008 event’s big news was the launch of the spectacular 1 km tall Nakheel Tower, an ambitious skyscraper which was put on hold just a few months later and would, ultimately, never see the light of day.

Much has been made of what has changed in the financial markets since the collapse of Lehman Brothers, with reports surrounding the 10th anniversary referencing regulation that has come about since.

In the lead up to this year's Cityscape Dubai 2018, Zawya spoke to some key players within the industry to get a range of views on how the market has changed over the last ten years, especially in terms of regulation and investor confidence:

• The developer: “Regulations are there to protect consumers”
• The lawyer: “The system’s much better now”
• The investor: “Hindsight is a wonderful thing, you learn so many lessons”
• The land department: “Our smart solutions played a key role”
• The research analyst: “Many of the disputes have now been settled”


What’s changed in real estate development regulation?
The Dubai property sector is increasingly regulated. The years 2008-09 have reached folkloric proportions in recent Dubai history, with tales of off-plan buyers queuing to pay deposits on luxury properties then popping to the back of the line to sell these homes on at a 25 percent profit to those desperate not to miss out.

When the financial crisis took hold, investors were left holding properties they could not afford to pay for, and could not sell, while others with mortgages were forced to sell at dramatically reduced prices and live with debt. Others paid deposits for prime properties, only to see projects stall indefinitely, developers go bankrupt, or for their homes to be ‘value engineered’ beyond recognition, reaching nothing like the re-sale value promised at the time of investment.

A famous example of an apparently irrevocably stalled project is the Dubai Pearl, and one that has not yet reached its formerly promised potential is Falconcity of Wonders, which was originally planned as a mega development incorporating an elaborate mix of homes and seven wonders – including replicas of the Taj Mahal, the Pyramids, the Eiffel Tower, the Great Wall of China, the Leaning Tower of Pisa and the Hanging Gardens of Babylon. Recent press releases from Falconcity suggest the developer has been courting Chinese investment, and, prior to Cityscape, it announced the launch of Eastern Residences, a villa project with a scheduled completion date of September 2021 backed by a promise to pay buyers 150,000 UAE dirhams ($40,844) annually in case of delays.

Enough investors emerged with tales of burnt fingers that tales of the property market’s crash in 2009 reverberated worldwide, meaning the same ‘gold rush’ atmosphere is unlikely to ever take hold again in the emirate. And there have been changes in real estate development and mortgage laws.

Escrow accounts mean developers are not allowed to use investors’ or financier’s cash at will. Funds can be released once projects reach certain stages of construction, and they must deposit 20 percent of the value of the project in the account before they are allowed to commence sales.

The mortgage market has also changed, with expats needing to pay a minimum deposit of 25 percent on any property they buy, and UAE nationals being asked to pay 20 percent – a far cry from the height of the bubble.

But, is it enough? Are the new regulations and preventative measures enough to stop Dubai experiencing another boom and bust scenario in its property market, which is, after all, such a key part of its non-oil strategy? What do the key players say?

The developer
Zawya approached numerous Dubai-based developers for their views on what has been learned in the past 10 years, but only Damac Properties was willing to contribute.

Damac, which boasts net assets of 13.8 billion UAE dirhams ($3.8 billion), has delivered over 21,700 homes to customers so far, and has over 40,000 more in the pipeline. Some of its most high profile developments including the Trump Estates at Damac Hills, incorporating Trump International Golf Club Dubai.

Like many of Dubai’s major developers, Damac Properties has had disputes with dissatisfied investors in the years since the crash, but it continued to deliver homes – 3,251 units during 2009-11, and 16,401 since – and has an upbeat take on how the industry has evolved since.

In response to emailed questions, Niall McLoughlin, senior vice president, said the industry had ‘made leaps’ in the past decade.

“If you look at JLL's 2018 Global Real Estate Transparency Index, this year Dubai maintained its number one place in the MENA region, while improving its global ranking as one of the top sectors in the world (Dubai is ranked 40th globally out of 100 real estate markets).

“We commend the Dubai Land Department and other initiatives by the public sector that ensures regulations are there to protect consumers, while growing and stabilising the industry to become a key part of the UAE economy.”

Asked whether there are still improvements to be made, he said: “Like anything, you can always evolve and improve. The major legwork and infrastructure has been done, but we’re still seeing a constant push by the DLD to adopt smaller but improved measures related to rental caps and rental increase calculator, and so on. These initiatives cascade into the wider sector.

“We also learned not to just apply industry best methods or ways of doing business and instead set the benchmark ourselves as a city. You’re also seeing a huge push by the government to implement the latest technology solutions, which will increase transparency and ease of doing business, among other benefits.”

The lawyer
Henry Quinlan, head of litigation, arbitration and investigations for law firm DLA Piper in the Middle East said: “There is definitely a better system, it’s much better regulated. What you had before was people who did not own the land being developers, but you also had developers and sub-developers using funds from one tower to fund the construction of another. That sort of thing can’t happen now. The system’s much better.”

Quinlan, who arrived to work in Dubai in 2009 from a Canary Wharf-based firm, added that, at the time in the Middle East region, it was still considered taboo to sue government-related entities, such as developers.

“Certain companies made the decision that it was too much for them to lose and they decided to sue, and suddenly the gloves were off, and there were thousands of arbitrations,” he added.

In the years since the crash, the various court disputes between investors and developers have been a regular feature of property news pages. A specially convened tribunal at Dubai International Financial Centre (DIFC) to resolve disputes involving companies from the former Dubai World Group has handled 87 cases since 2010, according to its official website.

Costs vary depending on whether those wishing to sue go to onshore or offshore courts, he explained, with the initial fees for suing offshore being higher, but with successful cases being awarded costs. Fees may be lower in onshore courts, but those who win their cases are not awarded costs.

Construction disputes, such as companies suing developers for non-payment, tend to be resolved faster, usually between 18 and 24 months, but they can be complex and expensive, and, if successful, payment still needs to be enforced through the courts.

Lack of transparency can be a problem, as unlike in jurisdictions where there are public company registers, in Dubai those wanting to sue have no way of knowing whether funds will be there to collect at the end of a lengthy and expensive court process, Quinlan concluded.

Accentuate the positive
A positive note is that the city has become a regional centre for arbitration, said Quinlan. While systems may have been convened at speed to allow those wronged some recourse, it is now a place investors and businesses can go to resolve disputes from all over the region.

“The global financial crisis meant that arbitration went from being a completely unknown word for most of the people across the region to something that everyone was comfortable with, meaning that arbitration is here to stay with Dubai becoming a real regional hub for dispute resolution.

“A lot of the disputes in Qatar, Saudi Arabia, Oman and Africa are also referred to the DIFC for resolution with everyone recognising the experience and quality of the lawyers, arbitrators and the courts here,” said Quinlan.

The investor
Whatever may have happened nine or 10 years ago, the fact remains that Dubai’s reputation for tax-free benefits and favourable climate make it popular with investors, of whom thousands put billions of dirhams into the emirate’s property market every year will attest.

The latest information from Dubai Land Department is that 9,500 new investors entered the real estate market between January, 1 and August 31, 2018, bringing 19 billion UAE dirhams of investment.

However, there are some who were burnt by Dubai’s property crash who are unlikely to be tempted into trying their luck again.

Someone who has particularly bitter experience of Dubai’s off-plan property market is Pat Mills, who has the dubious honour of having invested in one of Dubai’s most notorious stalled prime developments, The Dubai Pearl. Mills says he now thinks he was naïve when he invested 2 million British pounds ($2.6 million) in a large, high-end apartment and a commercial unit in the development.

The Pearl was originally intended to be a 22 million square foot mega-development of high-end residential and commercial properties, incorporating the eye-catching quadruple-towered Table Top building, hotels, offices and homes for 30,000 people. The project seemed like a safe bet in May 2008, when Mills first put his money in. However, a decade later it still sits as a partially-built structure at the entrance to the Palm Jumeirah, Dubai’s flagship manmade island.

In 2008, despite increasing concern about the coming global economic crisis, the headiest days of the Dubai’s off-plan property market were still in full swing, and investors from all over the world competed to be included on waiting lists for prime properties.

Escrow accounts, designed to hold real estate project cash, were launched in 2007, prior to Lehman Brothers’ collapse, but too late for developments like Dubai Pearl, which actually dates back to 2002.

Mills is part of the Dubai Pearl Owners Group trying to get some resolution on behalf of himself and a group of 88 investors who have seen their money disappear into the doomed project – a number he believes accounts for 20 percent of the investors.

He says the people in the group fit into three categories - speculators who bought blocks of apartments or a commercial floor on the basis they could later rent it or sell it, then people who bought apartments outright as homes to live in, then the third group, the ‘most disadvantaged’, who bought properties with a mortgage, whether as an investment or to live in later, who are now liable for the mortgage but who have no asset.

Mills himself invested in an apartment in the high-end Baccarat building, overlooking the Pearl, that would be his home in Dubai, and a commercial unit in what was to be known as the Table Top building, so he would also have the option to start a business and work in the emirate.

Mills says his investment was at the time the equivalent of £2 million ($2.6 million) - money that he has had to accept that he will not see again.

The process has been complex, Mills explained, with many people starting court cases between 2011 and 2013, and then having to abandon them because of the expense, particularly when new regulations required individuals who had bought multiple units to file a separate case for each.

A suggestion that Dubai Properties may take over the project was reported last year by Arab News. Dubai Pearl did not respond to several requests from Zawya for an interview by phone or email.

Asked if he thinks lessons have been learned, Mills says: “Are things better? Yes. Have things been improved? Yes. Have things reached the point where they are good? No. They have gone from bad to less bad.”

Looking back, he says, he would, of course, have done things differently, but like many others, he was caught up in the opportunity.

“Hindsight is a wonderful thing, you learn so many lessons. At that point in time, it was just a very shiny development in a great location, certainly at the time it was the best location in town. Even now, I would say it is probably in the top three best locations in town, it was a very high-end development, it was very glossy, very glamorous, it looked fabulous. That is what I thought I bought.

“It did not occur to me, it should have done, to do the in-depth review of who was behind it, what was the history, what the financial structure was.”

Investors were fighting for the opportunity to buy, he says, with units ‘selling like hot potatoes’.

“You either bought when you had the opportunity, or you did not. If you said, ‘Hang on, I want to see your records or your accounts’, they just moved on to the next person.”

He adds: “I have not invested in anything [in Dubai] since that period, and I would not invest in anything in Dubai, not until the legal framework progresses. I have been burnt and I have learned my lesson.”

Dubai Land Department
Dubai Land Department (DLD) did not respond to several requests from Zawya to respond to questions related to this article, but issued a press release on the eve of Cityscape which said the emirate’s real estate market was ‘global, smart and sustainable’.

HE Sultan Butti bin Mejren, director general of DLD, said: “For years we strived to position our real estate market as the preferred choice, in pursuance of the vision of HH Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai. Our smart solutions played a key role in consolidating Dubai’s position as a preferred investment destination that provides a legislation system that protects investors’ rights, as well as great privileges in recognition of their trust in our real estate market, and for choosing the Emirate as a safe haven for their long-term investments in the real estate market.”

The real estate consultancy research head
Craig Plumb, head of research at JLL for the MENA region, says projects that were stalled by the global financial crisis in 2008 and 2009 have now been successfully relaunched. “The largest example would be Dubai Lagoons, which has now been rebranded as Dubai Creek Harbour,” he said.

He also said there was nothing to stop developers relaunching if the market conditions are right and any pending legal disputes are resolved.

In addition, the Dubai World Tribunal, which has seen more than 80 cases since 2009, has been successful in allowing companies to restructure their debt and once again undertake major real estate development.

“The situation for resolving other disputes has been less successful, but even here many of the disputes have now been settled through the arbitration courts and some of these projects have been either completed in their original format or relaunched in a new format,” said Plumb.

(Reporting by Imogen Lillywhite; Editing by Shane McGinley and Michael Fahy)
(imogen.lillywhite@thomsonreuters.com)

Our Standards: The Thomson Reuters Trust Principles

Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.

© ZAWYA 2018