'Make cancelled projects public'

About 87 per cent of respondents in Hadef and Partners’ new survey felt public announcements of cancellation of  projects will assist Dubai’s real estate market as the issue is creating uncertainty amongst investors.

The Dubai-based legal consultancy in its report titled “What is the legal state of the Dubai real estate market?”  said an overwhelming 90 per cent said developers, who cancel or place developments on hold without a definitive  completion date, should be required to pay loss of profit related damages to buyers who are not in default.

“Many respondents felt it was unreasonable that developers are entitled to damages from buyers when it appears that  developers are not being subjected to similar compensation. Notably several respondents accept that they may lose  money (i.e. as a result of not receiving a full refund) if a project is cancelled but it seems that some are  willing to accept this consequence in exchange for the desire for certainty,” Michael Lunjevich and Brent Baldwin, authors of the report, said.

The uncertainty is creating a prolonged negative effect for two primary reasons: Many market participants are  gripped in a suspended state. They are unable to move on as they still do not know what is happening with their  investments; and the supply side pipeline will remain skewed and uncertain until public announcements are made  regarding cancelled projects. If the supply side numbers could be narrowed to actual deliverable units, and  investors can move on with their lives after accepting that certain investments are lost then this will enable the  market to move forward more quickly in the medium term. Prolonging the inevitable is unlikely to enable the  commencement of the cleansing that is needed.
　
Hadef and Partners suggest there are several options that the government can consider as an alternative to  cancellation of projects and/or the liquidation of developers. These include: the forced consolidation of  development projects that individually have little chance of going ahead but might collectively stand a reasonable  chance of viable delivery even if many years late.
 
A scheme could, for example, be put in place so that investors and developers in unviable projects have the option  of consolidating partially sold projects into one single project. This would enable the assets of projects not  going ahead to be sold off to raise money for the single project that is continuing.

This could be administered as a not-for-profit, publicly administered scheme in which all cash contributed by  either developers or investors is aggregated and then divided into respective shares of the project. This could be  supervised by a “development fidelity trust” that is responsible for pooling the funds, deciding which project goes  ahead, determining participants’ respective shares and coordinating a lump sum construction contract.

Another option suggested is creation of a new law that allows (say) 66 per cent of stakeholders in a project to  vote on a proposal by a developer to delay construction against a compensation package. Such a scheme would need to  be open and transparent, for example, by way of offering investors additional financial information to demonstrate  the future viability of the project.

Investors could then vote on whether to place the development on hold or terminate and sell it by public auction.  Such a proposal could not only give the market time to recover, but also give investors more control over the  future of the project in a manner that requires all participants to share the short term pain of a loss or  collectively take the risk that the development will be viable in the future.
　
Insufficient stimulus

About 97 per of respondents believed greater transparency will assist in recovery of the real market, while only 39  per cent that Law No 9 and Decree No 6 (dealing with real estate disputes) had been useful.

Ninety per cent of respondents either agreed or strongly agreed that 'more laws and regulations are required to  assist with the recovery'.

“This suggests that some respondents feel that existing laws are not providing sufficient stimulus in the right  areas, or are not achieving the outcomes for which they were designed,” the authors said.

There was, however, an almost equal split between survey respondents who agree that current laws have had a  positive impact on the real estate sector, and those who disagree. Sixty seven per cent of respondents consider  that the new real estate laws had provided “limited help” with the recovery of the real estate market, while 64 per  cent agreed that the existing laws were not being “adequately enforced.“ An overwhelming 92 per cent believed that  “more investor protection was required.”

The Escrow Law, according to the report, was generally viewed to have been the most useful law with approximately  68 per cent of respondents agreeing to this. This was followed by the Landlord and Tenant Law with 57 per cent and  the Jointly Owned Property (Strata) Law, Mortgage Law and Pre-registration Law each having 45 per cent of  respondents who agreed they were useful.

Only 39 per cent of respondents felt that Law No 9 and Decree No 6 (dealing with real estate disputes) had been  useful.

“This is interesting given the focus on dealing with real estate disputes over the last two years and demonstrates  a continued lack of confidence by investors in the practical assistance these laws have provided. It is our view  that the response of the Dubai regulators by way of introducing new laws has been acceptable and timely compared  with other regional markets, however, the Dubai market has been struggling to catch up with the consequences of  poor practices during 2005 to 2007 by a range developers,” the authors said.

According to the report, the regulators in Dubai had the added disadvantage of having to rapidly introduce  regulation to previously unregulated market to address the real estate boom, and then react. It is no surprise that  the laws have been tested so much, particularly as Dubai has not had the benefit of hundreds of years of legal and  real estate development. This meant that the Escrow Law, Pre-Registration Law and other regulatory regimes designed  to introduce order to the market were required to operate in a reactive manner to endeavour to catch up.

“This is not an enviable position to be in and most objective observers would sympathise with the challenge the  regulator faced in trying to control market forces and some of the excesses of human nature. These issues were  compounded by the operations of the regulator which were perceived by some market participants as lacking in  transparency and clarity,” the report said.

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