Analysis Consolidations of properties and mergers between developers have made the sector a rapidly changing, complex one for investors.
Investors take great leap of faith
Consolidations of properties and mergers between developers have made the sector a rapidly changing, complex one for investors. Some developers are encouraging investors to gather their purchases in one or two towers, then cancelling the rest of the buildings, or merging with other developers to pool resources. This has happened in Marmooka City in Ajman, ACI's developments in Dubai Waterfront, and with Damac and Hydra Properties on Reem Island, among others. For many investors, it is largely a question of trusting the developer.
In the case of off-plan projects that have been put on hold by large master developers such as Emaar or Nakheel, investors are allowed on a case-by-case basis to cancel their contract and consolidate, or transfer their credit to other investors' properties. But in other cases, buyers can choose between waiting for years with no guarantee of their project being built, or accepting another property that has better chances of being completed. They often end up with properties that bear little resemblance to what they had originally purchased.
"Basically, the developer says the project is not cancelled, it is on hold," says David Nunn, a partner of the law firm Simmons and Simmons. "When investors ask about the 30 or 50 per cent that they have already paid, the developer says 'well, you have agreed to pay that amount of money and to pay even more, and I did not agree to do anything in return immediately. I just said I would do it at some point'."
The developer ACI, based in Dubai, recently said two tower projects on Dubai Waterfront were on hold and that they were shifting clients' investments to other projects in Business Bay, on which construction had been started. "In Waterfront we have managed so far to transfer 50 floors from a total of 180," says Robin Lohmann, the managing director at ACI. "This is a beginning of a solution. As long as we are not in a position to get money back from Nakheel, we just can't give people their money back either. So it is important to sit down and try to find a solution.
"In Business Bay, for example, we have people who are downsizing. For instance if they had four units and consolidate into two units and want to give back two units, then we can give them to the people who want to move from Waterfront to Business Bay. "But this is a big administrative work and co-ordination with RERA [the Dubai Government's Real Estate Regulatory Agency]. The clients must be shifted if they want to."
Morten Hald, who booked a floor in March last year at Dubai Waterfront, refused an offer last month by ACI to exchange with two units in another area. "They are offering me property at around Dh1,350 (US$367) per square foot, which is totally unrealistic because today you would never get more than Dh800 in the market," Mr Hald says. "And they want additional payments immediately." Rather than accept the offer, he filed a legal case against ACI to get his money back.
Investors in several projects launched by Hydra Properties on Reem Island in Abu Dhabi have been invited to shift to Hydra Village, a development half an hour's drive away from the town centre, on which construction has begun. All the villas have been sold, so candidates need to buy them from existing investors. "Hydra Properties were giving out a list of people and contact numbers to those investors who were told they had to consolidate," says Julie Wallace, an investor in Hydra Village.
"I was receiving phone calls from investors offering me different prices. The person who finally bought out my unit had previously invested in Hydra H2O on Reem Island. It was quite an awkward situation in the Hydra office in Dubai because this man was obviously very unhappy." Hydra Village's clients are very happy to get out of their investment. Since the purchasing date the master plan has changed, along with the size of the villas, the total price and completion date.
"The most popular area to which people are shifting is Hydra Village, because of the completion date," says Matar al Shamsi, the deputy commercial director of Hydra Properties. "The first phase of around 150 villas will be delivered in the beginning of 2010. Investors want to have something available so they think the sooner the better." Mr al Shamsi could not explain the delays in the company's other projects but said Hydra did not charge any penalties for transferring, although there was a transfer charge of 2 per cent.
Not everybody thinks this is acceptable. "It is a bit like you saying 'I want to buy a Land Cruiser', and they say 'That's fine, here is the price and we will give it to you next month'," says one of the Hydra Village investors, who wanted to remain anonymous. "So you pay a 50 per cent deposit. And the next month they say 'you are not getting a Land Cruiser but a Land Rover in a year's time, and by the way, it is going to cost you another Dh20,000'."
Another investor who had bought in a Damac Properties tower on Reem Island, Harbour Heights, says he has paid all the money that was due before construction, about 40 per cent. "When we decided to go and see the progress of construction a year later, we were shocked to see absolutely nothing," he says. "This was 20 years of our life savings. I struggled for months to get information and considered going to court. My wife got sick as a result of the stress."
The investor finally accepted two weeks ago to sign a contract for another Damac flat in Marina Bay, also on Reem Island, and cancel Harbour Heights. "We took a slightly smaller flat for Dh2 million versus Dh3.2m for our previous one in Harbour Heights," he said. "Our money now covers 72 per cent of the new property. I am relieved, but the most difficult part was to get proper information. We were totally depending on their goodwill."
According to Damac, its recovery programme has been one of its strengths in recent months. "We have found that by offering investors a chance to swap their off-plan property for a ready or semi-finished one, this allows them to start renting out the unit or to live in it earlier, or even to trade the unit in the market," says Niall McLoughlin, the senior vice president of corporate communications for Damac.
"However, this still remains just an option for customers and of course is entirely their choice." Marmooka City, a 206-building development along Emirates Road in Ajman, was scaled back last month to 20 buildings. More than 100 sub-developers have cancelled their contracts and were allowed by the government master developer to transfer the credit of their investment to other properties, or join other developers to build a tower there.
The penalty they were charged exceeded 30 per cent, which means they have less money to refund investors who had already bought units. Adora Tan bought last year in a flat in Bianca Tower 2, a project recently cancelled by Virgin Property Development in Marmooka City. "When I called the developer, they told me that they have merged with another one called Kognic and that they would not refund me," Ms Tan says.
"Kognic has offered me to take another unit in their tower, but what I bought earlier on has a lagoon view. The new flat has a view of a small canal and another building." Ms Tan says that because the new unit is larger, she will have to pay more and the payment plan is different. That means, she says, she will have to pay 80 per cent of her salary every month, which is almost the double of what she was to pay under the original plan.
"Strictly speaking, under the law a purchaser has no legal right to prevent the developer from selling the land on and doing that irrespective of the contract," Mr Nunn says. "The sad truth is that the only time you get property is at the end of the process. Before that, it is a promise. That is the principal of off-plan building. "Even if you paid 30 to 40 per cent and the money is going to an escrow account, you don't get a share of the building. They still have to complete it and transfer it to you."
David Sanson, from the law firm DLA Piper, says: "The investors can pursue the developer, but the question would be the extent to which it is worth pursuing a claim if they know that the relevant developer does not have any money behind it. Investors are left with little choice. It is a take-it-or-leave it situation." As for Ms Tan, she has paid Dh40,000 to date, which amounts to about 10 per cent of her property. But according to a consultant, going to court alone would cost her at least Dh20,000.
The Ajman Real Estate Regulatory Agency has announced the creation of a property resolution committee, but it has not yet eventuated. In the meantime, the choice is limited: "If I were an end-user and faced with the prospect of no activity for years and the developer coming back and asking for more, the real issue is that you went into a foolish contract," Mr Nunn says. "I would say reflect on that fact. That might mean that you get the product built very quickly. You get your hands on something. It is much better potentially than having an unsecured promise against a developer who could go bust any day."