Dubai's legal structure is improving but for some property investors, it may be too late.
Sold short by the developers
It sounded like the kind of home most people dream about. With a private beach on the doorstep, perfectly landscaped courtyards and a choice of seven gyms, Jumeirah Beach Residences (JBR) was set to become the epitome of lavish beachside living. Set along the north shore of Dubai Marina, and with the Palm Jumeirah close by, the 36-tower project was going to offer "a year-round beach resort lifestyle" to its anticipated population of 25,000, according to the sales pitch used to attract investors to the Dubai Properties development.
Buyers began moving in to their new homes last year and looked forward to the day when their dream would be made complete with access to their own private beach park and gym complexes. But that day never came. In June, they were horrified to learn that a significant part of that beach would be used as a car park, while only two of the seven community gyms would be built. "This is a massive part of the lifestyle that was sold to us," said Wassim Islam, who bought a three-bedroom apartment at JBR. "It's changed my perception of a development from something that was desirable to something that is just a residential estate. While the value of my property has gone up, I would not be able to afford the lifestyle sold to me now."
This is just one of countless stories that have prompted a change in the way Dubai's property market is regulated, aimed at making sure investors get what they paid for. Residents of JBR can at least take comfort in the fact that their homes were built and are now worth about three times the purchase price. The same cannot be said for those who have ploughed thousands of dirhams into projects that have either been delayed or cancelled. These people were not necessarily pining for the high life. All they wanted was a home they could afford, and in a location that was likely to increase in value.
In early 2006, Lorenza Gazzola, a Dubai resident, bought an off-the-plan apartment in Dubai Lagoon, a development by Schön Properties, a Pakistani company. Attracted by the project's location away from the hustle and bustle of central Dubai, and even more so by the price of Dh600 (US$163) per square foot, Ms Gazzola thought it would be the perfect investment. An attractive payment plan also alleviated the need for a mortgage, which few banks were offering at the time.
"When I first saw the Dubai Lagoon project, I was impressed by the number of buildings, the lagoons and the greenery. It felt like a perfect family community, with a friendly and quiet environment," she said. "It wasn't marketed as a luxury development, but I was happy that finally someone with a limited income like me could purchase something affordable, and without having to pay high interest rates to the bank."
Two years on, Ms Gazzola has nothing to show for her investment. After a series of delays over the project's design, construction finally began at the end of last year. But progress stalled in May, when the contractor ran into difficulties because of the surge in construction costs. Pressure from angry investors and the Dubai Real Estate Regulatory Authority (Rera) has forced Schön to resume construction on the first two zones of the seven-zone project, while an additional contractor has been appointed to build zones three and six. Another contractor is expected to be appointed for the remaining zones and the project has now been marked for completion in 2011.
"My dream of buying a home has turned into a nightmare," Ms Gazzola said. "I was looking forward to moving in this year. I have so far spent the majority of my savings on a modest property that hasn't yet materialised." Dubai is not the only emirate to have felt the brunt of property scandals. Earlier this year Tameer Holding, a company based in Sharjah, decided to put its Dh30 billion AlSalaam City development on hold because of problems with power and water supplies. Those who had made payments towards their property in the past three years have since been left in limbo while awaiting the development's fate.
Although Tameer has offered them a refund with interest, or the chance to transfer their investment to another project, many are reluctant to accept. Martin Nield, an investor from the UK, bought 10 townhouses in the project at Dh600 per sq ft. He has so far paid Dh2 million. "I don't think it's acceptable just to be offered your money back. Some people have been making investments for the last three years and have paid around 70 per cent," he said. "But how long can it continue to be on hold for? The land was graded two years ago, but all that's been built are eight show houses."
The common thread between all of these projects is that they were launched between 2004 and 2005, a time when big project announcements were all the rage, but legal protection was limited. Risks were taken on the premise that huge returns on investment could be reaped. For some, the gamble paid off. "Many have made huge profits on property here," said Niall O'Toole, a partner at the law firm Clyde & Co. "But others have been naive and haven't accurately calculated their risk."
Dubai's legal structure, although improving, has had to play catch-up with the market. The arrival of Rera last year came as a relief to many. All developers now have to be approved by the authority and have an escrow account, into which all money paid by investors goes and is used solely for the development's construction. But while Rera has instilled some confidence in the market, many of the problems faced by investors today stem from projects launched before it was set up, at a time when there was no protection via escrow accounts.
"Contractually, these investors are not without rights, but how effective are they? If the developer is broke and the contractor is broke, what can they do?" said Mr O'Toole. But better legal remedies are on the way. Foreign investors in Dubai will now be able to take their grievances to the Property Court, which begins this month and is expected to speed up the process of hearings. "A crucial part of the evolution of Dubai is the appreciation that property and construction breed disputes, and so there must be appropriate ways to resolve or determine those disputes," said Nick Carnell, a partner at the law firm Kennedys.
"But it's also fundamental that the court gets off to a good start. Without an effective means to deal with such disputes, confidence will be eroded very quickly." Also in the pipeline is a consumer protection law, which will better protect off-the-plan buyers from misleading marketing by developers and will make it more difficult for developers not to honour their promises. "These changes, if introduced, will impact how developers market their projects and will hopefully assist in preventing some of the problems that have occurred recently," said Stephen Kelly, an associate with Clyde & Co.
Still, these changes will go a long way towards avoiding the kind of problems experienced by some investors. Abu Dhabi is still a little behind Dubai in terms of getting its property law in place, although plans are in the pipeline to adopt a similar strategy to Dubai's. "I believe the Abu Dhabi Government has hired an Australian consulting firm to help devise a Strata Law in Abu Dhabi," said Mr O'Toole. "There is currently more protection in Dubai than the Abu Dhabi. For example, Dubai has the escrow account in place."
Mr O'Toole said the best remedy was doing your homework before buying. "Be careful, do your research and look at the strength of the developers. The big ones have huge asset banks, while the smaller ones are more exposed to risk. Human nature is such that we talk about learning from other people's mistakes, but we very rarely do. This is a crazy market and I don't think people will learn their lessons until there are major failures."