Some home buyers in stalled Dubai developments are unlikely to find the millions of dirhams they have paid into escrow accounts, regulator says.
Regulator raises escrow doubt
Home buyers in stalled Dubai projects are unlikely to find the millions of dirhams they have paid into escrow accounts as many developers have already spent the money, says Ahmed Khalid Obaidat, the chief financial officer for the Real Estate Regulatory Authority (Rera).
"What I can tell buyers is, don't think what they have paid into escrow accounts actually exists," Mr Obaidat said. He said the problem is concentrated in payments made before a federal law established escrow accounts in 2007.
The escrow accounts - which are funds paid by buyers in unbuilt projects, and are supposed to be guarded independently - are a hot-button issue with buyers, who question how developers are spending money in dozens of stalled projects around Dubai. Many complain that developers have misused or absconded with the funds, which should be used to repay buyers.
Rera has launched its annual audit of the escrow accounts, but this year's exercise will have a twist - for the first time it is requiring developers to use approved auditors. In the past, developers could choose their own auditors.
The new rules will make the audits more trustworthy, Mr Obaidat said.
"Our main objective from approving project firms is to have more reliable audited statements and financial reports," he said. "We need a partner in the audit firm in this area."
Rera does not disclose specific results of the audits. Last year about 80 per cent of the projects complied, Mr Obaidat said. But the audits have discovered few problems, he added.
"The problem is the transactions appeared before the establishment of the law," Mr Obaidat said. "The problem was what happened before that date."
Before the law was established there was little accountability on how developers were spending buyers' money.
"The market welcomed" the law, said Paul Preston, the managing director of Elysian Real Estate. "Since the escrow accounts came in it has really helped the market."
The annual reviews focus on how much money was collected and how it was spent. Developers are forbidden from using the money collected on other projects or any expenses not directly related to the project. They can legally use the escrow money on construction, land costs, marketing and other legitimate project-related expenses, Mr Obaidat said.
Developers that do not file audits are liable for penalties of up Dh100,000. They may also be required to cover shortfalls in the accounts if the audit discovers inappropriate payouts.
Many buyers in Dubai believe they are entitled to refunds from escrow accounts on delayed or partially built projects. But developers are not legally required to return funds until Rera officially cancels a project.
Although Rera has established guidelines for declaring a project dead, developers need only show work is progressing to stave off cancellation. Some developers have refused to return funds by invoking the force majeure clause in buyer contracts, citing the economic downturn or problems with master developers as "acts of nature" to explain the delays.
Rera began requiring annual audits of the escrow accounts in 2008, following the mandate of the 2007 law. But the opportunity to choose their own auditors often added an extra layer of complexity.
"This year will be good communication between us and the developer," said Khalid Obaid Al Mutaiwei, the senior director of Rera's Real Estate Trust Account Development Department. "The communication will be easy."