Mitigating Dubai real estate risk factors management of interim installments via escrow trust accounts

Peter Penhall, CEO of Gowealthy Holdings outlines the regulatory aspects of the introduction of the new Escrow Law in Dubai. The bearing of the law and the subsequent effects will be covered in Part II of the comprehensive article to be published at a later date.

The recently passed Law No. 8 on Guarantee Accounts intends to bring in relevant controls in Dubai regarding the manner in which off-plan deposits on projects are channelled, making Dubai an even safer place for British investors. Under this law, banks or financial institutions certified by the Dubai Lands Department act within stipulated conditions and will manage such funds under separate trust or ‘escrow’ accounts.

This new law provides a mechanism whereby buyers’ funds raised against a particular property development will now be ‘ringfenced’ and applied to that project only – hence removing the temptation to roll funds from one project to the next. The law should also bring some much needed relief to potential buyers faced with fears of being saddled with projects that never really see the construction stage.

What could be a short-term slow-down in terms of new project launches especially from the small time developers would eventually lead to long term market stability and enhance the maturity process. In addition to institutional investors and fund management firms, including REIT (Real Estate Investment Trusts), will also instill confidence among potential international mortgage providers and their entry strategies. Since the law covers both residential and commercial properties, the entire breadth of the market is considerably more ‘secure’.

Though faced with prospects of challenging project management issues, tougher cash flow management and related issues, developers across the spectrum have undoubtedly warmed to the idea that these stricter regulatory controls will improve investor confidence – a welcome boost to an ever changing real estate market. Banks such as Dubai Islamic Bank have already set up special trust accounts to help developers manage investors’ funds in accordance with the regulations. Discussions with the Dubai Lands Department indicate that many developers (large and small) have applied to the Lands Department for such guarantee accounts and special accounts have already been created for those developers that fulfilled the required stipulations.

The law clearly specifies that its provisions shall be applicable to those who sell units on the plan of the Emirate’s property developments that are not yet completed, whether under or in the process of construction, and who receives payments from buyers or financiers against such units before completion of the developments.

It also spells out conditions that regulate the advertising and marketing of properties. Article (5) under Chapter 1 of Law 8 defines: A developer shall not advertise in local or foreign media, or participate in local or foreign exhibitions, for promotion of sale of units or properties on the plan or in the process of construction in the Emirate, until having obtained a written permit from the Department. The Director shall issue the necessary decisions to regulate the terms and conditions of advertising in media and participation in exhibitions.

Further protection to the buyer comes in the form of Article (13); the Account Trustee shall keep 5 per cent of the value of a development in the guarantee account for a period of one year after a developer has obtained a certificate of completion. This reserved amount will not be paid to the developer until one year after the units are registered in the names of the buyers. Developers who have intentions to go around the law or flout any of its tenets will have strict penalties to contend with, as a penalty of incarceration and payment of a fine not less than AED 200,000 will be imposed on such parties. This stringent penalty covers illegal activities such as non-licensed development operations, false document submissions, false property sales, embezzlements and misappropriations and also takes into account falsifying documents and reports by auditors and consultants.

All of the above gives an indication of the seriousness of the law and its foresight. The government’s timely intervention to regulate the market and protect buyer interests will go a long way in leading the Dubai property market into the next wave of development and consolidation. One can now logically expect the final remaining aspect of the real estate laws in Dubai, namely the Strata or Condominium Law, to be formally announced within the near future, thereby bringing long overdue closure to a sector of the Dubai real estate market legal framework that represents a significant portion of the trading activity.

For further information on the Dubai property market and the array of properties on offer, visit gowealthy.com.