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Abu Dhabi’s new real estate law

2015-09-02 03:20:33

Abu Dhabi’s real estate market is expected to witness substantial growth in the future, with both developers and investors likely to allocate a greater proportion of their investments towards the UAE capital.

This positive outlook is the result of a recent announcement by His Highness Shaikh Khalifa Bin Zayed Al Nahyan, President of the UAE and Ruler of Abu Dhabi, in which he outlined a new law aimed at better regulating the real estate sector in Abu Dhabi. The final law is due to be published soon.

Al Tamimi & Company has had the privilege of working with the team responsible for drafting this new law, which has been through more than seven years of consultation, review and drafting. In our view, the new law is a positive step towards attracting increased real estate investment in Abu Dhabi, and across the UAE more broadly, as it tackles many of the concerns raised by investors in the past, while also drawing on the real estate  investment experience in the UAE, and especially in Dubai, over the past ten years.

Lessons learnt

The UAE’s real estate sector witnessed a period of controversial development over the past decade, and it suffered a severe shock during the global financial crisis. Lessons were certainly learnt from that experience, leading to greater stability and maturity in the real estate investment market we see today. However, this new law is the next important step forward and should be welcomed as a balanced approach to providing important protection for stakeholders and the wider public.

There are many encouraging provisions in the law, with implications and consequences that require all parties to take swift measures to safeguard their rights and avoid legal penalties, which can, in some cases, lead to imprisonment and considerable fines.

Clear-cut rules

Here is a prime example: real estate developers and brokers, owners association (OA) managers, appraisers and surveyors may not engage in any activity before obtaining a licence from the Department of Municipal Affairs (DMA) and are not entitled to claim remuneration and fees if they are not licensed. Failure to comply with this requirement may lead to imprisonment and a fine between Dh50,000 and Dh200,000, or up to Dh2 million in the case of real estate developers.

Furthermore, the law prohibits real estate companies from selling off-plan units unless the developer and the project have been registered with the DMA and the company has opened an escrow account for the project and obtained written permission from DMA to advertise and market it. It is therefore essential that developers reconcile their positions within the time frame specified under the law.

The law prohibits developers from collecting registration fees (about 2 per cent of the property price) from investors and only allows developers to charge administrative fees, which must first be approved by the DMA. This means lower costs for buyers. The law also protects investors by requiring developers to register units sold off-plan in the interim real estate register. In addition, it sets out how a breach of this requirement by developers is to be dealt with.

There are many key accomplishments within the new law, including provisions for setting up OAs comprising all the owners of real estate developments. OAs will be independent legal entities that hold title to the common areas, and in this way the owners in jointly owned property are responsible for its management in accordance with international standards.

The law is expected to shake up the real estate finance sector too, with mortgage provisions to guarantee enforcement in the event a debtor defaults on payment of instalments. A bank can now enforce the mortgage immediately through the court after giving notice to the debtor, without having to obtain a court judgment that the debtor owes the debt.

Address issues

In addition, the law allows units sold off-plan to be mortgaged provided that the loan amount is paid into the relevant escrow account and the loan is allocated for payment of the purchase price. New provisions on property mortgages will help address the issues and impediments that banks face in connection with real estate financing, encouraging them to become more actively engaged.

Unsurprisingly, the law will not be well received by developers that fail to complete construction work. It sets out clear guidelines for the DMA to follow in dealing with developers when there are delays in meeting project milestones, to ensure that investors’ rights are protected and there is no delay in legal proceedings.

The new law will come into force six months from the date of publication in the Official Gazette, so it is important that all parties review and understand their obligations under the law, and that they start preparing for the winds of change that are about to sweep the Abu Dhabi real estate market and stimulate investors’ appetite.

Stay prepared

However, while the law itself is a great achievement for Abu Dhabi and the UAE, there remains the question of implementation. Having one authority, the DMA, in charge of developing the real estate market is beneficial. But, for the changes to be truly effective, it is critical that the DMA is completely ready to regulate and supervise the market in Abu Dhabi.

Pleasingly, the DMA does seem ready. It has taken the appropriate steps to prepare effectively for the successful implementation of the law. So, the real estate market looks ready to enter a bold new phase in its development and maturity.