11 May 2011


Authored by: Michael Lunjevich and Ashraf Sayed


In brief

  • The economic events of 2008 sent shock waves around the world and even Dubai was not immune to the effects of the resulting financial turmoil.
  • Dubai has the necessary political and legal framework to enable it to safeguard businesses in adverse economic climates.
  • Such protection as offered to businesses seems to be lacking for individual investors, and many would argue, offering investors commercial solutions that are comparable to those offered to banks and trade creditors would be viewed as a huge step in the right direction.

Dubai enjoyed a prolonged boom before eventually succumbing to global events during the second half of 2008. This boom period earned Dubai global recognition as a ‘new international business hub’ and ‘the city of dreams’. During this period, many people invested their savings in a very popular segment of the city of dreams, namely high end real estate developments.
There is a significant contrast in the economic climate in the first half of 2008 and post 2008, and one should not overlook the difference between these divergent periods. In analysing what a sustainable international business hub requires, we have sought to assess some of the strengths, weaknesses and opportunities of the Dubai real estate market. Sustainable international business hubs typically perform well when considered in the following areas:
1.              political stability;
2.              location;
3.              infrastructure; and
4.              rule of law.
On first impressions, Dubai succeeds in all of these areas. Dubai is well located within the Middle East and is generally considered to be a politically stable and neutral state. It is conveniently positioned to bridge business between east and west, and has a significant proportion of the world’s population within a six hour flight. Emirates Airlines and Jebel Ali Free Zone have achieved considerable success in connecting Dubai to most parts of the world and the national infrastructure is relatively well developed. Finally, the relative ease of implementing new projects and laws in Dubai has enabled Dubai to adapt to address business issues quickly and efficiently when they arise.
However, the dynamic development and rapid introduction of laws and regulations can also affect investor confidence, particularly in times of recession. An example of this is Dubai Decree No.57 of 2009 concerning the Dubai World restructure, which is widely viewed as a successful restructure in many of its dimensions. This law paved the way for the relevant Dubai World group companies to push forward positively with a massive restructure that is aimed at securing the long term viability of these entities. In the process of the restructure, banks and trade creditors have been relative beneficiaries of the commercial terms offered, in comparison to those individual investors who invested in the off-plan real estate projects.
Essentially, banks and trade creditors are commercial parties who accept risk as part of their business model. This means they factor contingencies into their business decisions and this subsequently affects considerations of where they do business and their pricing. For example, in pursuit of an opportunity, and to balance their risks, they may decide to reduce or terminate operations in one region in order to maximize on opportunities elsewhere. By contrast, most individuals are usually not as fluid or well informed and are often directly or indirectly dependant on banks and suppliers who facilitate business opportunities and loans more readily when the economy is more stable. Trade creditors who vanished post second half of 2008 may, however, be encouraged to return to Dubai when the business climate is right.
Pursuant to the terms of the Dubai World restructure, banks and trade creditors were offered commercial terms for the settlement of their due amounts. In the case of trade creditors in Nakheel, they were offered part cash payment with the balance payable through a Sukuk with healthy profit rates. However, real estate investors in the so called “Red Projects” (which are unlikely to be delivered by the originally agreed dates or to the specifications) have not been offered a comparable deal and instead have been informally advised that they can switch their investments into ”Green Projects” (those projects selected to be delivered in the short to medium term) or sell their investment to other investors by way of ‘credit notes’ or wait five years to be repaid in full but without profit rate based compensation.
Investors can have long memories, particularly when their personal wealth is affected. This will be even more the case for genuine end-users, as opposed to speculators who should also have factored risk into their decisions and who may also be fickle and leave a market at the first indication of a down turn. Dubai needs individual investors who wish to invest long term and for personal reasons, with minimal risk, such as for the purchase of a primary or secondary home. These investors will not rush to escape if the market turns down in the short term as their objective is to enjoy their home and lifestyle. These investors are the ones who may have invested life savings in “the city of dreams” and who would desperately like to see a commercially acceptable deal tabled that is comparable to that offered to trade creditors.
Hadef & Partners recently conducted a survey entitled the “What is the Legal State of Dubai Real Estate Market” and an overwhelming 90% of respondents felt that Dubai’s regulators and courts should do more to help investors. The general feeling from the market was that Dubai needs more investor protection in order to enhance confidence in the real estate market. Unfortunately the current alternatives offered to investors, such as those on offer in Nakheel’s Red Projects, may not meet investors’ expectations.  
Legally speaking, a developer has an obligation to deliver units by the timeframe agreed under contract and cannot unilaterally amend the agreed terms, pursuant to fundamental principles of law under the UAE Civil Code and equitable principles of the Islamic Sharia. Despite investors having the option of filing civil cases for recovery of money, legal proceedings can be very expensive and time consuming in the UAE and the risk and cost of litigation may out-weigh the possible fruits of victory.
In our opinion, the ordinary investor is a key component of the recovery of Dubai’s real estate market. Market participants and regulators should be concerned to ensure that the ordinary investor is appropriately supported and not overlooked. However, the ordinary investor may have lacked a unified voice or seat at the table in the wider restructuring arrangements. At this point in time contractors, consultants and other construction related ancillary service providers are not the primary keys to recovery. Dubai needs investors to soak up the more than ample supply and if Dubai is able to provide investors with increased confidence in the legal system many will elect to enter or return to this market.
It is difficult to predict what will satisfy the investors’ needs as this group is comparatively disparate in nature and emotions and sentiment have a bearing on some aspects of their decision making. However, offering investors commercial solutions that are comparable to those offered to bank and trade creditors might well be viewed by many as a huge step in the right direction.