PASS THE PARCEL ANYONE?

Authored by: Ashraf Sayed

Recent weeks have seen several high-profile real estate developments launched and developers are using innovative ways to try to control the usual melee associated with launch day.    In this article Ashraf Sayed, Senior Associate in our Property & Commercial team explores techniques which were used at a recent launch and also puts the spotlight on some of the risks for investors and speculators.
 
A few days prior to one recent launch, the developer commenced online investor registration whereby only registered investors could attend the launch and buy property. This was possibly an attempt to avoid the usual fracas and overnight queues experienced previously. However, events that unfolded over the weekend show that speculators keep finding ways to create hype and drive potentially rampant price rises.
 
Those fortunate enough to register for last weekend’s launch received appointment tokens in 3 different colours: red, blue and yellow. No one knew the significance of the colour but this added to the mystery, hype and intrigue of the occasion.
 
Within hours of tokens being received, the airwaves were full of offers to sell the tokens, with the red tokens quickly becoming the most in demand. It seems our dear friend the ‘speculator’ and his forever present colleague the ‘broker’ are back and hungry to earn. Some tokens purportedly exchanged hands for in excess of AED 200,000, whilst others formed partnerships with token holders to buy and flip for a premium the same day.
 
Amazingly enough, neither the investors, the brokers, nor the speculators seemed to have any definitive details of the project, but the “pass the parcel” game was in full swing. On launch day, the developer announced only red token holders could buy. This reportedly created some angst among those holding yellow or blue tokens, especially those that had paid for them, and one can only wonder what was going through their mind when they paid for a piece of paper with totally unknown significance. 
 
Registered investors with red tokens were invited in accordance with their token number, and purchases could only be made under the names registered. Within 6 hours the project was reportedly sold out and the developer claimed the launch a massive success.
 
However, was this an exercise in regulation gone wrong, did speculators out think the developer and other investors, is there anyway to control such rampant speculation or was this carefully calculated hype? According to market sources:

1. Genuine end-users complained to have little or no knowledge of the prior registration requirements or significance of the token colours;
2. Brokers seemed to quickly identify the value in red tokens with these changing hands at significant values prior to launch day;
3. Until launch day, there was very little information released as to the specifications for the project, although this didn’t seem to matter to the speculators; and
4. Most who purchased units, began to resell the units on the same day under MOUs, with some asking a premium of 20% almost immediately.

It is clear, if the above is all true that speculators will trade almost anything and everything. The tokens just seemed to add another item to the list of things to be traded, and it seems they have little care or knowledge of the real consequences of what this trading ultimately means.
 
In consideration of what transpired over the weekend, one must question if investors/speculators are truly aware of some of the real risks of trading as per the above. Such risks include:

1. The owner of the property is the person who registered and will be credited in Oqood as the buyer. Those who have bought directly from the developer with a view to flip may find they are stuck and unable to transfer the property to a new buyer. Similarly, buyers under MOUs risk the developer rejecting the transaction as prior developer consent was not obtained, at which time they may have already paid monies to the initial buyer.
2. The subsequent flipping transactions and trades under MOUs are void, unless registered. Article 3 of Dubai Law No. 13 of 2008 states that any disposition that transfers or restricts title or any ancillary rights shall be void if not recorded on the Register maintained by the Dubai Land Department;
3. On-sales cannot be processed until a certain percentage of the purchase price is paid. There has been suggestion the developer at the recent launch implemented a lock-in period until at least 30% of the purchase price is paid.
4. The initial registered buyer/speculator has given post-dated cheques to the developer of up to 30-40% of the purchase price, so is personally and criminally liable if they bounce, although it is understood they have back to back post-dated cheques with the subsequent unregistered buyer. Article 401 of the UAE Penal Code provides for a sentence to detention or to a fine, whoever draws in bad faith a cheque without sufficient funds or who, after giving the cheque withdraws all or part of the funds, so that the remaining balance is insufficient to cover the amount of the cheque, or gives order to the drawee to stop payment, or if he deliberately writes or signs the cheque in such a manner as to make it non payable.
5. If a token was bought for AED200,000, and PDC’s were issued for 30% on a AED 2 million unit then speculators are AED800,000 into the transaction without any security. Accordingly the speculator may find they have already invested to much without being able to resell for the premium they thought they could have achieved;
6. The money traded on the tokens is unlikely to be recoverable and could have been better spent by being collected by the developer as part of the down payment.

With the rampant speculation and the above risks in mind, one can only ask what is driving people to take such obvious risks. It can only be assumed that it the speculators are either not aware of the magnitude of the risks, or they are acutely aware but find it acceptable in consideration of the possible short term gains.
 
Developer’s appear to be powerless to stop people intent on finding ways to manipulate the system, however, one thought is that authorities, developers and brokers may need to launch awareness campaigns to make people aware of the risks. The Department of Economic Development's (DED) Commercial Control and Consumer Protection Division has launched a successful consumer awareness campaign in recent years and perhaps the time is now for similar awareness campaigns by RERA and/or the DLD aimed at the real estate market. In addition lock-in periods prior to resale and the application of strict penalties on those found to be trading in tokens or selling property without developer consent may further help remove speculators from the market.
 
Unless a solution to the activities described above can be found, speculators may run the market into another boom/bust cycle and genuine investors may find it hard to get an affordable entry to the Dubai property ladder.

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the develop jurisdiction of the UAE.