Dubai’s new escrow law will have a significant impact on international property investors…

Peter Penhall, CEO of Gowealthy Holdings outlines the bearing of the new Escrow Law and its subsequent effects to the Dubai property industry and international investors.

One of the main reasons why the escrow law found immediate favor with the major developments was the well-crafted and ‘democratic’ structure that saw the involvement of the various major developers, through consultations by the Dubai Government and Lands Department.

Though the law has been put into immediate effect as of its Official Gazette on June 28, and the fact that RERA (Real Estate Regulatory Authority) now has the authority to facilitate the positive transition to compliance, I anticipate this process will be supported by a number of Regulations that will need to be implemented before the law is totally comprehensive for both developers and investors. In essence the new laws taken with the anticipated regulations are seen by all serious industry players as just another great step forward for Dubai’s real estate industry as a whole.

Increased formalisation

The initial gazette of the escrow law brings a further significant increase in the formalisation of the industry, especially from the developer’s perspective.  The first steps have already given investors a better sense of security through their no nonsense approach.

But as I mentioned earlier, there is still a way to go. RERA and the Dubai Lands Department have begun regular forums with industry representatives to verify that every facet of the law in place goes hand-in-hand with regulations that will act as a ‘fail safe’ to ensure developers and other interested parties get the most out of the new law, whilst ensuring absolute compliance.

That said, Article 18 of the law gives developers six months (by December 28, 2007) to meet the new structure in compliance with the aforementioned upcoming regulations. To help this process along the current real estate survey being carried out by the Dubai Land’s Department will categorise each project by how far along it is in terms of development progress.

Grace period

For example, developments that have not yet reached the shoring* stage, an escrow account will need to be opened straight away; but for those developments that are 70 to 80 percent completed the developer will not need to open one. Either way, buyers are assured at this moment that their investment is being put to its intended use.

With this six month ‘grace period’ of sorts in place, those developers who elect not to implement the escrow account system for their project face a distinct disadvantage to those that have chosen or intend to choose compliance with this new law.

The escrow account has now given many developers a key differentiating factor to the myriad of potential investors; a differentiating factor that offers the promise of investor security and most of all adds a large amount of credibility. Developers who have had the foresight to implement this immediately are already reaping the benefits of their decision.

Another facet of the law that would require regulation is that of building plan approval. One of Dubai’s foremost advantages when it comes to property development is that of quick turnaround for necessary approvals. This aspect of the law has the potential to slow this advantageous process down, but with the advantage of more secure and final property developments to compensate for it, it is believed that this is a trade-off investors would welcome.

Chain of development

It is also important to note that the law will not only affect the developer but all the different levels in the chain of development – again, a good thing. This has the potential to compel those marketing these projects to literally have to ‘put their money where their mouth is’.

The simple fact that as per the escrow law, investor or purchaser capital can now only be used to actually develop the property meaning that developer’s budgets will now have to be very carefully thought through. This in turn translates into more competitive and solid offers rather than just relying on marketing hype.

What’s more, the investor’s funds are kept in a ‘project account’ rather than a ‘developer account’ thus guaranteeing the funds stay with the project under development rather than attaching to the developer who may otherwise be enticed to apply the funds to other uses.

This poses a challenge for property broker companies because it presents a very important decision - whether or not to partner with those developers that have chosen not to implement the escrow law yet – clearly a decision that may well have a significantly negative effect on overall sales potential and hence cast a doubt on that brokerages own market credentials.

Multi-faceted plan

As I mentioned previously, we are on the verge of a new age for the property market in the UAE. We have already seen a property law on lands and individual dwellings, a broker’s law that regulates and licenses brokers, the new escrow law and with the upcoming strata law which will govern the rights of residential owners of the numerous apartments; we will see the culmination of a multi-faceted plan to develop a rock solid real estate sector for investors.

Marwan Bin Ghalati, CEO of RERA said it best when he explained their objectives were, “to establish the foundation for a globally attractive real estate sector that satisfies and guarantees all stakeholders’ rights and expectations.”

As professional brokers what we are beginning to see is the big picture now and we have to say, “we like what we see”!

For further information visit www.gowealthy.com