'We thought we’d get rich quick'

\nThe recession may be nearing an end, but many Dubai investors are still in trouble. Arabian Business investigates
By Elizabeth Broomhall
Sat 04 Feb 2012 07:32 PM

Alan Green couldn’t have been more excited. It was December 1st 2007, and Formula One legend Niki Lauda was in Dubai to launch a spectacular new property project bearing his name. Lauda was being paraded outside the exotic Pierre Chic restaurant to the world’s media, happily signing autographs and handing out brochures displaying an artist impression of the “Niki Lauda Twin Towers.”

“I couldn’t help myself. I'm a huge F1 fan, and thought nothing could go wrong. Prices were going through the roof, you had to force people to take a cheque off you. My wife and I stuck all our savings into that project. We thought we’d get rich quick,” he says.

Just over four years later, many experts say the GCC is entering a period of growth again, and almost everyone is talking about recovery. Property prices, which plummeted more than 60 percent in Dubai during the downturn, are finally expected to bottom out this year, and hotels that previously saw a slump in occupancy rates are looking forward to a boost in profits post the Arab Spring. It would seem that everyone is happy.

Except the likes of Green, who today are staring at huge holes in the ground. The buildings they expected to earn them a fast fortune have either stalled in construction, or in some cases are yet to break ground — despite in many cases payments of up to 50 percent being made and promises from property firms to complete the developments some years earlier.

Indeed, on closer inspection, it seems whilst the rest property market prepares to get back on track, many desperate, pre-recession investors are still stuck in a real estate nightmare.

The only consolation for Green is he has plenty of company. John Collins bought his property in the Onyx development on Sheikh Zayed Road in October 2007, with plans to use the 3,000 sq ft unit as his office upon completion. The commercial tower, being developed by real estate firm Ishraqah, was originally scheduled to finish in 2010, but little construction has taken place, even though he has paid half of the total purchase price. In an email to Collins, the developer has referred to an “expected completion” date of the last quarter of 2012, but Collins is far from optimistic.

“The project was started in 2007, but they are still busy with the basement, we’re talking about maybe another two or three years of construction [still to go],” he says. “I said [to the developer] if you want to give me a smaller unit that’s fine, but just give me something.

“They said they’d let me know, but they keep on telling me this, ‘we’ll get back to you’, and it’s been too long. Also they indicated they will now change the commercial tower to a residential tower. I cannot believe this.”

Luckily for Collins, his sales and purchase agreement (SPA) includes a section on late handovers, which lawyers say could be beneficial if the case goes to court. Except for any delay caused by a force majeure event, the agreement says that if the unit is not completed by 31 March 2011, then this is a breach of contract, and the seller is obliged to either remedy the breach within 30 days or refund the buyer following termination.

The problem is that when Collins contacted the developer to try and arrange a termination, Ishraqah replied it was not the “company policy” to provide a refund. Ishraqah did not respond to requests for comment from Arabian Business.

Countless investors around the emirate are still waiting for their homes or offices, hoping for the best, expecting the worst.

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Another case is that of Anil Chandran who purchased a property in one of the Jumeirah Wave Business Towers in Jumeirah Village, being developed by High Rise Real Estate. Here, construction is yet to even begin, despite an original scheduled completion date of the first quarter of 2009, and payments of 35 percent being made by Chandran.

According to the SPA, the investor is entitled to terminate the agreement and request a refund if the project is not completed by September 2009, but upon contacting the developer, Chandran claims he has received nothing back. He says the developer’s Dubai office is now closed, and he has no hope of construction going ahead in the future. High Rise also did not reply to emails from Arabian Business when asked for a comment.

Property analysts say the problems stem from a lack of project finance in the market which continues to strangle construction progress, triggered by tighter lending policies among banks. Matt Green, head of research at property broker CBRE, says there is no easy solution to the problem. “Project delays remain prevalent in Dubai with availability of development finance still posing a significant problem for the entire real estate market,” he says. “Although a number of investors and institutions are now willing to offer bridge finance, this is generally for projects that have already completed a significant proportion of the overall construction process.”

Other experts say project finance is just one part of the picture. Also having an impact is the apparent lack of trust in the sector, which in some cases is preventing investors from handing over payments.

“For many projects the finance was supposed to come from off-plan sales and to a lesser degree from banks, but with the crash, many investors stopped paying and to the committed buyers’ surprise, many developers stopped building and had not ring-fenced early payments,” says Roy Cherry, a property analyst at Shuaa Capital. In terms of value, he says, over $200bn worth of projects have been cancelled since the crash, with many failing to ever break ground.

Unscrupulous practices by property companies have clearly also been an issue, he adds. Prior to the launch of escrow accounts, many companies spent the money received from investors on new plots of land, and now have no further funds to give back to buyers.

“Some developers ceased construction without offering alternatives or announcing cancellation to avoid triggering the investor refund requirement in the law,” Cherry points out. “In many cases, they simply don’t have the money to pay back investors. If a developer has not found the money in the last three years to resume a project, I’m not sure they can find it now.”

That said, Cherry believes there are some more respectable developers who have tried to overcome their liquidity woes by being upfront with clients, and who have sought to consolidate their projects by allowing buyers to move their investment to a project which is more advanced and likely to be completed.

But for some investors, even this option has turned sour.

Anita Gangal has certainly found the flaws in this argument. She purchased a property in 2006 in the 64-storey ‘Skyscraper’ project, to be built in Business Bay by Al Attar Real Estate. After years of waiting for construction, making payments of more than AED714,000 in the timeframe, she was finally allowed to terminate her contract and was asked if she would take a unit in a different, eleven-storey project in the same area. Gangal was prepared to accept the alternative property, only to find that the new development was also not progressing.

“The original project was supposed to be a 64-storey skyscraper, lake-facing, that is what they sold to us,” she says. “But it was never handed over, so I went to RERA, and they told the developer they had to return the funds. They said yes, they started negotiating with me, but they have not returned a single fil. I was literally pleading and crying in their office.”

The developer followed up by offering her a unit in the new project, the Polaris Tower, but to this day, the project is still in its early stages. “I went to see the construction of the building, and there are only five or ten labourers there. In the last eight months, they have not called me once to update me on the project.”

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When contacted by Arabian Business, Al Attar said the project was making progress, but that they could not refund payments to investors because the money was required for construction.

“We have delayed this project due to the global financial crisis,” said a spokesperson, “In April 2011 we started the construction with completion [set for] two years [later]. We don’t refund the money to the clients, because our funds are lying in the escrow account, and are only for the construction expenditures.”

Unfortunately Gangal also purchased another office property in the pre-recession years, in ACI’s Niki Lauda development, the same project that Green stuck his cash into. Despite her making payments of more than AED750,000 since 2007, the project is yet to even begin.

Again, she was told by the developer that they would build another project in its place, but so far, there has been little sign of it, and Gangal claims her contact at ACI no longer picks up the phone. ACI was not immediately available for comment when contacted by Arabian Business.

Kareem Derbas, the CEO of property firm Cayan, believes investors should take some responsibility for the decisions they made during the boom years, but that unscrupulous developers should also be made to answer. “Many people decided not to pay the highest prices charged from more reputable developers who provided more security; and instead they decided to risk investments with new or unknown developers. As for the companies, some have simply run out of cash from a pure business risk side, and there are others who have just mismanaged the cash collected prior to the escrow regulation,” he says.

“Those developers should be held accountable by law to see as much returned to the investors as is reasonably possible. There are also some developers that are purposefully delaying projects, or who have the financial ability to finance the project, but don’t find it as profitable.”

He adds that in cases where developers are being honest and trying their best to finish a development, investors should also do more to support them.

“If the developer is genuinely putting all his efforts and financial resources into completing the project, then investors should be supporting the developer to complete it. Everyone must accept a compromise to move forward. People need to be reminded that we are in tough economic circumstances.”

In an earlier interview, Derbas said Cayan’s own project, the Infinity Tower, has itself been subject to delays due to investors holding back payments. Lawyers say that for such projects, where a significant amount of building work has been completed and the developer is working to complete it, investors would be unlikely to be able to terminate their contracts.

“The courts in Dubai will excuse developers for a delay if they find that the developer is serious, so they have built 60 or 70 percent of the project, because they know the circumstances of the real estate market,” says Mohammed Kawasmi, head property lawyer for the Northern Emirates at Al Tamimi and Co. “But in a case where the developer has built zero, or five or ten percent, the courts are more likely to order termination of the contract plus a refund of money.”

Investors should not be afraid of taking on local or state-backed firms, he says, as rulings have been made against such companies in the past. They should also not rely on property regulator RERA to solve their disputes, but seek legal advice and check for clauses in the SPAs which refer to completion and termination.

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“If there is a problem, RERA will try and help find a solution, but it is not a competent authority to decide on these disputes, it is just a regulator. They are doing a good job. Last year they cancelled many projects where the developer hadn’t started construction. This year, I think they will focus on projects with minor construction.”

Investors’ gripes are of course not limited to delays, but also include frustrations over a lack of amenities in developments. A dispute of this kind arose recently, where investors in the Remraam community- being developed by Dubai Properties Group (DPG), became outraged over the lack of community facilities promised to them.

Kawasmi says it is vital for investors to check their SPAs to see what the developer is obligated to provide. They should also bear in mind that as a general rule, judges will only order a termination of contract where they think there is a major breach, or where the developer has no excuse for not building facilities.

“If they promised that the apartment would be painted red but the walls are white, this is a breach, but it is not major. The developer might also try and convince the court that he did not build these amenities out of force majeure, or say they are about to build them, or they are in the process of completing them.”

Another lawyer, Nick Clayson of Norton Rose, says that developers may sometimes be obliged to deliver facilities even if there is no mention of them in the contract, so if they have marketed the development as one with ample amenities, but issues need to be considered on a case-by-case basis.

“It is unlikely that an end-user would be able to reject a property where, for example, the pool was not finished or the landscaping not complete,” Clayson says.

He recommends that investors keep tabs on all communication with developers, to support any future legal proceedings. He says a written note of each call should be made, and investors should identify the person they are speaking to and understand their position and ability to make decisions.

“Face-to-face meetings are better and minutes should be taken. If letters are sent these should be sent by courier and copies retained. A well-ordered file of all correspondence, receipts and notes of calls will also make things much easier if lawyers have to be involved.”

Looking at the bigger picture, analysts such as Green agree that Dubai’s real estate sector has improved since the downturn, with new regulations helping the market move towards maturity. Going forward however, he says a focus should be given to implementation of these laws, not to mention more clarity, speed and transparency in the legal process.

“From an investor perspective, the current pace of dispute resolution really needs to be far quicker,” he says. “At this stage, there are still a significant number of ongoing cases, and whilst this wrangling continues, it will cast a negative shadow over the market.”

The names of some investors in this feature have been amended to protect their identity.

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