Sustaining Dubai’s real estate boom

Each week Arabian Business turns the spotlight on a leading company or issue.

Dubai has just enacted a new property law - Real Estate Law (8) - based on escrow accounts. Sorry to ask, what is an escrow account?

The law actually refers to guarantee accounts, which are pretty much synonymous with escrow or trusts accounts.

The word escrow pops up in many contexts; it is basically an arrangement between two parties where one (the buyer) places something of value with a neutral party who disburses the valuables at an agreed time. Escrows are used extensively in real estate, but are also an important tool when acquiring companies or dealing with any significant sums of money.

So escrows protect buyers and sellers during big deals. How has this been applied to Dubai real estate transactions?

The new law mandating the use of escrow accounts when buying off-plan property is a major development. Dubai (and the GCC) has witnessed an amazing property boom over the past five years.

New developments seem to be launched everyday and sell out within hours, before structural plans are in place, and before a single brick is laid. Exuberant boom times have resulted in delays, spurned investors and struggling developers. While Dubai's property law has been lagging the market, the escrow provisions come at the right time. Developers will no longer have ready access to investors' cash, and will need to obtain the approval of the escrow agent and the Land Department. This forces developers to stick to the schedule, and safeguards investors from unscrupulous players.

I get it. Cash in an escrow is safe. But is this a good sign for the property market?

Almost everyone agrees that the market is overheated, and that the future holds a major challenge when supply outstrips demand. The Dubai government can enact new regulations, but it can't repeal the law of supply and demand. Nevertheless, the escrow law is significant and will improve the market and add to its maturity.

Who gets the interest on the money in the escrow? And how do the developers access the cash?

Unfortunately for both the buyer and seller, escrow accounts rarely pay interest (they function like current accounts). The capital generates revenue, but the banks do not disburse it to depositors; lost interest is the cost of safety. The developer gets the cash when the consultant for the project certifies that a milestone in construction has been achieved, say the completion of the steel structure. The Land Department needs to be informed of all disbursements, and penalties will be levied for improprieties, such as collusion between developers and consultants.

So, do I buy that US$500,000 one-bedroom penthouse now or later?

The escrow law should not influence that decision. What you can do is buy the apartment off-plan today with the peace of mind that the government (through a third party - the escrow) is looking after your money.