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Fri 17 Jun 2016 11:19 AM

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A cautionary tale from the Dubai property market

While a recent episode involving an off-plan developer and unhappy investors has been resolved, it should serve as a lesson to potential buyers.

A cautionary tale from the Dubai property market

For property investors, it’s a nightmare scenario. You complete your payments, spend almost a decade waiting for your apartment to be handed over and then are landed with an additional huge bill from the developer, due to extra floorspace being added to units - without warning.

Yet that is exactly what has happened to some buyers who bought units in Hanover Square, a project that offers “luxury managed apartments with 5-star hotel-style facilities” in Jumeirah Village Circle.

One investor told us that his two-bedroom flat – bought off-plan for $257,000 back in 2007 – had mysteriously grown by more than half. As a result, in March this year, he received a letter from developer ACW Holdings, which informed him that he would have to pay an additional $126,000 to receive the keys to his property.

How is this possible? Dubai legislation stipulates that developers may not charge buyers for “any area in excess of the net area of the sold Real Property unit” unless otherwise agreed with the buyer. But the sales purchase agreement (SPA) signed by investors in Hanover Square contained an extra clause, which stipulated that “if the floor area is increased by more than 3 percent, the Seller shall be entitled to increase the Purchase price in accordance with the increase”.  

Despite upsetting many of its customers, ACW Holdings has showed no regret for its actions in its correspondence with Arabian Business. It even had the temerity to blame its own customers for not reading their contracts properly.

“If any investor was dissatisfied with the SPA they should ask themselves why they continued to make payments knowing the position with regard to the terms and conditions of the SPA from day one,” the developer told us.

Some might argue that ACW has a point. If you are planning to make one of the most important investments of your life, any contract should be checked and double-checked, presumably with the help of a lawyer. Then again, I can’t believe that anyone should reasonably expect that their apartment size should increase by so much – with no warning – with additional costs running into the hundreds of thousands of dirhams.

One investor did query this clause back in 2008. The response he claims to have received from ACW’s solicitor at the time said that the size increase “is intended to cover slight variations in size arising during the course of construction. There is no way we would build the flats grossly larger than planned as it would be both incompetent and bad business to do so”.

That last phrase turned out to be fairly prescient. There is no suggestion that ACW has done anything illegal - thanks to the clause in the SPA – but the episode has certainly done the company no favours.

To its credit, Dubai’s property regulator, the Real Estate Regulatory Authority (RERA) has stepped in to resolve the issue.  After holding what was described as a friendly meeting with the developer in late May, RERA has confirmed that investors will not have to pay the extra fee, and many of them have been contacted to that effect.

Given the many issues that off-plan investors in Dubai property have faced in the years since 2008, it is encouraging to hear of a tale that has had a positive conclusion. It is also worth pointing out that – despite the floorplan debacle – ACW has stuck to its guns and delivered (finally) what it promised during a period in which many other developers have cut and run. But at the same time, the episode should serve as a cautionary tale to anyone wishing to invest in off-plan property – whether here or elsewhere.

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Nel 3 years ago

What does this mean for Investors? I understand they get the benefit of the size increase but does that come with an increase in the size of the pool share?? or does the Developer now take this..

If the Investor does not get an increase in the pool share with the size increase they will then find it difficult to sell their units..

MSM 3 years ago

Due diligence would require purchasers to review the SPA before signing, if developers provided them. Instead, the practice is to provide it after at least the first payment is made. The law needs to be changed to prohibit developers from collecting money until the SPA has been signed.

Disappointed Christina 3 years ago

I commend RERA for taking an interest in ACW. I hope the remainder of their projects are now examined. Hanover square was supposed to be 5 star - it is barely 2 star. Yes, they have delivered, but provided a Bajaj auto instead of a promised mustang.

Mohammad Ali 3 years ago

The K.M. Properties had sold offices in Tamani Arts Office Building, Business Bay at exorbitant price before 2008 crash. They sold the project based on Gross area. They left the project incomplete half way in 2012. The investors (like myself) found that the net area indicated by them in RERA registry system was less than half of the Gross sold area.

The Developer Properties had taken over the project since K.M. Properties left, re tendered the project, and almost completed it now through IAH (apparently with RERA support). They are the part of the solution. However, I am wondering, where are the the K.M. Properties Management hiding and why could not they be held accountable to compensate the investors for taking them to ride ?

Sandi Saksena 3 years ago

A little money spent paying a lawyer to read and explain the terms of the contract to the buyer would have saved the buyer a lot of money. If buyers are penny pinching, think they can read and understand a carefully worded legal document written to protect the vendor legally well then live with it. This happens way too often and yet educated people, holding responsible decision making positions or even owners of their companies ignore, brush aside (think they are qualified lawyers) the fine print!

Mark Walker 3 years ago

Just to clarify when developers increase the size of the apartment, the net size does not increase at all, in fact it can be less than contracted 10 years ago. The added area that the developer demands to be paid for at handover, yes at handover not any earlier, is for proportional common area. This common area is not just corridors and reception area but will be service roads, gardens and parking lot! Even proportionally it can add between 30%-50% to the price!
Regarding SPAs, they aren't worth the paper they are written on. Developers do what they like and the legal system is too expensive to do anything about it.
In our case, Stadium Point - Developer Pan Global, they did not recognize the authority of the original SPA and required us under threat of losing our 60% installment to sign a new SPA which had wording to the effect that they will charge us for proportional common area. We are now all expected to pay an additional 30% extra - RERA knows and currently isn't stopping it

Telcoguy 3 years ago

Well, as another reader (Sandi) has pointed you should perform your due diligence and understand what are your rights (really few) and obligations (plenty) when you sign a contract here.
This is not a new point in this forum, quite the opposite. It is not even original or specific to the UAE I saw similar situations happen to foreign buyers in Spain in the 70s.

I will now to enjoy the charge of the ra-ra-ra brigade

Ray Chaudhri 3 years ago

At least you are getting a bigger flat area at 2007 launch prices, which is not that bad if you have spare funds or the bank agrees to fund the excess proportionate to the earlier mortgage. What is very disturbing is that project by reputed developer AL ATTAR Group (Vue de Lac, Vista de Lago in JLT - Cluster K, and Global Point - Polaris - Poladio - Skyscraper - Toronto tower - Vancouver Tower etc.) simply stole millions of investor money and all you see there is LARGE GAPING HOLE in the ground, now almost 9 years have passed. RERA does nothing against Al Attar as their are UAE nationals. They have created massive fraud against hundreds of investors and should be prosecuted. In 2007 they pose me close to AED half million, which in 9 years should have been double the value if not more. They have enough wealth & assets to pay back the investors, but due to slack & inadequate real-estate laws back in 2007, they have used those loop-holes to go scot-free. This is inexcusable.