Escrow accounts, or trust accounts as they are also known, are the result of a new property law recently set up to protect buyers and developers when they are engaged in off-plan real estate sales. Escrow basically means an agreement between two parties where one places something of value with a neutral party which distributes the valuables at an agreed time. In this case buyers of off-plan properties place the money in an escrow account and the bank acts as guarantor to distribute the money to the developer only after an agreed phase in construction is reached.
A statement from the Dubai Land Authority, which regulates property developers, says: "The main purpose of Law No (8) of 2007 is to provide legislative protection to purchasers in off-plan transactions. More generally, the law seeks to introduce a regime of registration, licensing and regulation for all developers undertaking property development activities in the emirate of Dubai."
Escrow protects the buyer and ensures that his money is correctly utilized.
With developments being completed on almost a daily basis, buying off-plan in Dubai is commonplace. But in the past it was often the buyers and not the developers who were left facing problems following the late completion of a project. Sometimes up to 70-80% of the full purchase price was handed over to the developer despite not having the buyer's name on the title deed or an agreed completion date. It was not uncommon for buyers to be faced with losing money they had already paid and being labelled an insecure creditor if the developer failed to complete on time.
Moinuddin Malim, head of corporate and investment banking, Badr Al-Islami, the Islamic banking division of Mashreq, says: "In the past the buyers would pay the developer directly and it was the responsibility of the developer to use the money as he deemed fit. However, there were no controls in place to ensure the developer was using the proceeds to fund the specified project."
The new law, already in practice, requires all property developers to have an account at one of three registered banks, HSBC, Dubai Islamic Bank and Badr Al-Islam as well as Islamic finance providers Amlak and Tamweel.
It is intended to give buyers reassurance as Habib Bitar, senior vice president and head of real estate finance and investments, Dubai Islamic Bank, explains: "Escrow gives buyers peace of mind. It protects the rights of the buyer in order to ensure that the money being collected by the developers is going to be utilised for the construction of that particular project. I am glad that there is such a law in order to protect their rights - it provides added security. I wouldn't buy a property any other way."
Malim from Badr Al-Islami agrees: "There is now a comfort level; there are proper laws in place which monitor developers and that responsibility is being taken by the banks to ensure the money is being used for the correct purposes. This new law is a start and demonstrates Dubai's stance in always taking a lead in terms of international practices. I don't think it will be long until this trend catches on in the rest of the UAE and the GCC."
As an added incentive for the developer to complete on time the law also stipulates that a 5% retainer be held by the bank for a year until after the developer has transferred the deed titles into the purchaser's name. "The purpose of this retention is to act as a guarantee that the developer will promptly and effectively remedy defects in the property that are apparent on completion or which may become apparent within the first year following handover," says the Dubai Land Department statement.
There is actually very little a buyer must do now that he didn't do before as it is up to the developer to set up the account once they have been approved by the Dubai Land Department. The buyer incurs no added costs other than transferring the money into the specified account. Bitar of DIB says: "Is it up to the approved developer to open the account, not the buyer. The details of the escrow account are included in the sale purchase of the unit so the buyers can transfer the fund directly into the appropriate account."
The only thing a buyer and a developer won't benefit from is interest as the escrow account works in the same way as a current account. The capital generates revenue but the banks don't disperse it to the depositors.
As well as protecting the buyer, the introduction of the escrow account has been praised for increasing transparency within the real estate sector as well as boosting confidence in further foreign investment. Mehdi Amjad, president and CEO of Omniyat Holdings and Omniyat Properties says: "I think the market will see a new wave of investors in the real estate sector which has a completely different demographic profile from the buyers who have been investing in the emirate for the last five years since Dubai opened up the property market to foreigners."
The Dubai Land Department confirms that since its inception, the escrow account has been well-received by both buyers and developers. A number of developments have already been approved, the first being the La Vista Residence project at Dubai Silicon Oasis by Al Manal Development. Marwan Bin Ghalita, technical administration director, Dubai Land Department, says: "We didn't anticipate the response we have had so far. Some developers were already practicing their own escrow accounts but those that weren't have all rushed to create an account. We have already approved four developments."
So far there have been few problems with the account, despite it being relatively new. The Dubai Land Department recently defended the account amid rumours of "grey areas" and discrepancies for foreign developers registered as offshore. Bin Ghalita further says: "We were in constant talks with the developers throughout the entire process. Nothing has been changed with the escrow accounts and there have never been any grey areas with the account."
Escrow is the first step for Dubai toward increasing transparency and boosting both local and foreign confidence in its real estate market. And once again Dubai is at the forefront of new international practices encouraging other emirates and members of the GCC to follow suit.
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