By Damian Reilly
RERA CEO Marwan Bin Ghalaita discusses the challenges Dubai's real estate sector faces
Who in Dubai doesn’t want to know what Marwan bin Ghalaita, CEO of RERA, knows? RERA is the emirate’s real estate watchdog, and bin Ghalaita then has the power to give the thumbs up or thumbs down to any building within city limits. There are many thousands of investors in Dubai who hang on his every utterance.
He greets Arabian Business affably in an office full of flowers – it was his birthday the previous day – and is keen to answer our questions. He’s been the boss for three years, he says, and he’s busy training up 3,000 real estate agents to make sure the cowboys who populated the market during the boom can never return. “Over my dead body,” he booms with a laugh.
And now he wants to hear our questions.
“How can investors get their money back?” we ask.
He furrows his brow. “That is a very easy question. I thought you said these would be difficult questions?”
And then we’re off, into a full description of the trials and challenges that face a regulator.... what follows is an edited transcript.
Cancellations and escrow accounts
How many projects have you cancelled in 2010?
We have already cancelled 115 [projects]. They never started, those are the cancelled projects. 115. Those people got their refund, and everything is ok. Hallas. Because the driving force of those projects is not there anymore. As per law if a development did not start within six months without any reason or justification, as per law I need to cancel it, to protect the investors’ money. So here we are segregating. 2009, you cannot do this exercise. But now, the end of 2010, I have a clear picture of all of the projects here in Dubai. Because you know we came late and we inherited so many projects that nobody knows about in Dubai. Now it is clear on my dashboard, to see what project will go ahead, which project is in ICU, which project is in the emergency room, which project is fine. And this is the way we will classify projects here in Dubai. Green, emergency, ICU, dead. This is the way we have worked for the whole of 2010.
You are going to start cancelling projects?
We already did. I told you, 115 were cancelled. Other projects are being cancelled.
But those 115 were projects that hadn’t started. How many projects that have started have you cancelled? Is it less than ten?
Started? Less than ten… But it is in the process. It is in the process of evaluating and cancelling. It is in the process. It is in the process of cancelling.
Soon there will be more cancelled?
Yes, in the process.
Because on some projects, nothing is happening after three years, and the investors want their money back, but they can’t get it?
Yes, but as I told you – we have a law. The law is saying ‘Marwan, if this project, all the commitment of Dubai government has been done for him - all the infrastructure is ready, all the design has been approved, everything - and this nasty developer is not starting, cancel him to protect the investors' money.’ This is what the law is saying, and this is the way we are segregating the project. We are looking at why this project did not start.
So in 2011 will we see a lot of cancellations?
You will see a lot of cancellations for projects that have no benefit for Dubai or for the investor… But look at it this way – cancelling a project is very easy in my hands. But imagine what is going to happen if I cancel a project with 500 investors. What is going to happen?
They get their money back from the escrow accounts?
If the projects started before escrow accounts? Some of the projects started before escrow accounts [were introduced]. Some of the investors will have invested before the beginning of 2007.
Then they are in big trouble, those investors?
That is what I am telling you. Cancelling a project is easy for Marwan. But I always think about the investor, what are they going to do? Imagine yourself as a regulator, in this situation. Cancelling a project is going to be music to your ears, because cancelling projects means reducing supply. Reducing supply is good for the real estate market. So cancelling a project is my wish. But I don’t cancel for the sake of cancellation.
But if you know the developer has run away, and is never coming back?
Then what I do – if I cancel? Where I will throw the problem? If I cancel a project that started? Where am I going to throw all the 500 investors? To the court.
Their money is gone?
The money is there. It is there. You have two situations. Either the project started within the escrow account regulation, so part of the money is in escrow. Or a project started before the escrow account regulation, so supposedly the money is all gone for the land. And the land is an asset itself. Yes, it has depreciated, but there is an asset. Then it is going to be a decision of the investors - when to sell. Do we sell now, or do we sell when the market will pick up, or do we wait for the regulator to find the solutions?
And this why I am telling you cancelling is the easy process, but in the Land Department we took on our shoulders all those burdens. Because all those investors trusted Dubai, and Dubai did deliver - infrastructure, metro, very fantastic building, registration, rules and regulation - but some of the developer did not play it right. So let us lean with the investors, because some investors, they don’t have that much knowledge about real estate, so let us support the investor now.
How? By getting their money back if their money is in an escrow account, because we started the escrow account to protect their money. Yes, it was a late stage, but it is there.
When we started the escrow account, in the first few months I used to have AED7 billion in my escrow account. AED 7 billion. Imagine how much I will have if it had started from the beginning. I will be the wealthiest agency in the world, I think. So if there is money in the escrow account, I am giving their money [back], without law case, without hassle, without delay.
Then, number two, is to find options for them. And options for the real estate investor is not easy. Why? I have been in this seat for three years. Sometimes I get an investor; he is telling me “Marwan, I need my money back.” I say, ok, where is your money? He says “In an escrow account.” I say “ok, fine, go the legal department where they will process it for you quickly.”
And this is what is happening, this is reality. In the same project, another guy will walk in and I will say “you need your money back?” And he will say “no, I need my real estate. I trust this city, I bought it for my children.” This is another criteria. Another guy will say: “I need my real estate but I need to reduce my payment.”
So everybody has his own personal issues.
Under what circumstances can a developer access escrow accounts?
When we started the escrow accounts, the rules were very clear. You can take land payment for your own land, but you cannot pay for other land. If you do not purchase the land, you cannot have a project.
Before the escrow it was a chaos. Everybody would do whatever he wanted. After the escrow accounts [were introduced], you needed land to start with. That means you go and you purchase the land from the master developer, or from our government… Let us assume you took land from Nakheel as the developer. And you paid ten percent. And you come and you register this land with the Land Department.
So then you come to RERA and you said “I would like to launch this project, to sell it as an off plan.” There is a certain requirement. Design need to be approved etc. You met all those criteria, then I give you a no objection letter to sell, and to open an escrow account. So you open the escrow account, and you start launching the project.
Once you launch the project, you take five percent as an initial deposit. All these five percents will go to the escrow account. So all peoples’ money will go to the escrow account.
In the beginning, the rules were that it is ok to pay from this five percent [for] the remaining land payment. And to pay up to five percent for management, and marketing and real estate agent and whatever. But since the crisis happened we stopped all the payment except for contractor. So that is why you will see in Dubai a lot of developments are moving, because of the trust account money. But we don’t give a developer [escrow money for] a land payment, we don’t give him [escrow money for] advertisement, we don’t give him [escrow money for] for agents, or admin fees, or marketing, nothing. Only contractors’ payments.
Are the escrow accounts now empty?
I have about five billion in the escrow accounts. Five billion.
Of the seven billion?
Yes. And how this two billion has gone? For construction.
So the reason the projects aren’t being cancelled isn’t because the escrow accounts are empty?
No, no, no.
So investors can have their money back, but they have to wait?
Yes…. I want you to understand this very well. You can get your money back through a court. But it is a choice you need to take as an investor. Because it is a contractual agreement. Three years in this seat, no one has come into this office and told me “Marwan, I need my real estate rights” and I rejected him or I failed him. Three years. And you can put it publically, on your website. If Marwan failed anybody to get him his real estate rights, I can challenge. But people are coming to me, and saying “give us our investment.” This is not my job. There is a difference. If you need your real estate right, I will give it to you. If you need your investment, this is not my job.
When will you release a list of the scrapped projects?
Is it going to add something to the sector to show scrapped projects? Transparency, yes, but there is a certain type or limit for transparency. Suppose for you, if you own a project in any building in Dubai that has been cancelled, you have a full right to know that. And this is what I am doing, I am giving them access to that. If you go rpdubai.com, you will see all of the projects approved by us. And you will see the status of the project today.
Why don’t you want to put up a list of scrapped projects? Is it bad for investor confidence?
I don’t see there is any added value for it yet. If I am giving all the investors the update about their investment, what is the value of a scrapped project list, for the sector? Still nobody has convinced me what it is going to do, but you have the right to know if your project is cancelled or not.
What happens when a project is cancelled?
If a project is cancelled by RERA, the developer is entitled to refund all the money to investors. This is the law. But in some cases the developer reaches an agreement with investors, and they said: ‘because we have spent this and that, we need to deduct five percent, ten percent, whatever.’ It is based on mutual agreement. If they don’t agree and they go to the court, the judge will rule based on the law. The law is saying if a project is cancelled by RERA, the investors have the right to get full refund.
Why are projects not being cancelled when obviously nothing is happening?
No, they are being cancelled.
So in 2011, will projects start being cancelled?
Yes. If a project is not feasible for Dubai’s economy, it will be cancelled. And owners will have the right to know it… Yes, there will be cancellations…. There will be cancellations. If a project does not add to Dubai’s economy, it will be cancelled.
Have you thought about introducing a penalty for developers who are late delivering?
Yes, I like this idea. But the way it is… when we introduced the laws, developers already existed. Contracts had already been signed. If you sign a contract, it is a contractual agreement, between you and the developer. I cannot introduce new articles or amendments to those contracts. But what we are doing is, we are already by law giving penalties to a developer if they are late or if they don’t submit documents. About AED10,000. And I have a penalty up to half a million I can impose on the developer. Half a million, and then I can make it a million, and then I can make it a million and a half.
But this is all regulation penalty, if they don’t share information with me, if they do a fraud on an investor… If they play tricks with the progress report. But if they are late, we are doing a new step now, at the Land Department we are introducing the Real Estate Investor Protection Law, and we are telling all the developers for the new contract: ‘if you are putting a penalty on the investor, you should put a penalty on yourself. It should be equal.’ And this is coming very soon, and we are encouraging all investors to ask for this clause in their contracts.
What is the definition of force majeure? Does recession fall under it?
I am not a judge.
I think a lot of developers are not developing and blaming force majeure?
If I am an investor I will say: ‘I am not paying because of force majeure’. I am not a judge. But my answer is if I am an investor I will not pay because of force majeure. If they can use it, so can I. And this is my answer. If a developer can use it, why can’t I?
For how long can a developer postpone construction work?
This is question that needs to be clarified. How long he can postpone? Based on the contract? If it is going to start soon, he should justify to me. If it is going to start soon, we look at different cases, but usually we give six months, but no more than that. He should define a date.
For not started, I give him a chance. But for started ones he should give me a feasibility study, because the only reason I can see why he is stopping construction is lack of funds, if the investors are not paying or the bank is not giving him finance. This is the only reason. Then we look at it heavily. And then we tell people why it is late – but we need an answer. We cannot compromise the Dubai real estate market by leaving [things] half completed. You cannot. We always need to find a solution. That is why we came up with the Tayseer initiatives. Tayseer initiative was meant to direct all the bank finance toward building that might stop. So we look at it case by case.
If my construction is delayed, and it is beyond my delivery date, what should I do? You have a choice to ask for liquidity damage.... I am suffering because of the delay, because I bought this apartment to move in, and now I am paying rent. You can go to a court and ask for that, for compensation. Because this is a breach of the contract. Because the delivery date is there... And people should seek proper legal advice from lawyers. It was a buying market, then a selling market, then an agents’ market, then I tell people there is a period in Dubai where it is a lawyers market. Where lawyers make a lot of money.
What if the developer hasn’t started because he says the master developer hasn’t put the infrastructure in place?
This is one of the reasons we give the [extension] period for the developer to start. Because there is a job for the master developer to do. What use is a project that is completed but there are no roads or electricity? The investor will suffer, not the developer. The developer will be very happy to take your money and construct. But then what is the use? You cannot stay on it, you cannot live on it, or rent it and get your investment back. That is one of the reasons we look at to give the developer reason to delay the construction. Infrastructure is very important. You need to wait, but if all parties are agreed that we don’t want to wait anymore, then cancel the project and return the money.
Has RERA prosecuted any developer that has transgressed the law?
We did fine some developers, but prosecuted, no. So far we did not prosecute anyone. But we did impose fines. But if anybody be proving that someone is doing something wrong, I will not hesitate to send him to the prosecutor.
How often is the RERA rental index adjusted?
It is adjusted every quarter. We are working on the one for 2011. You will see big changes every quarter, from 2008 until today. We adjust the index based on four models: the rental contract we are registering, our focus groups with the agents, the listing in the newspaper, and from a site survey.
On the rental index, is it fair to quote the same rent in a 30 year old building as in one that is new?
If it is fair, it is not fair. But if it is a choice, it is up to me as a tenant to move to a new building. And this is what is happening. And this is what is happening with the rental index. We introduced the rental index five years back... If an agent will tell you ‘this is a very good flat for AED40,000, take it.’ You will say: ‘ok I will accept your word.’ But now you can go to our website and check the prices, before you take a decision. The index is to give you an opinion about the prices, and then you can do your own checks. Is the building old, is it new? The new index will be according to the facilities that are given to the landlord. I don’t want to say next year, but it is coming. This is the next step of the rental index.
Do you think the poor quality of some buildings in Dubai will affect the market in future?
This is true, so what I am doing about that is I am classifying the developer. So, any development that will come in Dubai, the developer will be classified, as an A developer, a B developer or C developer. And I will make it very transparent to the investors before he invests in any property in Dubai, that he will know what kind of quality of what he is paying for. And before they hand over, there will be a snag list, to certify that this has met the standard. This is what we are doing. Quality should be better. Here in Dubai, some of the developers promised people a world class structure, but when they delivered it was not like that. It will affect the prices in the future, but will also affect something very critical; it will affect the owners’ association money, because the developer, once he has built the structure, he is gone. So it is the headache of the owners’ association, to pay more money to maintain this structure.
Do you think homeowners’ associations are being ignored by developers?
RERA’s rules are not ignored by developers, they are enforced by RERA. But owners themselves should educate themselves more about the law. The law on owning property, Law 27, is very clear for everybody. Once the building is completed, and the owners association has been formed and approved by RERA, the service charges approved by RERA, the whole control of the building is in the hands of the owners association, not the developer.
Can owners deduct from service charges when the services are not being provided or maintenance is poor?
They can discuss it with the owners’ association. Because it is like this: when I am paying something to be served, I should have the quality that they promised me.
If they did not give it to me, that means they should reduce it from the amount I am paying. The idea of owners association and service charges should be transparent between all parties. Because it is a group of people living together in one structure.
There is no developer above the law. Or sub developer.
Nakheel, Emaar, Dubai Holding, all of them are following the law of the regulatory agency. All of them. There is no exception.
If any of them has any assumption that they are above the law, then let them read the law. The law did not exempt anyone… But people think ‘oh those are the master developers, so they are exempt’. No, no, no. If your property is not registered with us, don’t pay them.
If your owners’ association charges are not registered with us, don’t pay them. And nobody can force you.
State of market
What is the occupancy level in Dubai?
Colliers or Cluttons said 86 percent. 86, 75 something like that. It depends, I don’t want to give an answer, because it depends. In Old Town, it will be more than in Jebel Ali Downtown, more than in International City, I think.
But across Dubai, I cannot give a number. But if you want me to guess, because my study did not finish yet, if you want me to guess, it is based on the international standard. It is close to the international standard of occupancy rate, which is 75 to 80 percent.
How is the market for Emirati-owned properties performing?
Dubai real estate market does have problems, like other markets, but if you look at it deeply, you say: ‘come on guys, most of the real estate, a lot of the real estate, is owned by locals.’ They are not going anywhere. People only talk in the media or in the newspaper about the freehold [areas]. They keep forgetting the old market. But the old market is part of the Dubai real estate market. And there are transactions on it, there is occupancy, there is operation. And [people] making a lot of money. Real estate is just a part of it. Freehold is part of it.
Yes, but that is the only part international investors can get involved in?
But when you look at the market you should look at it as a whole. You cannot separate the freehold from the non-freehold, because this is a market. The old market is the majority.
Is the split 70/30?
More, more. I do not have the number. We have only these small, few, designated areas [where foreigners can buy land], that’s it.
Is there too much supply on the freehold market?
Everyone is saying there is too much supply… Supply in Dubai is coming from master developers, Nakheel, Dubai Holdings and Emaar, and sub developers. And we need as a regulator to watch for the master developer, not the sub developer. Because the master developers should understand... that they are damaging the sector by introducing more supply.
The heart of the matter is that Government should take a proactive role and be directly involved if Dubai Real Estate is to be put back on track and investors not to be deprived from their investments.
There are many incomplete projects. There are also a number of projects with no progress other than procurement and leveling of the lands.
The best solution that will reduce the Real Estate excess inventory in Dubai is to merge the projects and move the investors' money to semi-built ones.
This, however, will necessitate the Government's creation of a body to execute this task as well as its readiness to take over some of the lands and channel the sales proceeds to semi-built projects.
This will not only results in investors' money remaining in Dubai but will also dramatically improve the Real Estate conditions and induces global confidence in Dubai economy.
Great news Mr.Marwan. Let us start with the dead projects and then move to ICU's and move on. Let us accept the facts and agree on a win win options in line with the RERA guidelines. Small investors / actual users to be attended to on priority for practical reasons.
A lot of talk from RERA, but in reality it is a toothless tiger.
Dear Mr Marwan, it is hard to know what to believe! You have said a lot of positive things. Your written laws are good laws too. But I have to tell you that outside of these articles the actions & attitude of your dept bear no similarity to any of these words or laws. So we have to wonder is this discrepancy by design or is there a genuine intent by you personally to protect homeowners & investors (which by the way is my own belief) but where such good intentions are ignored by your team who work instead to their own agenda? This is the core of the problem and your clarification - whatever the truth - is the key starting point to all the issues you cover in your interview. I and many others await your further feedback on this with great anticipation as we want actions & words to match each other.
I invested a Milion Pound Sterling in Dubai, not as a speculator, but as someone who wished to come and live here, and enjoy your country and spend my money. But I find that their is no stability in your laws, they change at the drop of a hat, and contacting RERA is a very big problem to me and many of my friends, as they do not answer emails or return calls. All my projects are late, one is 2 years overdue, I suppose I am lucky they even got built, but even so, I don't wish to employ a lawyer, when their is a regulatory Authority already in place, I feel that should do more for the Owners like me.
Dear Mr. Marwan,
Why does RERA not get involved directly to help the investors ?
There can be a lot of positivity in the market if RERA steps in to stop the lending institutions from charging excessive interest on mortgages. Still ,many institutions are charging @ 8.5 % where LIBOR is currently below 1% or EIBOR is less than 3%. It is indeed absolutely wrong to charge anything more than 4% from the investors at this juncture when everyone is struggling to make payments. No business should be allowed to make this kind of profit at the cost of the residents. Any steps in this direction will definitely help boost the sagging image of Dubai Real Estate.
I thought most of the money in escrow had been spent on land payments (which were an authorised deduction) so that the reality is that there is nothing in the majority of these accounts....of course i may be wrong
Please publish the name of the projects that is cancelled or it can be listed in your website at least.
This is to P, remember ,most of the land is owned by the royals, so mske them richer, and keep the others poorer, it should make for a better country, says Egypt?
Rera , if the money is there , where is mine? They, Minc has sold my unit two times , once to me then to another,.Minc says they have no money in their account, they closed the account? So guess what no refund for me. All my life savings gone. If you Rera do not make it right , the entire country will fall. I have been waiting since 06, I only post comments so that no one should send anything to Dubai/.