Leasehold of life

Changes to Dubai property law over the past six years have opened up the market to foreign ownership and is helping to bring about the creation of a recognisably westernised property asset class.


Leasehold of life
Prior to 2002, non-Gulf Corporation Council (GCC*) expats living in United Arab Emirates were only permitted to rent property or own property on the federal law-approved 99-year leasehold basis.

Then in 2002 the Dubai government permitted the ownership of freehold property to expats, triggering a chain of events which quickly began changing the face of the real-estate industry in the Gulf.

Emirate Ras Al Khaimah was the first to copy Dubai, with Ajman quickly following. Sharjah was next, but only in allowing foreign ownership of leasehold property, though not freehold – a model also copied by Umm Al Quwain. Fujairah has followed the “freehold” line, whilst Abu Dhabi passed its property law in August 2005 permitting 99-year land ownership and renewable 50-year surface ownership in specified areas within the Emirate.

The terms “freehold” and “leasehold” are similar but not necessarily equivalent to what Western practitioners understand by those terms, and UAE currently does not have a federal law defining what it means by “freehold”.

Dubai property for foreign investment

Dubai is not oil-rich like some of its neighbours and has therefore focused the development of its economy by establishing itself as a trading hub between East and West, an emerging financial centre and as a tourism destination, using its remaining oil revenues to stimulate the development of a self-sustaining economy using a different model.

It is this dash to establish an economy independent of oil revenues which has accelerated the pace of change, including the boom in the real-estate industry.

The current boom can trace its sources back to 1997, with the creation of the publicly quoted Emaar Properties and Al Nakheel Properties, which has spawned developments such as Dubai Marina, the Emirates Living Community developments and, following an announcement in May 2002 by Nakheel, the man-made island, The Palm Jumeirah, followed a year later by the second man-made palm shaped island, The Palm Jebel Ali. Further island developments such as “The World” and “The Universe” have followed.

The 2002 announcement coincided with the Crown Prince’s decree allowing foreigners to buy and own freehold property in selected areas of the city, known as New Dubai. Foreign ownership of freehold property in Dubai is broadly limited to areas on Sheikh Zayed Road, Jumeirah, Jebel Ali and along the Emirates Road.

It then took until March 2006 for the publication of the new law legalising foreign ownership of properties in designated areas. Many hoped that a relaxation of immigration law would accompany the property changes, but they were to be disappointed as the law fell short of giving property owners permanent residence visas or an automatic right to work in Dubai.

Key features of the new Dubai property law included: the setting up of a property registration office at the Land Department responsible for documenting property rights and their amendments; permitting non-GCC citizens to own freehold or 99-year leasehold in certain designated areas (article 4); conferring wide regulatory powers on the Land Department (article 6); the setting up of the property register (article 7); requiring property transactions to be registered (article 9) and the requirement to register inheritance rights (article 11).

In addition, as a further move to boost investor confidence, the Real Estate Regulatory Authority (RERA), was established in July 2007. RERA, as part of the Dubai Land Department, formulates, regulates, manages and licenses various real estate-related activities in Dubai, such as the registration of developers and escrow accounts.

Dubai property sector: the future

The land registration laws bring certainty, enhancing confidence for investors in a market which commentators believe to be seriously in danger of overheating.

Further attempts to bring clarity and certainty into the sector have followed, with the latest being the announcement in August 2008 of a new mortgage law for this autumn requiring mortgages to be sold by registered financial institutions, to carry compulsory insurance and for registration of the mortgages with the Land Department, where registration details will include the size of the loan, the repayment period and the value of the property.

The last year in particular has seen an explosion of western firms seeking a trading foothold in the UAE – and especially in Dubai.

Only a small handful of years ago there was no international market in property. Since then we have seen rapid change and the beginnings of mechanisms designed to internationalise land as a trading commodity and attract investors.

From a closed market six years ago, the new regulatory regime permits foreigners to own, mortgage and lease land and buildings for occupation or as a trading asset.

The Dubai government continues to seek to plug gaps in the law to bolster investor and occupier. It is a testament to the success of their attempts so far that we see the drive from western law firms to provide property-related legal services.

While the majority of these services have so far been in the area of development agreements, project finance and development law, we can now see the emergence of real-estate finance, an embryonic investment class and, as these develop further, the move to more sophisticated leasehold arrangements and property management transactions which will become more recognisable to western investors.

The pace of change has been breathtaking. With this political will continuing – and there seems to be no sign of it abating – we could see the emergence of a fully recognisable westernised property asset class within three to five years.

Adrian Barlow is group head of property at Pinsent Masons

*Gulf Corporation Council members are citizens of one of six participating Arab states: Bahrain, Qatar, Kuwait, Oman, Saudi Arabia and United Arab Emirates.