Silvia Turrin paid two-thirds of the $520,000 purchase price of her Dubai apartment, only to learn that it won’t be finished until 2012, two years late. When she stopped payments to Emaar Properties PJSC, the developer hit her with late fees.
“We feel hopeless and we’re running out of options,” said Turrin, one of about 400 buyers in two nonexistent towers called 29 Boulevard. “It’s almost like we don’t have any rights.”
Developers in Dubai are demanding that buyers like Turrin keep paying for homes that in some cases haven’t even been started. Builders in the emirate have delayed or canceled projects worth about $330 billion, Dubai-based market researcher Proleads estimates. The best performing real estate market in the world collapsed in 2008 after credit dried up, sparking defaults and forcing writedowns of land and property values.
Emaar, the United Arab Emirates’ biggest developer, isn’t the only one dealing with disgruntled buyers. About 30 filed a claim against Union Properties PJSC at the Judicial Authority at Dubai International Financial Center, saying it breached contracts by failing to deliver apartments on time. Nakheel PJSC, the creator of palm tree-shaped islands off Dubai’s coast, said it’s assessing which projects will be halted.
“There is a growing distrust between developers and customers,” said Chet Riley, a Dubai-based analyst at Nomura Holdings Inc. “Customers don’t want to pay because they can’t see the development being completed and developers can’t continue building because customers are not paying.”
Disputes between buyers and builders are eroding confidence and discouraging new investors needed to spark a recovery, Riley said. Dubai and its state-controlled companies amassed $109 billion in debt to turn the Persian Gulf city state into a financial center and tourist destination as oil reserves dwindled. Neighboring emirate Abu Dhabi and the country’s central bank provided $20 billion in financial support in 2009.
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Buyers in Emaar’s 29 Boulevard were notified of the two-year construction delay in February, just before the original completion date for the two 45-story towers. Most have paid 30 per cent to 65 per cent of the purchase price, according to Mehdi Nosratlu, who heads a group of investors negotiating with Emaar. The site remains a walled-off hole in the ground with idle cranes hovering above.
Emaar, among the first companies to allow buyers to swap for different units, said in a March 18 statement that it’s offering customers flexible payments on an individual basis and has informed buyers about negotiations with contractors to lower construction costs. It didn’t respond to a further request for comment. Nakheel said it’s offering alternative properties and new financing terms to investors in stalled projects. Union Properties said in a March 29 statement that it isn’t in breach of any contracts.
Dubai real estate prices were rising at the fastest rate in the world in 2008, allowing investors to profit by buying and re-selling properties — often before a single brick was laid. Customers stood in long lines to sign contracts for the yet-to- be-built houses and apartments that accounted for about 90 per cent of the market, according to Elaine Jones, chief executive officer of Dubai-based property manager Asteco.
At the time, real estate, business services and construction accounted for 24 per cent of the Dubai’s nominal gross domestic product, according to government statistics. If building materials and financing are included, the figure was about 40 per cent, said Nabil Ahmed, a Deutsche Bank AG analyst.
The credit crisis put an end to all that. Emaar’s profit fell to 327 million dirhams ($89 million) last year from 6.58 billion dirhams in 2007, as revenue declined by more than half and the value of its properties fell. Nakheel, owned by state holding company Dubai World, has struggled with 73.3 billion dirhams of liabilities, including term loans of 16.3 billion dirhams, according to its first-half financial report.
Emaar shares are down 63 per cent in the past two years. They have gained 5.2 per cent this year to 4.06 dirhams.
Buyers soon found they had little power to recover their investments when work stalled or force developers to finish projects or offer alternatives of equal value. While negotiations have resolved some of the disputes, customers who aren’t satisfied with the developer’s offer face a long battle through an untested arbitration process and the courts.
“There have only been a few actual decisions made,” said Ashley Painter, a partner at Dubai-based law firm Clyde & Co. “The property court won’t take on a case unless it’s been through mediation and then the whole thing grinds to a halt.”
Most of the laws and regulatory bodies dealing with real estate contracts have only been created in the past two or three years and haven’t been able to cope with the sudden flood of disputes, lawyers and property buyers say.
The Real Estate Regulatory Agency, or RERA, was set up in 2007 to license and govern the market. A real estate court was also created to rule on disputes that aren’t resolved by the Dubai Land Department’s mediation center. RERA put in place laws that tie customers’ payments to the progress in construction.
“Gradually, Dubai has been passing its real estate laws and regulations,” said Lisa Dale, a partner in the Dubai-based law firm Al Tamimi & Co. “However, further resources need to be dedicated to implementing these laws fully and evenly everywhere.”
Turrin, a 32-year-old property consultant, has been paying for a two-bedroom apartment on the fourth floor of Tower 1 at 29 Boulevard since 2007. She said Emaar offered her a 5 per cent discount in return for signing a new contract with a later completion date or an alternative apartment in the Loft or Burj Khalifa, the world’s tallest skyscraper, at double the price.
Obtaining a document from RERA supporting her right to withhold additional payments to Emaar didn’t stop the company from charging her 14,623 dirhams in late fees, Turrin said.
“We can enforce linking payment to the progress of construction, but only the Real Estate court can cancel contracts,” RERA Chief Executive Marwan Bin Ghalita said. “Why did investors pay up to 65 per cent before any construction was done? The law has been out there for two years.”
Investors hurt themselves by signing contracts that were ambiguous and usually favored the developer, Clyde & Co’s Painter said. Some didn’t even include completion dates and others failed to define the buyer’s rights if a project should stall.
“Two years ago, many of those same customers were throwing checks over the rails at developers,” said Nomura’s Riley. “In effect, there was no paperwork or anything. A lot of buyers who decided to enter the market had no intention, capacity or capability to complete on the purchase.”
Wherever the fault lies, Dubai’s government can’t afford to leave the conflicts unresolved if it wants to restore confidence and bring investors back into the real estate market, he said.
Dubai pledged to take direct control of Nakheel last month, providing $8 billion in cash and saying it will help buyers of stalled projects to swap their properties for units in developments nearing completion or receive credit for money already paid. It may also offer revised payment plans.
“There is pressure from the government to improve service and treat investors fairly because Dubai needs them for the long term,” said Majed Azzam, an analyst at Al-Futtaim HC Securities in Dubai.
Nakheel had to make a deal with buyers or face “massive defaults,” said Saud Masud, head of Middle Eastern research at UBS AG in Dubai. Buyers may not get units without additional cost and will still have to deal with negative equity, falling prices and maintenance expenses, he said.
“Nakheel will continue to assist customers in longer-term projects in their consolidation or swapping process to find an alternative investment in an active development if they so choose,” the company said in a statement on April 8.
New buyers in Dubai won’t be forced to choose between unfinished developments because companies built more properties than they could sell in the last several years. Off-plan sales accounted for the majority of transactions after the property market was opened to foreigners in 2002, Asteco CEO Jones said.
Today, off-plan buying is “effectively dead” and isn’t likely to be revived anytime soon, Riley said.
After finding that they own unfinished properties that are worth less than they owe on mortgages, many buyers just want to get out, RERA’s Bin Ghalita said. While the regulator can protect buyers’ rights, “people have to take responsibility for their investment decisions,” he said.