Delayed projects axed, buyer cash at risk

DUBAI - Many real estate projects claimed to be on hold due to the collapse of the UAE’s property market have actually been cancelled, but developers do not want to admit this because then they will have to return investors’ money, industry observers say.

Observers also question some developers’ ability to repay investors when projects are finally cancelled, with the prospect of buyers losing millions of dollars.

“In the 18 months before the downturn a number of projects were announced that were not financially viable and therefore unlikely to see completion,” said Tahir Akhtar, chairman of Dubai Business Advisors, who has invested in projects across the UAE.

“Developers do not want to admit this because then they will have to return the funds.”

Billions of dollars worth of developments were launched during the UAE’s real estate boom, which had seen property prices close to double by mid-2008 from the start of 2007.

The boom was driven by speculation and easy credit, with developers funding the construction of projects through off-plan sales.

When the global financial crisis gripped the country’s real estate market prices plummeted as financing and demand dried up, leaving developers unable to fund construction.

UNDER REVIEW

Many developers have put projects on hold or have said they are reviewing projects, but few have come out and outright cancelled projects.

“If they (developers) say it’s cancelled they will have to repay the money to clients. Probably for that reason they are saying it is still on hold,” said Charles Neil, CEO of property consulting firm Landmark Advisory.

Michael Shvo, a well-known luxury real estate marketer from New York, said a developer told him privately a project that is “officially” delayed is actually cancelled, declining to name the developer.
 
“A developer told me that officially the project is on hold, but it is actually cancelled,” Shvo told a conference at Cityscape Dubai earlier this month, prompting him to call for greater transparency.

The number of real estate projects cancelled or on hold stood at around $408 billion in September, up 18 percent from $346 billion in April, according to the Kuwait Financial Centre.

The Centre, also known as Markaz, said it expects cancellations to rise further in Dubai due to the continued lack of financing and uncertain economic outlook.

UAE real estate regulations vary from emirate to emirate, but currently there are no laws governing how long a project can be on hold before a developer must refund investors’ money.

In Dubai, the UAE’s most developed real estate market, authorities are in the process assessing which projects are unviable and should be cancelled, with the findings due out before the end of the year, according to the Real Estate Regulatory Agency (RERA)

Developers are not allowed to cancel projects in Dubai without the approval of RERA and the Dubai Land Department, RERA said, adding that if a developer does get approval to cancel a project it would have to reimburse investors.  

“It will vary from project to project as which ones will go ahead. Some will end up with half-completed buildings and some may not start (at all),” Landmark’s Neil said.

INVESTOR CONCERN

Investors have become increasingly vocal in voicing their concerns about delayed projects, calling on developers to transfer their investment to another project or refund their money.

Larger companies such as Emaar Properties and Nakheel have set up schemes that allow buyers to swap their investments between projects, but smaller developers lack the project portfolio to offer an alternative, analysts say, leaving investors at risk of losing their money.

Dubai Business Advisors’ Akhtar said a group of investors he belonged to stood to lose around 150 million dirhams ($40.8 million) from projects in the UAE emirate of Ajman that now look like they may not go ahead.

“Not a lot has been done to protect investors," he said.

Dubai brought an escrow account law into force in mid-2007 in an effort to better protect investors - requiring developers to hold buyers’ money in a special bank account until the completion of a project - but many projects had been launched prior to the law, and other emirates were even later in introducing similar regulations.

“Most projects that fall under the escrow provisions of RERA have an established level of comfort and protection. Those projects that are not covered by escrow are a different situation,” said Blair Hagkull, regional managing director of Jones Lang LaSalle.