Persian Gulf Real Estate Investment
April 17, 2008
Farhad Alavi - Washington
The Persian Gulf region is currently witnessing a construction boom that is unparalleled anywhere else in the world. Many jurisdictions, such as those of the United Arab Emirates (UAE), Qatar and Bahrain, are attracting massive investment and development in many sectors. This development will ultimately transform the region beyond the energy hub it is today to a center for international financial services, investment, transportation and other industries.
As the region has been opening up its markets to investment, locals and foreigners have been rushing to claim their share in these booming economies. The focal point of development in the Persian Gulf is currently the UAE, where most notably Dubai and Abu Dhabi are witnessing construction and development on a mammoth scale. Due to regulatory reforms, foreigners can now seek their fortune in local property markets.
The UAE is a federation of the seven emirates of Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah and Umm al Qaywayn. The union was formed in 1971-1972. While together they form one country, the emirates, like the states in the U.S., have their own laws within the framework of a federal system.
Why Dubai?
The emirate of Dubai remains the most high profile of all Persian Gulf jurisdictions. A metropolis rising out of the Arabian Desert, Dubai is quickly emerging as a major international business hub serving regions far beyond the Persian Gulf region. Not being as oil rich as some of its neighboring emirates, Dubai has continually undertaken ambitious plans to diversify its economy. Today, oil comprises roughly 6 percent of Dubai’s income.
Dubai offers potential investors a host of benefits, the most important being its strategic location and business investment-friendly environment. It is a major air and sea hub and is politically stable, known for its pro-business legal and business environment. As such, Dubai has traditionally been a haven for regional investors and now increasingly for Americans and Europeans.
Dubai’s Current Real Estate Market
Dubai’s construction boom is unmatched internationally, as a simple trip to areas such as the Dubai Marina will indicate, where tens of construction cranes and new highrises dot the landscape. In addition to some of the better-known recent and current projects, such as Burj Dubai which will be the world’s tallest building, the man-made Palm Islands and the 100-plus acre Dubai International Financial Centre (DIFC), numerous other large-scale commercial, tourism, residential and other projects are currently under development. Examples include the Badawi tourism complex which will ultimately contain 60,000 hotel rooms and 40 million square feet of retail space, and the mixed-use Dubai Waterfront development.
Commercial occupancy in Dubai is high and there are often waiting periods for those seeking to take delivery of purchased space. Some office rents in the city have skyrocketed to above AED 500 (USD $136) per square foot per year in popular areas such as Dubai’s main thoroughfare, Sheikh Zayed Road, as well as in the DIFC, although it should be noted that many purchase their office space in Dubai. Residential rental rates have also increased dramatically.
In response, landlords face a government-mandated 5 percent rent cap for 2008, though some have found ways to circumvent this. Importantly, Dubai recently enacted a new tenancy law, which became effective on February 29, 2008. This law requires the registration of tenancy contracts with the Dubai Real Estate Regulatory Agency (RERA), and aims to clarify sometimes vague tenant rights.
Nationals of the UAE and other Gulf Cooperation Council (GCC) states (Kuwait, Bahrain, Qatar, Oman and Saudi Arabia) can own any real property in Dubai, and, since 2002, non-GCC citizens have been allowed to own freehold property in certain designated parts of the emirate.
Pursuant to Article 4 of Law No. 7/2006 Concerning Land Registration in the Emirate of Dubai, non-GCC citizens can, subject to the decree of the Ruler of Dubai, either purchase freehold property in certain designated parts of Dubai or acquire the right of “usufruct” or leasehold of land up to 99 years. In such areas, title can be held by a foreign individual or legal person. Areas designated for non-GCC citizen freehold transactions are now becoming choice areas for development.
Whether looking to purchase or develop a commercial high-rise, office space, hotel, destination resort, vacation villa, or even rental residential property, sophisticated internationally-focused businesses and investors have many reasons to invest in Dubai’s thriving real estate market but must also address several issues that will typically arise.
Finding a Location or Property
Navigating the maze of Dubai and federal UAE law – and finding suitable property – can be frustrating and difficult, as the process is wrought with ambiguities and intricacies. Due to the geographic limitations on where non-GCC citizens can purchase property in Dubai, it is important that buyers first determine where they can directly invest. It is essential that investors find reputable and knowledgeable professionals to help them find property. A problem often encountered in Dubai is unreliable or inconsistent information from certain real estate agencies and brokers.
Investors should exercise particular caution and do their homework with regards to any investment opportunity presented to them, particularly projects which have not yet been built, so-called “off plan” projects. In June 2007, the Dubai government issued a new escrow law which affects such transactions in areas such as preconstruction sales and even marketing. Under the new law, developers must be registered with the Dubai Department of Lands and Properties before they can advertise developments in local and foreign media. The government has also issued model ethics laws for real estate professionals as well as an index of rental rates to help buyers and renters navigate the waters of the local market.
Legal Counsel and Choosing the Right Investment Vehicle
Investment in Dubai is attractive but not risk free, as its real estate regulatory regime has numerous, relatively unique intricacies. The newness of foreign freehold ownership in Dubai presents challenges to investors accustomed to property laws that are more established. For example, policies on land registration and eminent domain are vague and confusing. One concern perhaps unique to the Persian Gulf is that in some cases property that may be marketed as waterfront may after some time no longer be waterfront due to significant land dredging, as seen in the Dubai Palm Islands. In addition, the applicable regulatory frameworks can vary within Dubai. For example, the DIFC, a financial district popular among U.S. and European companies and home to the Dubai International Financial Exchange (DIFX), has its own real property law.
Activities related to property development also must be analyzed from a legal perspective. Aside from regulations for acquiring property, issues such as construction and importing materials are strictly regulated in Dubai. For example, the purchase of land does not necessarily enable the owner to develop the facility itself absent certain permits and licensing.
Although owning property in Dubai does not require a business or trade license, engaging in activities such as construction, leasing and renting does require certain licenses.
Tax planning is also a key concern when considering real estate investment in Dubai, as the investment vehicle can bear numerous tax considerations for the investor back home. Additionally, activities such as flipping, which is commonplace in Dubai’s real estate market, must be analyzed from a U.S. tax perspective. Individual investors will also need to review estate planning and inheritance issues with local and U.S. counsel.
Financing
The number of institutions providing real estate financing in Dubai has increased over the years, though the market is not yet as sophisticated as those of the U.S. and Europe. Financing is available to foreign investors through a vast network of sources such as local and foreign banks. Many top U.S. and other international financial institutions have operations in the Persian Gulf. Typically, banks can also provide Sharia-compliant Islamic financing schemes in line with Islamic customs prohibiting interest yet still ensuring a return.
Lastly, non-GCC citizens will typically need to submit a number of documents and materials, which may vary depending on the circumstances, ranging from corporate consents to passport copies and powers of attorney. These documents can be collected in the United States and authenticated by the UAE Embassy in Washington, D.C., and handled by local counsel and other contacts, which in turn can provide for local administrative coordination, such as the local authentication of legalized documents.
Other Persian Gulf Jurisdictions
While a large percentage of construction activities is taking place in Dubai, other parts of the Persian Gulf are booming as well. An example of the development boom beyond Dubai is Abu Dhabi, the capital of the UAE, which is undertaking ambitious development plans, such as Saadiyat Island, a long-term project which will ultimately contain commercial space, housing for 170,000 people, as well as museums, including the Louvre Abu Dhabi and the Frank Gehry-designed Guggenheim Abu Dhabi. Abu Dhabi’s laws permit foreigners to enter into leaseholds in certain designated areas and own property, although they cannot own the underlying land. However, it has been speculated that the laws may be relaxed in the future to more closely resemble those of Dubai.
Within the UAE, less-developed emirates such as Ras Al Khaimah are starting to attract investors. Beyond the UAE, Qatar has in recent years pursued an aggressive development agenda, including the Qatar Financial Centre, which seeks to establish itself as a regional base for international business, and the Pearl, a large-scale multi-use development on reclaimed land, which is open for foreign freehold ownership. Other significant developments are also taking place in Bahrain and Oman.
Real Growth or a Speculative Bubble?
This growth frenzy has brought with it some skepticism towards the region and particularly the growth of Dubai and Abu Dhabi, with some considering the rush a short-term bubble. However, due to the massive scale of wealth in the region, fueled in large part by high oil prices, the general impression is that the development of Dubai and the greater Persian Gulf is largely equity rather than debt funded. Increases in prices and the volume of construction are not just fueled by speculation. While some may be quick to write off the development in the Gulf as a speculative boom, many factors, such as the development of tourism, as well as other activities such as finance, shipping, media and even academia (Persian Gulf states are increasingly becoming home to satellite campuses of western universities), indicate that demand is driven not just by speculators seeking overnight profits, but also by investors with an eye to the long term.
As the Persian Gulf states continue to establish themselves as stable, comparatively liberal and transparent oases in a region known for general instability, bureaucracy and closed business environments, it seems highly likely that demand for investment and development in jurisdictions such as Dubai, Abu Dhabi and Qatar will only increase.
Conclusion
The Persian Gulf offers potential for internationally-oriented investors seeking promising economic opportunities in real estate. However, as is the case with many other foreign jurisdictions, investing in the Persian Gulf region is not without its challenges and risks. Investors should exercise caution and seek professional advice as they look for new opportunities in this promising yet still developing investment destination.
For more information, email Farhad R. Alavi at farhad.alavi@hklaw.com or call toll free, 1.888.688.8500.