Dubai Real Estate: Beset by Scandals and Uncertainty

Amid fears of an overheating real estate market in Dubai, a chain of legal and management scandals involving property firms threaten to shake investor confidence and ruin the …

Amid fears of an overheating real estate market in Dubai, a chain of legal and management scandals involving property firms threaten to shake investor confidence and ruin the city state’s stellar business reputation.

In a bid to root out corruption and create a better, more transparent corporate governance standard, Dubai’s public prosecutor office has opened a series of investigations into several property and finance companies. This renewed focus on corruption has ensnarled some of Dubai’s well known known brands and resulted in the questioning and arrests of a number of high profile business individuals who are suspected of using their position to make illegal profits.

Unhappy investors have filed lawsuits against real estate companies while others have had to threaten legal action to resolve their grievances. In some cases, Dubai’s real estate regulatory authority had to get involved to mediate disputes between investors and developers.

At the beginning of this year, a Wisconsin based real estate company, Capital Partners, filed a $1 billion suit against Dubai’s Tecom Investments alleging that the company sold it land it didn’t own and then unfairly cancelled its contract while in a middle of a dispute arising from ownership issues, according to The Financial Times (U.K).  Capital Partners was planning a $1 billion mixed-use project that included apartments, hotels, and office space. The land that is the subject of the suit is a protected archaeological site allegedly owned by Dubai’s tourism department, according to Arabian Business.

In March reports came out that Damac Properties was canceling its Palm Spring project on the Palm Jebil Ali, Dubai’s famous manmade palm-shaped island, according to Arabian Business. The cancellation prompted upset investors to threaten legal action against the company, which is a subsidiary of Damac Holding, the largest private property developer in Dubai. Although Damac offered to return their money with interest, investors were deeply unhappy and argued the compensation was inadequate because it didn’t take into consideration current market values. With pressure mounting on Damac from both investors and Dubai’s real estate regulatory authority, the project was later reinstated. The 25-story Palm Spring project, scheduled to be finished at the end of 2007, is now back on but its investors remain skeptical.

In April, the CEO of the publicly traded Deyaar, the second largest real estate developer, was arrested for allegedly embezzling $33 million, according to Arabian Business. He has since resigned, along with some board members of the company. Later in the month, a second executive from the company was also arrested.

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In August, the Emirate’s police announced that a former CEO of Tamweel, Dubai’s large Islamic mortgage company, and vice chairman were under investigation for financial fraud allegedly committed at the mortgage company, according to Gulf News. In the wake of the announcement, Tamweel’s shares tumbled by 9.8 percent and the Dubai Financial Market index went down by 0.57 percent. Alarmed by its losses and in a bid to reassure its shareholders, Tamweel had to release a statement clarifying that the company itself isn’t under investigation.

Later in the month, four executives were arrested on bribery charges at the state owned real estate company Sama Dubai, according to Gulf Times. Nakheel, another state-owned property company, also confirmed that two people associated with the company are being questioned by the police.

Further, it was revealed that the progress of the $800 million project, Dubai Lagoon by Schon Properties, will be monitored by the Dubai Real Estate Regulatory Authority, according to The National (Abu Dhabi). The project has been suffering from repeated delays since the its launch in 2005 and its investors have become deeply unhappy with the way the company handled their concerns and their requests for refunds.

The Dubai real estate market

In 2002, Dubai was the first among Arab Gulf countries to permit real estate ownership by non-citizens, according to The Wall Street Journal. Real estate transactions rose to $125.8 billion in 2007, a 12-fold increase in value since 2002. This figure is expected to shoot up to an estimated $195.5 billion in 2008.

Dubai’s real estate regulatory authority (RERA) is looking into measures against the rampant practice of flipping that has distorted the property market in the city-state, according to Khaleej Times. However, suggestions of implementing a stiff capital gains tax on investors who sell newly built properties within a year of acquiring them to stave off short term investors were turned down by RERA.

In the meantime, some property companies are taking their own measures against market speculation. Emaar and Nakheel, two of the biggest property companies in Dubai, for example, have moved to limit off-plan sales, according to the Financial Times (U.K). With mortgage financing available with a downpayment of only 5 percent, buying off-plan properties has been popular among short-term investors.

The real estate sector in Dubai is largely controlled by three big property companies and their multitude of subsidiaries that are “directly or indirectly government owned,” according to an August Morgan Stanley report on the Middle East North Africa property market.  The report warned that, while long term market prospects looked good, 2009 may bring some negative news for investors. Risks facing the real estate market include falling investor confidence, the possibility of oversupply, and a price correction against sharp rises fed by a speculative market. From 2008 to 2010, the report predicted price increases of 25 percent in Abu Dhabi and 15 percent in Qatar and a 10 percent decline in Dubai.

Some disagree with the Morgan Stanley’s prediction, according to The Financial Times (U.K). HSBC, for example, said population growth and construction delays will keep demand higher than supply until 2011. In addition, one Dubai factor that cannot be anticipated is how the government or the ruling families would react in a case of industry troubles. Since many of the known developers are state or royal owned, those in charge can act at any given point and take measures against market threats and rescue the sector, which made up approximately 30 percent of the city state’s GDP in 2007.

“Let us not forget that Dubai’s Government has been the most proactive developer in the emirate and its recent legislation and regulatory initiatives suggest this support is not only likely to continue but will respond appropriately to any adverse market developments,” Peter Cooper wrote in his op-ed for Business 24/7, the United Arab Emirate’s English-language business publication.

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