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Dubai: Greater institutional investment in Dubai real estate could be on the cards after the government issued a law safeguarding property buyers' payments, say developers and analysts.
Under Law Number (8), which was published in the Official Gazette this week, installment payments for off plan property will be paid into guarantee accounts (also known as trust or escrow accounts) that are authorised by Dubai Land Department with an approved bank. The capital in the account will only be released to the developer once certain construction milestones are met.
Before the law, developers' use of buyers's money was unregulated.
As a result, institutional investors such as banks, fund managers and insurance companies will be more inclined to invest big sums into Dubai's real estate, said Tom O'Grady, real estate partner at the Dubai office of global legal services organisation DLA Piper.
"We've already seen an increase in the number of institutions entering the market, which indicates that confidence is growing. For Dubai this is another step in the right direction," he said.
The law could potentially alter the overall profile of investors in Dubai real estate, added Mehdi Amjad, president and CEO of Omniyat Holdings and property developer Omniyat Properties, which is working with HSBC to set up trust accounts for its developments.
"The real estate sector will see a new wave of overseas investors who have a completely different demographic profile than those who have been investing since Dubai opened up the property market to foreigners," he said.
Amjad said institutional investors were reluctant to invest in off-plan developments because of the lack of measures to protect their investments.
"The new law gives them the security they have always required," he said.
Despite the fact that trust accounts will restrict developers' access to off play payments, leading to potential cash flow problems, most have spoken in favour of the law.
"Such legislation is needed to protect both the consumer and legitimate developers.
"It can only help the real estate industry and will have a positive impact on the economy of Dubai," said Sanjeet Joher, group chief operating officer of KM Holding, parent company of KM Properties.
A key article in the law says a percentage of the project value must be retained in the guarantee account for one year after all units are registered. This will also boost investor confidence, said O'Grady.
"This ensures that end users can be confident in the quality of their property or their ability to make the developer rectify any structural problems," he said.
With trust accounts now established, analysts say a Strata (Condominium) Law, which clarifies owner/occupier responsibility for commonhold land, must be passed. The Land Department said the law is awaiting approval by Dubai Government.
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