'Transparency' is Hot Topic at Dubai Real Estate Industry Function

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(DUBAI, UAE) -- About 80 members of the real estate industry attended a Cityscape Connect breakfast this morning in Dubai to discuss the impact and implications of legislative changes on the local real estate industry. What they kept coming back to was the need for greater transparency. With moderator Blair Hagkull, Chairman of Jones Lang LaSalle (JLL) MENA, in charge, the four-member panel focused on escrow, owners' associations, and valuation as some keys to bringing transparency into every aspect of real estate.

Hagkul cited the importance of investor "sentiment" as an important benchmark "in the absence of transactions." Jones Lang LaSalle's fourth survey of investor sentiment released in April found that 33 percent of regional investors consider legislation the most important factor in investment while 22 percent put risk as most important.

Investors look for transparency in risk assessment and overall management. Tenants look for transparency of information so that they can compare housing and office costs and have more options. Hagkull pointed out that while transparency is typical of a mature market, Dubai has slid back from where it was in 2008 as the world market most improved in transparency.

The Global Transparency Index released a month ago found that now Dubai ranks with the semi-transparent including the BRIC countries, Brazil, Russia, India, and China. On the other hand, Abu Dhabi leads the MENA region as the most transparent, accompanied by Bahrain and Jordan. Saudi Arabia and Egypt, the two biggest countries in the region, have low transparency which impedes their development. Pakistan and Kuwait are "opaque markets" with little transparency of rules and regulations in real estate.

Panelist Michael Lunjevich, partner, head of commercial and real estate, Hadef & Partners, called the Escrow Law of 2007 "the first major step toward regulating the market," specifically the sale of off-plan properties. But although the law helped clean up real estate advertising and promotion in exhibitions like Cityscape, it relied too much on self-regulation which hasn't always worked, he said.

Lunjevich mentioned a developer who collected nearly $82 million from buyers, most of which went into marketing, advertising, and other promotion. Only $245,000 went to actual construction. Such behavior by developers was only too typical during the go-go years. The Escrow Law was intended to subject developers to financial controls and encourage "sustainable planning."

Among the problems not solved by existing legislation, Lunjevich pointed out, is the discovery process. Whereas in more open legal systems, opponents must share documents, here requests for documents have to be made in court, creating a slow and expensive process for plaintiffs. Other problems are insufficient fines which don't act as a deterrent and the absence of small claims court.

The Law on Jointly-Owned Property which makes owners' associations possible also goes back to 2007 but the enabling rules came into effect only recently. Kent O'Brien, CEO-Managing Director of Strata Global, said developers have 30 days to register the owners' association for their project and claimed that "consumer protection is stringent," more so than in Australia, New Zealand, and Canada, for example.

However, a basic problem in the market, according to O'Brien, is that most people believe the fees that developers collect as service charges go into developers' pockets rather than to pay for services, a result of lack of transparency.  He said the law discusses dispute resolution between developers and owners in three paragraphs that do not explain how it is to work.

The law calls for the Real Estate Regulatory Agency (RERA) in Dubai to manage escrow accounts from developers; requires centralized tenders for services providers; and provides penalties. "Lack of planning" by developers, O'Brien said, means that it will take most of them 4-6 months "to establish relations with owners' associations."

The biggest problem for owners' associations lies in mixed use projects. Having residential, commercial, and retail operations all under one owners' association is "a recipe for disaster," O'Brien said. His panel colleague Jeremy  Oates, General Manager, MPM Properties, agreed. The Emirates Towers complex which includes a hotel tower, an office tower, and retail on several levels, works because it has a single owner, Oates explained, but the interests of someone who owns an apartment, someone who owns an office, and someone who owns retail space in the same complex can be quite different. 

The Burj Khalifa, which Oates used as an example, will have many owners of apartments, office suites, and the Armani Hotel and Armani Residences. How can they manage to agree on the level of service to be maintained? These questions will have to be resolved, but as the fourth panel member, Jim Drysdale, Director MENA, Royal Institute of Chartered Surveyors (RICS), emphasized, education is one of the keys in the market, education in valuation of property and education in responsibilities of developers and owners.

Service fees are an element of valuation, and they affect sales. Several years ago, when the Dubai real estate market was wild and woolly, the number 7 AED which is less than $2 was taken as the generic service fee per square foot. Today, that number makes no sense. According to O'Brien, service fees can vary from $3.27/sq.ft for commercial space; $4.90/sq.ft for apartments; $8.72/sq.ft for Kempinski Residences on Palm Jumeirah; to $19/sq.ft in Armani Residences in the Burj Khalifa.

Huge variations in service fees plus "unfunded liabilities" for 4-5 year old buildings that will soon need major upgrading of infrastructure in the harsh Gulf climate mean that owners' associations may face major problems.  Normally, O'Brien recommends, 10-15 percent of gross collectibles should go into a fund for future capital repairs. That isn't happening with most developers and the owners' associations still being formed will have to deal with the shortfall and/or sue developers.

The next two years will demand increasing transparency in all aspects of real estate as the players learn their new roles. It will take time, and all of this adds up, Hagkull said, to a market that "used to be about returns" now refocused on long term investment, something considered normal for real estate in developed markets, but new for Dubai and the UAE.

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