Tuesday, January 25

Saving the Dubai Property Market – The Rise of RERA

Saving the Dubai Property Market – The Rise of RERA

The small Emirate of Dubai, part of the federation of seven States called the United Arab Emirates, has seen an unprecedented boom over the last 10 years in its property market. What sparked this surge were new laws allowing expatriates to own property in certain areas and developments. What almost killed it was a lack of regulation in the market.

In any booming economy, especially one as relatively immature as Dubai, there will always be cracks and gaps in laws and Government ministries. The gaps in the property laws though were major: prior to RERA’s introduction there was no standard sales agreement, no training required to be a property broker and no authority over-seeing the property industry. Considering how important the property industry has been, and continues to be, to Dubai’s growth, regulation in this sector was paramount.

To understand why confidence was deteriorating, and  advocates in dubai  why RERA’s impact is continuing to be so large, it is important to understand the process of purchasing a property in Dubai.

To sell or purchase a house an agreement, called either a Sales Agreement or MoU (Memorandum of Understanding) would be signed by the buyer and seller. In most cases the MoU would be drawn up by one of the brokers and could be anything from 2 paragraphs to a 20-page document. There was no standard form and no standard clauses and no legal requirement for a lawyer to help out or oversee the process. The brokers had no government-mandated training and no documentation to show they were authorised brokers (in fact there was no system to certify a broker). An individual could join a company on Sunday and be selling on Monday with no knowledge of the market or how a real estate transaction works. This is scary stuff considering that for most people their house is their single largest investment.

A deposit would be paid by the buyer to the seller, normally 5%-10% of the value of the property, as a commitment by the buyer to purchase the property. The seller made no reciprocal commitment other than a clause in most MoU’s that stated they would pay back the deposit, plus a further penalty, should they pull out of the deal. In most cases the buyer would lose his deposit, or a substantial portion of it, if he pulled out of the deal.

Once the MoU was signed there would normally be a 4-8 week wait while financial documents and other paraphernalia were arranged. After that both parties would go down to the developers’ office to affect the transfer. The buyer would pay a transfer fee to the developer, normally 2%,, and in most cases a 2% agent’s fee to the agent, and the property would be transferred.

It doesn’t take long to see the issues in this arrangement – how does a buyer get his deposit back if the seller pulls out? What if an agent doesn’t know what they’re doing, or they “pull a fast one” on an unsuspecting buyer or seller? Who do you complain to, or ask to investigate, if something goes wrong?

The answer to all these questions was the introduction of the Real Estate Regulatory Agency, otherwise known as RERA.

RERA was essentially created with the introduction of Dubai By-Law #85 of 2006. Its function is to serve as a regulatory authority for the real estate sector in Dubai. RERA’s mandate includes many diverse requirements, including:

– Certifying agencies, agents and developers
– Arbitrating disputes between parties
– Recommending new property laws to the Government
– Setting up processes and documentation for standardised procedures related to property
– Providing information and statistics on the Dubai property market to both the Government and the public
– Tracking and authenticating real estate agreements, including rental agreements

In short then it’s RERA’s purpose to professionalise the Dubai property market. So how is it doing this?

RERA has engineered several changes to the Dubai property market:

– Ensured that all companies involved in real estate were registered with the Land Department.
– Ensured that all developers used escrow accounts to hold clients’ monies.
– Introduced training and certification of both real estate agents and agencies. This ensures that an agent with a broker’s card knows about Dubai property law and how to perform a transfer. It also ensures the agent knows how to use RERA’s specific forms.
– Introduced standard forms for sellers (Form A), buyers (Form B) and the sales agreement (Form F). It has also introduced several other forms to handle common processes.
– Changed how agents and agencies work. We’ll go into this in more details in the next few paragraphs as it deserves significant attention.
– Introduced accreditation of developers
– Stopped developers charging a transfer fee. In most cases this was 2%, and it is now illegal for a developer to charge this, in fact it is only legal for the Dubai Land Department to charge a transfer fee. However it must be stated that many developers will change this to an “administration” fee to ensure they can continue to charge.

The work that RERA has done to professionalise the way in which agents and agencies work has been considerable. In order to sell your property, the agent needs to have a signed Form A from you and has to present this at the transfer otherwise the transfer will not go through. In addition, if an agent is acting on the behalf of a buyer he needs to have a signed Form B. Again the transfer will not be processed if this is not presented. The Form F – the agreement to sell/buy between the two parties – must also be signed and presented at transfer. Finally the agent must have a broker’s card from RERA – without this they cannot sign the RERA forms nor can they perform the transfer.

Another interesting change has been in the area of remuneration. Previously the agent’s fee was generally 2%, and on a transaction where 2 or more agents were involved that fee would be split between the agents. With the new RERA system each agent works on behalf of their party (either seller of buyer) and can charge them individually, rather than a single charge made to the buyer. This is to ensure the broker works solely for their own client (seller or buyer). The amount charged to the buyer or seller can vary, however it is generally in the 2% range to each party.

Under the RERA system buyer deposits are also now held by the real estate agency as opposed to the seller. This is significantly safer than the old system where the seller held the deposit. However it is still not perfect and many real estate agencies are hoping RERA will introduce trust accounts for agencies to use. This will again help to bring confidence in the real estate market to a higher level, and many estate agencies recognise confidence is a key factor in maintaining Dubai’s buoyant market.

Finally, on the agent side of RERA’s activities, should an agent, or agency, either miss-handle a transaction or quite simply do something that is illegal or unethical a complaint can be brought to RERA. If the complaint is upheld there are various actions RERA can take, from adding a black mark against the agent/agency’s name to cancelling the agent/agency’s license, thereby stopping them from doing business altogether.

It is worth noting that at the time of writing many of RERA’s new processes and procedures are still voluntary and are not mandatory. Many of them were to become mandatory on June 1st, 2008; however this date was delayed until later in 2008. Again, at the time or writing, only approximately 30% of the agents in Dubai are RERA-certified, further enhancing the possibility that mandatory usage of RERA’s processes and procedures is further delayed, perhaps as far back as 2009. In some areas this has caused significant disruption and confusion in the market, both at the developer/agency/agent level and at the buyer/seller level. This kind of upheaval in expected though as RERA introduces its policies and modifies them according to reality, with the end result of a professional real estate market in Dubai outweighing the short-term pain in achieving that goal.

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