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Chapter 2
Trowers & Hamlins
Middle East Real Estate -
A Comparative Review
Introduction
Whilst recent developments in property laws in the Middle East
have been overshadowed by the effects of the global financial crisis
on the regional real estate market (especially in Dubai), it is still
useful to consider the steps that have been taken over the last year
or so to take the market forward and increase its attractiveness to
investors. This chapter takes a tour of various countries within the
region and extracts recent developments of note.
The countries within the GCC (as compared to the remainder of the
Middle East) remain the most active in developing their real estate
framework, with some taking several strides ahead of others. For
example, there is now a considerable dichotomy between property
law regimes in place in countries such as Dubai and Bahrain when
compared to the likes of Saudi Arabia and Kuwait. It will be
interesting to see the extent to which the tremendous effects of the
financial crisis trigger a response from Governments of GCC
countries to push forward plans for bolstering their regulatory
frameworks in the context of property, and whether they will take
this opportunity to heed the lessons coming out of the fall-out from
the crisis in places such as Dubai.
In hindsight, it is probably fair to say that some of the more
impressive steps taken by the Dubai Government to deal with
various holes within the property law system came a little too late
to fend off the crisis that had developed for all to see. Nevertheless,
once the market stabilises, these changes that have been made over
the last year will surely have a positive effect on the property
market. Our chapter on Dubai highlights the considerable strides
that have been made there to produce a system, which, on paper at
least, is now the most sophisticated of all regional property lawregimes.
Abu Dhabi
Abu Dhabi is keen to establish itself as a centre for real estate
investment within the region. Until now, it appears to have adopted
a wait and see policy and in recent years, Abu Dhabis property laws
have been more restricted than those of its sister state, Dubai. It
has, however, introduced the concept of designated investment
areas within which more relaxed laws are in place.
Various announcements have recently been made to the effect that
Abu Dhabi intends to introduce sophisticated property laws to
create a firm regulatory framework within which owners and
investors will be protected.
The first stage of Abu Dhabis strategy to overhaul its property
framework was to permit the Executive Council of Abu Dhabi to
allow companies not wholly owned by UAE nationals to own land
outside designated investment areas, to confirm that GCC nationals
can own properties within designated investment areas through
their corporate vehicles and to confirm that foreign nationals who
own leasehold interests within designated investment areas (they
cannot own freehold interests) can own the structures that they
develop on such leasehold land.
Since then, the Government of Abu Dhabi has introduced a general
right for tenants to enjoy a minimum tenure of three years. An
independent tenancy disputes settlement committee has also been
established. There has been a revision to the law on rent caps,
preventing rent increases over 5%. As with all recently introduced
rent cap measures, however, there are considerable difficulties in
implementation and widespread concern about the abuse of
available loopholes.
These are very much the first stages and it is important that these
principles are followed up by detailed implementing regulations to
enable practical effect to be given to these policy moves. There
have been suggestions that the Emirate is likely to establish further
laws dealing with the common ownership of apartment buildings
and the establishment of owners syndicates or associations. The
question is to what extent Abu Dhabi will transplant the laws
developed in Dubai over the last two or three years as opposed to
establishing a different regime entirely.
The chapter on Abu Dhabi by our colleagues Mark Orman and Jane
Dalton goes into more detail about the real estate laws in Abu
Dhabi. Note in particular the reference to various official
announcements which suggest that these might include the
introduction of strata title laws, escrow laws and the establishment
of a real estate regulatory authority.
Bahrain
Bahrain has undergone significant growth over recent years,
particularly in the degree of foreign investment in the country. Real
estate has become an increasingly important element of Bahrains
investment profile and some of the regions most well-known
projects are based on this small island. The law regarding non-
Bahraini property investment and development is quite fluid,
although nothing of immediate note has occurred in the last year or
so. There is undoubtedly a need to establish some more
sophisticated laws to bolster the system as more and more end-user
units come to completion. It should also be noted that Bahrain does
not currently have a system for registering leases and this certainly
limits the options available to developers when they market their
projects, as end-users are unlikely to be interested in - or be able to
obtain finance for - leases that cannot be registered and create no
interest in land.
Peter Greatrex
Abdul-Haq Mohammed
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GCC citizens have always had wide rights, broadly equivalent to
those of Bahraini nationals, to own property in Bahrain. Legislative
Decree No. 2 of 2001 provides that non-Bahrainis (both individuals
and companies) may own built properties and land in the Kingdom
of Bahrain in any manner prescribed by earlier legislation and
subject to conditions prescribed from time to time. The land that is
available for foreign ownership is limited by the Kingdom to certain
areas and is dependent on the intended use of the land by the
proposed buyer. It is worth noting, however, that these areas are
often areas of prime real estate showing considerable economic
growth.
In 2003, Bahrain enacted further legislation to enable foreigners to
own real estate on a freehold basis in areas designated for foreign
ownership. The most recent update to the law was in 2006,
pursuant to Ministerial Edict No. 67 of 2006. This permits the
ownership by foreigners of residential units of certain types
anywhere within the Kingdom. There is also a specific power for
the Government to designate from time to time certain lands for
tourist and investment projects of a special nature. Projects so
designated will then permit unlimited foreign ownership.
Note that if the foreigner is a corporate entity, ownership of built
property and land must either be one of the companys objects or it
must adopt a board resolution approving the ownership of built
property and land in the Kingdom of Bahrain.
Dubai
2008 was the year that the Government of Dubai introduced a raft
of new legislation designed to create a sophisticated and robust real
estate regulatory framework.
Highlights of the new framework include the introduction of a pre-
registration law, which allows for interests in off-plan properties to
be registered on an official land registry. This could grant buyers
significant protection in an otherwise uncertain market, as off-plan
purchases occupied a significant element of the property business in
Dubai.
There is also a mortgage law requiring mortgages to be registered
with the Lands Department and also permitting the registration of
charges over contractual interests as opposed to just legal title.
Again, this is designed to grant protection to buyers and facilitate
property finance during the early stages of an off-plan development.
There is a new landlord and tenant law (introduced in 2007) which
requires all leases to be registered with the new Real Estate
Regulatory Authority (RERA). RERA has also introduced standard
forms that must be used on the secondary market for residential
property. These forms can only be used by licensed real estate
brokers. Part of the aim here is to remove undesirable practises and
provide for more certainty in the residential market. Prior to the
introduction of this Authority, there had been increasing concern
about the activities of unscrupulous brokers and agents operating
within an unregulated environment. A real estate database and
rental index has been introduced providing details for average rents
in various districts which tenants and landlords can use when
agreeing rents. This index is revised on a regular basis and provides
a useful tool for gauging the open market value of properties.
An escrow account law was passed requiring developers to place a
certain portion of monies received from buyers on escrow, to
protect buyers from failures to deliver on projects.
A strata title law has also been introduced which provides for the
common ownership of communal areas and facilities within large
scale developments. Previously, common ownership has really
only been available in apartment blocks. This law, whilst relatively
simple, takes on the principles utilised for commonhold and strata
title community ownership in the United Kingdom, Australia and
elsewhere. Implementing regulations are still awaited and therefore
the effectiveness of the law is somewhat uncertain at present.
Egypt
Egypt has been witnessing strong economic growth in recent time
and there is now an appetite for real estate investment that was not
present a few years back. Various Middle Eastern developers (such
as Dubai developers Emaar and Al Futtaim) have established
Egyptian entities and are in the process of developing projects
comparable to those in the Gulf.
Egypt has always had a well established legal system in theory,
although perhaps some of the practice has left a lot to be desired.
For example, whilst a mortgage financing law has been in place
since 2001, mortgages have never taken off because of the concerns
banks have had about enforcing their security. The critical factor
behind this low uptake is the fact that banks have been unable to use
unregistered properties as collateral. Only 9% of properties in
Egypt are registered and Government land registration fees have
been prohibitively expensive.
In an effort to deal with these significant hurdles, the Government
has established a special office within the real estate registry for
recording property subject to a mortgage. At the same time, a
special division has been established within the Enforcement of
Judgements Department of the Ministry of Justice with the specific
purpose of enforcing foreclosures on properties.
These measures come on the back of recent efforts to cut the costs
associated with the property business. For example, in 2005
registration fees for property purchases were cut from 12% of a
propertys price to 3% and capped at 2,000 Egyptian Pounds.
On the investment side, the Cairo Alexandria Stock Exchange(CASE) has been working to increase investor appetite in the
Egyptian market. A series of Ministerial Decrees have been enacted
to allow the creation of various funds including real estate or realty
funds. These will be tradable on CASE.
Oman
Omani Law contains a concept of integrated tourist complexes,
within which special rules apply allowing for foreign ownership.
From time to time, new projects are accorded integrated tourist
complex status and there has been a push towards allowing for
bespoke regulatory regimes to be allowed within such complexes.
For instance, in 2008 the Wave project was the subject of aMinisterial decision giving the developer the authority to establish
internal rules and regulations for the project. These regulations,
whilst fairly simple by international standards, do set out a series of
principles essential for the regulation of a master planned
development of this kind. They deal with issues such as the
requirement to abide by development wide rules, the obligation to
pay service charges, the right of the developer to enforce sanctions
against owners and occupiers of the project for failure to pay such
service charges and restrictions on disposals if the regulations have
not been adhered to.
There has been a significant amendment to Omans legislation
dealing with leases, with the implementation of the Royal Decree
No. 72 of 2008, which applies to all lease arrangements (whether
residential, commercial or otherwise). There are some important
provisions within this Decree including a cap on rent increases of
7% every three years. There are also now strict notification and
registration procedures for situations where a landlord sells
property which is tenanted and there is now an implied obligation
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on landlords to renew annual lease contracts. To give practical
effect to this new Decree, the Muscat Municipality will be
amending their standard form lease contract.
In the context of corporate ownership, Ministerial decision No. 249
of 2008 now allows wholly GCC owned companies with the
necessary objects to own land for property development in Oman.
This ties in with the general aim of all of the GCC countries to allow
freedom of ownership of land for their citizens in other GCC
countries to enable them to freely practice their economic activities
and businesses.
Kuwait
Kuwait has for some reason failed to establish itself as an
investment destination for real estate projects. Indeed, it is common
for Kuwaiti investors to plough their money into assets elsewhere in
the region and around the world. Some of the major regional
players in real estate market are Kuwaiti and very little of their
projects are implemented in Kuwait itself. Despite this, Kuwait
City has some of the highest property prices in the entire region,
although it is suggested by some that this is simply owing to a
dearth of quality commercial space.
There is a general perception that real estate development in Kuwait
is a costly and time consuming process. Very little has happened in
the way of new real estate regulation although there was a recent
announcement about the development of the City of Silk project, at
a value of approximately $58 billion over 250 square kilometres of
land. It remains to be seen whether this project will increase
investor appetite for Kuwait and whether the downturn in the
market in places such as Dubai will have an impact on the delivery
of the project. The nature of the project is such that it is likely to
require a multitude of sub-developers to take on sizeable zones
within the project. There is a general concern that the infrastructure
is not yet in place to make real estate attractive to potential investors
and of course there is very little legislation permitting foreign
ownership. If the City of Silk project is to be a success then it must
be accompanied by an overhaul of the real estate regulatory
framework.
Just about the only movement in the regulatory regime for real
estate projects in Kuwait in recent times relates to Build-Operate-
Transfer (BOT). Traditionally, the Government of Kuwait has
obtained financial investment into projects by offering developers
and investors concessions to build and operate a project for a fixed
period, with ownership ultimately reverting back to the
Government. Kuwait has had a BOT rule in place for some time and
this was updated last year. The original rule was considered to befar too restrictive, although there are questions as to whether the
new rule will improve things substantially.
The previous BOT law stipulated a maximum BOT concession
period of 20 years. Under the new law, larger projects can be
granted a longer concession by the Government on a case-by-case
basis. Importantly, BOT projects will also now be coordinated
through a new body called The Central Authority under the
chairmanship of the Ministry of Finance. The intention is that this
will provide consistency and transparency. The new BOT law
requires that a public shareholding company is created for new
projects with shares held by the Government. The law was ratified
on 29 January 2008 and entered into force on 10 February 2008. No
Government agency can enter into agreements for BOT projectsinvolving state owned land without obtaining the approval of The
Central Authority. Upon expiry of a BOT term, it must be handed
back to the Government for no consideration and without any
compensation being paid to the operator. One difficulty with the
law is its restriction on granting pledges over construction during
the projects term. As a result, it is likely that investors will need to
find other collateral to obtain financing as a result.
It is possible that the BOT rule might be used for developing certain
types of real estate projects, although it is perhaps better suited to
the industrial projects with which BOT has always been associated.
Clearly, BOT will not work for the development of residential
projects, where end-users expect to be granted either freehold or
long lease interests in their units.
Qatar
Qatar has taken several steps in the last few years to increase its real
estate investment profile. There are some major projects currently
taking place on the island, with investors coming from around the
region including Abu Dhabi and Bahrain. Qatar operates a
designated areas system similar to those in Bahrain, Abu Dhabi and
Dubai. Foreigners may acquire both freehold and leasehold
interests in certain designated areas and there is a wider range of
areas within which they can acquire 99-year leasehold interests.
There is also a law in place (Law No. 2 of 2006) permitting
residency permits to be issued to non Qataris subject to certain
conditions where such foreigners have acquired property in Qatar.
The Foreign Investment Law of 2000 contains a range of measures
that remain applicable. For foreign developers, there is a right to
enter into leases of up to 50 years for the implementation of an
investment project, with rights of renewal (subject to agreement)
and rights to transfer such leases to other investors.
A law was also passed (Law No. 4 of 2008) in relation to leases.
This law introduced a series of measures to curb escalation in rental
prices. The lease law is a wide ranging piece of legislation
providing for the establishment of Lease Registration Offices and a
Rental Dispute Committee. It applies to all forms of leases (except
for certain categories such as farmland, industrial land and tourist
apartments and particular designated residential units).
Leases must now be registered with the Lease Registration Office
to be enforceable. It appears that this applies to all leases and that
an annual fee of 1% of the rent is then payable to the Lease
Registration Office. There are penalties for failing to register leases
after execution.
The Rental Dispute Committee will be chaired by a judge with two
other members appointed by the relevant Minister. It will be able
to resolve all disputes between landlords and tenants.
In terms of rent control, the law states that for a period of two years
there can be no rental increases on contracts executed after 1
January 2005. It sets out a formula for rental increases for contracts
executed before that date. The law also automatically extends
leases already in existence to provide more protection to tenants,
although the landlord may apply to the Rental Dispute Committee
to seek vacant possession in certain circumstances. Note, however,
that leases executed after the date of the law are exempted from the
caps and this is likely to have a significant impact on and greatly
reduce the efficacy of the law. It is probable that landlords will find
ways to get rid of their current leases and, therefore, avoid the
restrictions under the current rent law - these are similar to
problems faced with rent cap laws elsewhere in the region. Another
key exemption is that the law does not apply to residential
companies compounds leased by companies for the use of their
employees, which remains a very common practice in Qatar.
Saudi Arabia
The key piece of legislation within Saudi Arabia over the last year
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has been a mortgage law. This has been in the pipelines for many
years and is considered critical to the development of the real estate
market in Saudi Arabia. Whilst mortgages have technically been
available in Saudi Arabia, they have traditionally been refused
registration by notaries public. The idea behind the new law is to
remove any such uncertainty, thereby creating a formal frameworkfor the registration of mortgages over title and providing security
for banks.
There are concerns as to how effective these provisions will be in
the short-term because of the recent downturn in the housing
market; many investors are already at the limit of their borrowing
capacity. There are currently also concerns that it will only benefit
large real estate developers because of the limited capacity of the
law.
There is scope for foreigners to own real estate in Saudi Arabia
although a range of restrictions do apply. The foreigner in question
must be a legal resident of the country and must only purchase the
property for his own use. Foreign ownership of large scale
development projects require special approval. There are specificexclusions to rights of foreign ownership. For example, foreigners
may not own any property in Makka or Madina.
Conclusion
There are interesting times ahead for the real estate market in the
Middle East. Property has been an incredibly buoyant part of the
regional economy over recent years. The recent downturn - with
the dramatic drop in investor sentiment and the reluctance of banksto finance property development and purchases - has had an
obvious effect on those markets that were previously most active
and most subject to speculative activity. It is to be hoped that, once
the dust settles, the regional market will emerge as more mature,
better regulated and longer-term in its thinking. In the meantime,
we might expect to see a refocusing of emphasis towards social
infrastructure and affordable housing projects. This would replicate
trends seen in Western markets, where the public sector picks up
when the private sectors experiences a dip. The returns from
affordable housing might not be as spectacular and might require
longer-term investment, but they could provide an attractive
alternative for real estate developers feeling the pinch from the dip
in the commercial market. Of course, this will only work if it is
approached in a considered and strategic way with the support ofgovernment.
Abdul-Haq Mohammed
Trowers & Hamlins9th Floor, The TowerSheraton Commercial ComplexPO Box 3012ManamaBahrain
Tel: + 973 17 515 607
Fax: + 973 17 535 616Email: [email protected]
URL: www.trowers.com
Abdul-Haq is a partner in Trowers & Hamlins Bahrain office and thehead of its Middle East Real Estate team. He specialises in allaspects of real estate work, advising developers and investors onmajor property projects throughout the region. He is currentlyworking on a range of projects in Bahrain, Qatar, Abu Dhabi and
Oman. Before moving to Bahrain in 2005, Abdul-Haq spent severalyears in the Commercial Property department of Trowers & Hamlinsin London.
Peter Greatrex
Trowers & Hamlins9th Floor, The TowerSheraton Commercial ComplexPO Box 3012ManamaBahrain
Tel: + 973 17 515 627
Fax: + 973 17 535 616
Email: [email protected]
URL: www.trowers.com
Peter is a lawyer at Trowers & Hamlins based in its Bahrain office,and is a member of its Middle East Real Estate team. Peterpreviously worked in the Housing Projects team in Trowers &Hamlins London office. Peter has experience in acquisitions anddisposals of both freehold and leasehold property including
development work, a range of landlord and tenant matters and thecharging of large portfolios of residential property. He is currentlyadvising on a number of large-scale mixed use development projectsin Bahrain.
Trowers & Hamlins is a modern, international law firm. Our principal office is in the City of London. We also have five
offices across the MENA region: in Abu Dhabi, Bahrain, Cairo, Dubai and Oman as well as a co-operation agreement
in Saudi Arabia. In addition, we have two UK regional offices, in Manchester and Exeter.
We have more than 100 partners and over 700 staff. We are ranked in the top 40 (by turnover) of the UKs law firms.
We are ranked in the top 15 (by turnover) of the UKs law firms for real estate. We were awarded Law Firm of the Year
at the 2007 Lawyer Awards.
Trowers & Hamlins is consistently ranked highly by legal directories for our Middle East practice and has thriving
corporate, commercial property, projects and construction, banking and finance practices operating across the region.
We advise our clients in relation to Middle East matters from both our local offices and from London.
Each of our Middle Eastern offices advises on matters both in its relevant jurisdictions and also across the region. We
have, for example serviced our Saudi based clients from Dubai and Bahrain as well as London. The London office has
also been very active in Kuwait and Jordan.
The work undertaken by each of our offices is a broad mix; we provide a wide range of corporate, regulatory andcommercial services to our clients including, mergers and acquisitions, private equity, joint ventures (both corporate
and commercial), commercial property, banking and finance, intellectual property (in particular protecting IP rights) and
information technology and general commercial matters such as supply and distribution agreements.