middle east real estate comparative review

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Real Estate 2009

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Published and reproduced with kind permission by Global Legal Group Ltd, London

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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Trowers & Hamlins Middle East Real Estate - A Comparat ive Review

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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.

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