Following the financial crisis, Dubai’s real estate market has undergone a huge transformation. Gone are the “flippers”, investors who would buy units off-plan only to resell a day later, making a substantial profit in the process. Instead, given the scarcity of credit and on-going concerns about the ability of certain developers to finish construction on time (or at all), there is now a keen focus on projects that are complete.
Further, with experts generally agreeing that there is an over-supply of completed units, prices have remained depressed, with few predictions of any increase in prices in 2011.
While there are specific areas where foreigners, both individuals and companies, are allowed to buy real estate, in the past not many gave much thought to the investment vehicle they used. Recent changes to the regulatory framework, though, have brought into sharp focus the need to consider this matter at the earliest stage.
The Dubai Land Department circulated a set of guidelines to take effect from 1 January. They state that, where real estate is purchased in one of the designated areas, the Dubai Land Department will only register title in the name of a company if the company is either (a) registered onshore in Dubai or (b) registered offshore with the Jebel Ali Free Zone Authority (JAFZA).
A company that involves a foreigner and is registered onshore in Dubai must be owned at least 51% by a UAE national and accordingly is not ideal as an investment vehicle. On the other hand, a company registered offshore with JAFZA may be 100% foreign-owned by either individuals or companies or both.
As the guidelines apply only to companies, individuals remain free to take title to real estate in the designated areas in their own names.
Similarly, real estate owned by non-JAFZA offshore companies that is already registered with the Dubai Land Department is not affected by the guidelines.
The effect of the guidelines would be that where a company incorporated in the British Virgin Islands (for example) has contracted to buy real estate but has not yet registered title, the company would not now be allowed to register title.
In such cases it may be necessary for the buyer and seller to enter into an amendment of the purchase contract, to allow the buyer to appoint a nominee (i.e. a JAFZA offshore company). Similarly, where the buyer has contracted to mortgage its interest in the real estate to a lender, the mortgage documentation will need to be amended accordingly.
Do take along
The guidelines conclude that any application for registration that is made after 1 January by a JAFZA offshore company must be accompanied by (i) a JAFZA registration certificate, (ii) a shareholder certificate (i.e. detailing the company’s share capital and the shareholders), (iii) the company’s memorandum and articles of association (i.e. detailing the objects and powers of the company) and (iv) an undertaking to inform the Dubai Land Department of any change in share ownership.
Rationale for change
This final point is crucial. It is generally understood that the department issued the guidelines with a view to reducing the avoidance of registration fees. Prior to the guidelines, where company A wanted to buy real estate from company B, it could either (a) buy it directly from company B and register title by paying a registration fee of 2% of the purchase price, or (b) purchase shares in company A and so avoid paying the registration fee.
Under the guidelines, if such a share transfer takes place without the consent of the Dubai Land Department, they could take action against company A when they become aware of it.
However, it is not believed that the guidelines were introduced to block all such share transfers. The department would consent to share transfers, subject to receipt of a share transfer fee, which could perhaps be equal to the registration fee that would have been paid had there been a direct transfer of the real estate from seller to buyer. It remains to be seen whether a share transfer fee would be chargeable where the share transfer would not be such as to change control of the company.
The guidelines apply generally, but additional documentation may be required for any given case. In addition, over time as the policy evolves, it is possible that companies registered in other free zones may come to be treated in the same way.
Andrew Yule (firstname.lastname@example.org) is an associate at Afridi & Angell. The above information is not legal advice and is neither intended to create nor creates a lawyer-client relationship. Neither the writer nor Afridi & Angell are responsible for anyone relying on the above information. You are recommended to take independent legal advice.
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