Over the last two years, Dubai’s real estate sector has recorded the largest improvement in transparency of any market in the world, according to a recent Jones Lang Lasalle report. The study classified 82 markets into five tiers, the first being ‘highly transparent’ and the last ‘opaque’. Dubai was one of only eight markets to move up a full tier from ‘low transparency’ to ‘semi-transparent’. In the global ranking, Dubai moved from 46th place in 2006 to 32nd in 2008 and it currently heads the three most transparent markets in the MENA region — Dubai, Bahrain and Abu Dhabi — which are the only MENA markets in tier three. Additionally, Dubai’s level of transparency is currently on par with Russia and ahead of the other BRIC countries Brazil, India, and China.
Indicator of openness
With the globalization of real estate markets and the increasing growth in the sector, the transparency index has become a key indicator in measuring the openness and ease of doing business in a particular market. Blair Hagkull, managing director of the MENA region at Jones Lang Lasalle, told The National that transparency “ultimately provides the foundation for the investment climate.” Transparency is very important for tenants, investors, and other real estate stakeholders. It lowers the risk for investors as well as the volatility of the market cycles. At the same time it increases sales activity, foreign participation and leads to stronger demand for corporate real estate.
Dubai’s lead in transparency is mostly due to the Freehold Law issued in 2002 that opened up the market to foreign ownership and resulted in a 12-fold increase in real estate transactions over the last six years. Starting in 2001, foreigners, who make up more than 80% of Dubai’s population, were allowed to take up leases on apartments and villa properties in Dubai for a period not exceeding 99 years. In 2006, a new freehold law allowed foreign buyers and investors to own property for life in large parts of the city, as well as lease, sell, or rent at their own convenience. According to the Dubai Land Department, as quoted in the Jones Lang Lasalle report, real estate transactions at the end of 2007 reached $125.3 billion, up from $10.6 billion at the end of 2002. The freehold law was described in the report as the “single most important factor driving the growth of the real estate sector in recent years.”
Even though the freehold law did a good job in strengthening the market and was by itself a sufficient driver for growth, the government of Dubai did not stop there. In August 2008, a new mortgage law was issued. Marwan Ahmed Bin Ghalita, the CEO of Dubai’s Real Estate Regulatory Authority was quoted by Business Intelligence-Middle East as saying the law will regulate the mortgage process in order to protect the rights of borrowers and lenders and to improve transparency. Additionally, the Regulating Initial Property Registration Law introduced a system of pre-registration for off-plan sales contracts at the Land Department. It also provides the basis for implementation of some of the provisions for Dubai’s new mortgage law. All unregistered off-plan sales will be invalid under the new law and all developers that do not comply with its provisions will be reported to the relevant authorities for investigation.
Speedy Gulf development
According to the Jones Lang LaSalle report the regulatory and legal environment is one of the main drivers of Dubai’s market growth. Craig Plumb, head of research (Middle East and North Africa) at Jones Lang LaSalle, recently said that Dubai’s development is very fast compared to mature cities like London and Hong Kong, which took decades to develop. Additionally, he stated, Dubai should improve the transparency of its real estate market by introducing more property performance indices, making more information available, and offering indirect ways for investing in real estate. If these improvements are made, Dubai is expected to be in tier two by 2010.
Abu Dhabi, another emerging real estate market in the UAE is also witnessing a significant improvement in transparency. The National quoted Hagbull as saying, “Abu Dhabi is three to four years behind Dubai’s real estate boom and what it has achieved in terms of transparency is remarkable.” Abu Dhabi’s main setback is the existence of foreign ownership limitations that keep the market relatively closed and limit the city’s proportion of foreign investment coming to the UAE. Freehold ownership for non-GCC investors is not allowed on Abu Dhabi Island itself. It is limited to 99-year leasehold interests in approved investment zones, like Reem Island and Raha Beach. The city’s environment is expected to gradually liberalize by introducing “structural reforms and more outward oriented business policies,” said Hagbull.
Bahrain’s real estate market is classified in the third tier somewhat less transparent than Dubai but better than Abu Dhabi. Like Dubai, Bahrain also issued new legislation in 2006 enabling foreigners to own property in certain residential buildings, which have been classified as zones A, B and C. The law was then extended to enable foreign ownership in the many new tourist development projects throughout Bahrain. This allows for increased real estate investments by expatriates who have come to live and work in the kingdom and who represent a strong element in the country’s population. The real estate markets in Bahrain and Abu Dhabi were both considered in Jones Lang Lasalle’s report as having “governments and regulatory authorities […] recognizing the importance of improving transparency to enhance their competitiveness.” Continuous efforts are made to strengthen this sector since investors driven by increasing globalization are always in search of new and better opportunities. This creates a strong incentive for governments to open up the markets and allow a free flow of capital in hope of attracting new investments and developing their economies.
The rest of the MENA region remains in the fourth and fifth tiers and is ranked as the world’s least transparent, although it has witnessed the biggest progress since 2006. Egypt and Saudi Arabia (both in the fourth tier) rank among the world’s ten most improved markets, while other countries like Algeria, Syria and Sudan (in the fifth tier) show little or no improvement at all. However, these markets continue to open up and are expected to attract regional interest and make some progress in the next few years.
