A new dawn in Dubai real estate
The UAE has introduced new laws this year that effectively widen the range of possibilities for expatriates to be more deeply involved in the long-term economic growth of the country. Many of the policy changes mainly concern foreign business ownership, visa regulations and curbing the cost of living.
In a country where 80 per cent of the population is made up of foreign residents from all over the world, the new regulations are viewed as crucial in efforts to tap further into the expat population’s massive investment potential across different industries.
In the real estate sector, experts believe the new regulations are particularly effective in drawing more foreign direct investments. We look at the new laws and their impact on the real estate landscape.
Foreign ownership
The UAE Cabinet approved in May changes to foreign business ownership rules, which had previously restricted foreign businesses to designated free zones. Outside these zones, foreign establishments can only operate if they yield 51 per cent ownership of the company to a UAE partner. The new law, which is set to take effect later this year, would allow 100 per cent ownership of non-free zone businesses by foreign investors.
“For a long time, partial ownership of 49 per cent has scared off prospective investors,” says Anna Skigin, CEO of Frank Porter. “If the law goes ahead, it will create more openness in the region and a huge surge in foreign investment. A more open and friendlier business environment will positively affect the real estate market — as the confidence in the region increases and more people will purchase properties to live in or for investment.”
As Cityscape Global opens, foreign investors will find more incentives to commit to long-term real estate investments
The UAE’s highly competitive real estate prices combined with the reinvigorating effect of the new law on businesses has already resulted in an uptick in transaction levels, according to Andrew Covill, director of Henry Wiltshire International.
“The new initiatives, like the option to work from home, will encourage more people to start businesses without significant expense and bureaucracy, further incentivised by the news that they will be able to own 100 per cent of their company,” says Covill. “This, together with streamlining the development process and speeding up payments to contractors, will create jobs and growth and encourage people to remain in the UAE, which means more people to rent and buy property.”
10-year visa
Along with the new business ownership regulations, the UAE Cabinet, chaired by His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, also approved a new residency system that would grant 10-year residency visas to investors and certain professions. Students will also get a five-year visa, and the Cabinet is reviewing the possibility of extending their residency permit after graduation.
This month the UAE Cabinet also approved a new law that would allow retirees over the age of 55 to avail of a longer residency visa that is renewable after five years. The law will take effect next year.
“[The extended visa] will help boost the economy and property prices, which on price per square foot basis are clearly the lowest globally for a city that has a highly advanced and developed infrastructure and completely secure to live, work and visit,” says Kalpesh Sampat, managing partner of Gulf Sotheby’s International Realty.
Sampat believes the visa rules will provide more certainty and stability from a mid to long-term perspective for expats and investors. However, while the Cabinet has issued certain criteria for retirees to avail of visa privileges, the other new visa regulations for investors and select professionals are still awaiting implementing rules.
Sampat says it is important that real estate investment, especially cash-based investments, be covered in the new visa regulations. “In my humble opinion, a five- or 10-year visa for new buyers in ready properties, which are cash purchases and not mortgage purchases, should also be considered to be introduced from January 1, or even now,” says Sampat. “This can be considered for property purchases of a higher investment threshold of Dh3 million, or perhaps $1 million [Dh3.67 million] for five years, or Dh5 million to Dh10 million for 10 years, or similar thresholds.”
The current two-year property-linked investor visa system is well-intended but does not lend itself to attract buyers, particularly investors who prefer a longer timeline for certainty and stability, says Sampat.
“Under the present rule, anyone who buys ready property worth at least Dh1 million is eligible for a six-month residency or investor visa along with the immediate family members and renewable unconditionally,” he says. “For property over Dh1 million, a two-year visa is granted.”
In comparison, a longer 10-year visa would be more attractive to investors as it gives them a long-term perspective when setting up start-ups, businesses or branches of their companies. For residents, the new regulations, including the five-year student visa, allows better planning around education and family.
“Currently, we have prices close to the 2008-10 lows,” says Sampat, noting that the potential for appreciation is “at the very minimum” 25 per cent, 50 per cent and 75 per cent for an investment outlook of two to three years, five years and seven years respectively. “Moreover, the property market offers the best rental yield advantage compared to anywhere else in the world with 8-9 per cent on smaller ticket sizes and 6-7 per cent on mid to larger tickets.”
Given the sizeable expat population, Skigin says most of the people coming to Dubai generally prefer to rent. The new residency rules would change that. “The 10-year visa would give people the reassurance needed to go ahead and invest in property,” says Skigin. “Confidence in the region will lead to growth in other sectors as well.”
Furthermore, the new visa system could be a powerful tool in retaining much of the money that leaves the country towards the home countries of expat residents. “With the introduction of the 10-year visa, I believe a lot of that money will remain in the country as people will feel more secure to invest in the country where they are living, and this is positive for the UAE,” says Skigin.
The student visas will also have a tangible impact on real estate with the expected rise in the UAE’s student population. “The education offering in the UAE is already a significant contributor to the real estate sector, attracting residents and students, as well as funds and other institutional investors,” says Alexis Waller, partner and head of real estate at Clyde & Co. “The new visa rules for students will in turn stimulate the owner-occupier market, with more residents seeking longer-term housing by purchasing their homes or renting for a longer term.
“It is also a stimulus to the investment market with schools and universities providing positive returns on investment.”
Mortgage law
The mortgage caps currently in place have served an important purpose in preventing a spike in speculative buying. However, there is also clamour from the industry to revisit the stringent regulations. Covill believes that relaxing the mortgage caps will help address a pent-up demand from end users, especially at the upper end of the market, where the down payment is at least 35 per cent.
The proposed Mortgage Law revealed by the Dubai Land Department (DLD) in April does not mention possible changes to the loan-to-value (LTV) ratio regulations, which currently limit off-plan mortgage to 50 per cent of the property value and 25-35 per cent for ready property.
“It will be interesting to see if the new mortgage law proposed by the DLD gets implemented and in what form as details have not yet been revealed,” says Covill. “[Relaxing the mortgage cap] should, of course, be federal and not just for Dubai and be actioned by the UAE Central Bank. The initiative shown by the DLD though is positive, and I firmly believe that more flexibility in financing options is key to the healthy growth of the maturing real estate market in the UAE.”
The proposed changes to Dubai’s mortgage regulations, however, is expected to have a big impact on foreign investors, corporates and real estate investment trusts (REITs), which have had limited exposure to the UAE market compared with other international markets.
“Most of these entities would be investing in commercial properties, but they may look to take whole residential buildings that are being delivered, which would soak up some of the excess supply,” says Covill. “The yields available are attractive when compared to other worldwide options, and there is always strong rental demand in the emirates due to the transient workforce and the structure of some companies’ housing allowances that do not allow their employees to use the funds to pay down a mortgage, so they are forced to remain tenants.”
Other incentives
Dubai has also announced a number of policy changes that are viewed as measures to curb the rising cost of living and doing business, effectively enhancing the UAE’s appeal as a business and residential destination. The announcements include freezing government fees for three years, reducing the market fee from 5 per cent to 2.5 per cent, cutting down hotel sales fees from 10 per cent to 7 per cent, disallowing any school fee hike for one year and cutting charges levied on real estate and businesses. The DLD has also waived the 4 per cent penalty for late property registration.
“All maturing economies have been through the process of refining and fine-tuning their policies, and how they manage these various factors that affect growth,” says Philip Sequeira, head of property regulatory at Hadef & Partners. “It’s pleasing to see the UAE government quite clearly has these issues at the forefront of its thinking.”
Sequeira notes how the new regulations such as the reduced hotel sales fees are aligned with the goal of increasing traffic into the country. “We predict this initiative will encourage more spending from the residents on staycations, which will give a boost to the hotel industry in particular,” he says.
By removing the late registration penalty, the government also showed that it is responsive to gaps in the market, says Riyaz Merchant, CEO of Realty Force. “The 4 per cent penalty was holding back buyers from registering,” he says. “The DLD also closed the loophole when it comes to property registrations on projects launched more recently. Now, the 4 per cent fee is incorporated right at the time of a buyer booking a unit.
“The government has slashed the aviation fees, some municipality fees, frozen school fees and delayed fining developers for late registration of projects, all in all keeping in mind the current market scenario.”
Editor's Note: This article was originally published in Gulf News on Tuesday October 2nd, 2018 http://bit.ly/GNNewDawnDubaiRealEstate