"Build it and they will come" has been a popular mantra in Dubai property circles arising from a time of frenetic building activity in the Emirate leading up to the global recession in 2009.
With a slow shift to a more mature real estate market in Dubai there has been an increase in occupiers seeking build to suit deals in order to achieve their requirements for office or industrial space—more a case of "build it upon demand for specific occupiers and they will come."
The key benefit to corporate occupiers of the build to suit model is that they are able to occupy space which is built according to their specification and which was presumably not otherwise available in the location. Other benefits include that the development phase is risk free as the developer takes on the risks associated with development work (the upside for the developer being that the build to suit model is demand driven and therefore it has an identified purchaser or tenant for the building before it commences construction). Corporate occupiers also benefit from the transaction being off balance sheet during the construction phase. However, there are a number of important factors that a corporate occupier needs to consider when contemplating a build to suit arrangement in Dubai:
- The timing of the move of employees and assets to the build to suit space may be determined by the expiry or termination of leases of other property in the same area or region. Due to Dubai’s landlord and tenant laws, the vacating of a property occupied pursuant to a lease requires action many months before the date of expiry. Therefore, the ability of the contractor to deliver the desired building to the specification required and on time is essential to enable the occupier to take such steps to vacate with certainty. Occupiers should therefore seek to have approval rights over the identity of the contractor and monitoring rights during the construction phase so that an early alarm is sounded if delays become likely.
- In Dubai the ownership of real estate by companies which are not wholly owned by United Arab Emirates (UAE) citizens is limited to certain areas (known as designated areas). If the desired commercial space is not within a designated area then the occupier will be limited to obtaining a leasehold interest rather than acquiring ownership of the completed space. Whilst a leasehold may indeed be more desirable to many occupiers, for those seeking freehold ownership, their location options will be limited to the designated or investment areas.
- If the occupier proposes to form a special purpose vehicle to acquire its interest in the building when completed, it is common practice that a parent company guarantee will need to be provided to the developer. Therefore, the occupier will need to consider which company can give such a guarantee (ie how far up the corporate chain) and this will need to be agreed with the developer and the lender providing construction finance.
- The bank providing financing to the developer is likely to seek an assignment of the benefit of the transactional documents which commit the occupier to taking ownership of, or a lease of, the space when completed. Therefore, the occupier will need to liaise with the bank and the developer in this regard.
- Given that the build to suit building is likely to be constructed on previously undeveloped land in Dubai, surrounding infrastructure will need to be developed as part of the project, for example, surrounding roads, car park, etc. The responsibility for providing such infrastructure may fall to the developer or a "master" developer if the land forms part of a master community. Either way, an occupier will need comfort that the infrastructure will be completed before it is obliged to take ownership of, or a lease of, the building.
Developers undertaking a build to suit development have various options for structuring the deal. For example, the developer may acquire the land to be developed and then sell/lease it to the occupier upon completion, it may enter into a joint venture with the land owner or the occupier may acquire the land and appoint the developer.
Taking each of these options in turn:
- Acquiring real estate in Dubai currently gives rise to a transfer fee of 4 per cent of the purchase price. Therefore, if the developer acquires the site and then sells it to the occupier upon completion, the total transfer fees payable will be considerable. The developer will need to have the occupier contractually committed to the deal before it incurs the cost of acquiring the land and pays the transfer fees. Whilst some parties will accept incurring such amounts in transfer fees, others may seek alternatives such as the occupier acquiring the land from the outset.
- Where a landowner has land available which it is not developing itself due to a lack of expertise or financial ability, a joint venture between the landowner and a developer may be possible. In this scenario, a joint venture company will be formed and the landowner will contribute the land and the developer will provide some equity and its expertise. With this model, the exit options for each party will need to be carefully thought through as the landowner and developer’s interests may not be aligned. For example, if the occupier is to take a long lease of the completed building, the landowner may be happy to take the rental income and be less interested in selling the building. However, the developer may be more inclined to sell the completed building to obtain the profits which can then be used for further developments.
- The parties may agree that the occupier acquires the land from the outset and simply appoints the developer to complete the project. This will reduce the overall transfer fees and may result in a lower overall cost to the occupier. However, this model requires the occupier to have the financial ability to acquire the land and pay the transfer fees some time before it can occupy the desired building.
The final major player in build to suit developments in the UAE is the lender, which must be a bank licensed by the UAE Central Bank. The lender will need to be satisfied with the tenant’s covenant strength and the ability of the contractor to complete the development on budget, on time and in accordance with the agreed specification.
The rise of build to suit developments in Dubai is one of the signs of a more mature, increasingly sophisticated real estate market and a sign that large companies are taking a more long term view of their business in the region. For these reasons, it is a very welcome trend in the market.