What is the general climate of real estate investment in your jurisdiction?
Transactional activity in the UAE real estate market remains depressed. The market has experienced an increase in developers selling property on a ‘deferred sales contract’ basis. Under such an arrangement, the purchaser is permitted to occupy the property while paying off the purchase price to the developer in instalments pursuant to an agreed payment plan. A gradual recovery in the UAE real estate market is expected in the run up to and beyond the Dubai World Expo 2020.
In addition, the recent announcement of the UAE federal government (pursuant to Cabinet Decision 56 of 2018) to offer long-term residency permits to certain categories of persons is expected to assist in the real estate market’s recovery. There continues to be disputes between contractors and developers relating to construction defects, defaults and payments.
Who are the most common investors in real estate?
The main source of investors continues to be cash buyers. The introduction of mortgage caps by the UAE Central Bank has led to a suppression of bank finance, particularly for residential purchase transactions.
Are there any restrictions on foreign investment in real estate?
There is no express prohibition in the Civil Code (Federal Law 5/1985) against foreign land ownership. However, each emirate can pass its own laws to regulate property ownership.
In Dubai, UAE nationals, Gulf Cooperation Council (GCC) nationals and companies fully owned by these can own property anywhere in Dubai (Article 4 of Law 7/2006). Non-UAE/GCC nationals can own only freeholds, leaseholds (up to 99 years) or usufructs (up to 99 years) in designated areas in Dubai, which are listed in Regulation 3/2006 (as amended by Regulation 1/2010), or in the free zones.
Under the Dubai Land Department’s existing policies:
- a foreign company can own only a freehold, leasehold (up to 99 years) or usufruct (up to 99 years) in the designated areas in Dubai and must be registered onshore in Dubai or offshore in the Jebel Ali Free Zone and certain other free zones; and
- a fund or a trust (or an entity which is held by either of these) cannot own property anywhere in Dubai.
What structures are typically used to invest in real estate and what are the advantages and disadvantages of each (including tax implications)?
Generally, a separate special purpose limited liability vehicle is used to purchase and develop a plot. These vehicles are primarily used because they ring-fence liability to the specific special purpose vehicle.
Although Dubai is mainly a tax-free emirate, there are governmental restrictions on:
- foreign investment;
- areas where investment is permitted;
- corporate structures that can be used for investment; and
- licences required before investment can be made.
One entity can own the plot and also hold the development licence. The licence is deemed to include leasing rights. Alternatively, one entity can own the plot while another entity holds the licence. Various licences are available and each has advantages and disadvantages. The decisive criteria are:
- the plot's intended use; and
- the applicant's nationality.
Real estate investment trusts (REITs) are permitted under:
- the Abu Dhabi Global Market’s REIT framework (ie, the ADGM Fund Rules);
- the Dubai International Financial Centre’s (DIFC’s) Investment Trust Law framework (ie, the DIFC Investment Trust and REITS Rules Instrument); and
- the Emirates Securities and Commodities Authority’s framework (ie, Administrative Decision 6/R.T of 2019 Concerning Real Estate Investment Fund Controls).
However, REITs are not permitted elsewhere. Therefore, REITs are not commonly used.