How freehold rules will expand home ownership in Abu Dhabi

 

In recent years Abu Dhabi introduced a number of legal changes designed to make the real estate market more attractive for expatriates. It is hoped that, in turn, a more established foreign population will increase foreign direct investment and boost the economy further. In April 2019 Sheikh Khalifa bin Zayed Al Nahyan, president of the UAE and ruler of Abu Dhabi, issued an amendment to the emirate’s 2005 real estate law allowing foreign nationals of countries outside the GCC to purchase freehold land within investment zones.

The legal change followed a series of meetings between the Abu Dhabi Executive Committee, investors and real estate developers keen to identify ways to enhance the emirate’s status as an international investment destination. Stakeholders were looking to leverage the emirate’s political and economic stability, as well as its geographic centrality, in the bid to attract foreign investment in real estate.

In its fourth quarter report on the residential market in Abu Dhabi in 2019, real estate consultancy Chestertons said the sector’s performance late in the year suggested the initiative was having the desired effect and had helped to steady what had been a trend of price fluctuations.

Buying Property

Previously, foreigners were allowed to own floors and apartments, but not land. This could be done through ownership whereby expatriates were granted deeds for up to 99 years that did not include land but allowed them to re-sell villas or properties; musataha, wherein expatriates could own residential units for up to 50 years through a renewable contract that allowed alterations and construction; usufruct, a contract allowing expatriates to own units for 99 years but under which they are unable to alter the property; and a long-term lease, granted for no less than 25 years. There were nine zones for expatriate ownership in Abu Dhabi: Yas Island, Saadiyat Island, Reem Island, Al Maryah Island, Lulu Island, Al Raha Beach, Seih Al Sedirah, Al Reef and Masdar City.

New Regulations

The 2019 ruling included amendments to Article 3 and Article 4 of the 2005 law. Under the new provisions, Article 3(i) gives property ownership rights to Emirati citizens, public holding companies where ownership by non-nationals does not exceed 49%, and any person receiving permission from the crown prince or president of the Abu Dhabi Executive Council. Article 3(ii) stipulates that non-UAE nationals have the right to own and acquire all original and in-kind rights in real estate properties within investment areas. Meanwhile, Article 4 stipulates that holders of a usufruct or musataha for more than 10 years have the right, without the consent of the landlord, to dispose of the property, including the right of mortgage. The landlord may not mortgage the property except with the consent of the usufruct or musataha holder.

Welcome Move

The move was widely welcomed by property developers. “This will not only drive the maturity of Abu Dhabi’s real estate market, but will also increase transparency and provide clarity regarding titles for property owners,” Talal Al Dhiyebi, CEO of Aldar Properties, said in a statement in April 2019. “This will increase long-term investment, injecting more liquidity into the market and encouraging longer-term residency.” That same month Aldar announced that its residential project Lea on Yas Island, which was open to all nationalities, had sold out, generating Dh400m ($108.9m) in sales.

Visa extensions have also been credited with removing doubt for prospective international buyers. In 2019 Abu Dhabi began granting visas to foreigners who made real estate investments in cash (see analysis). “The new regulations will continue to amplify the capital’s overall offering,” Luann Parker, director of business development at real estate developer IMKAN Properties, told OBG. “Expatriates who may have been reluctant to invest now have the opportunity for a long-term future. This will further enhance the emirate’s competitive edge and incentivise talent to stay.”

Even so, observers are realistic about the time it will take for the full benefits of the law to be felt. “The freehold law will be good in the long term, but it will take time for individuals who were hesitant to purchase under a leasehold to buy property because a freehold is on offer,” Christopher Taylor, CEO of mortgage provider Abu Dhabi Finance, told OBG.

Cost of Living

Another factor that determines whether expatriate staff choose to settle in Abu Dhabi is the cost of living. According to human resource consulting firm Mercer’s 2019 cost of living index, Abu Dhabi ranked 33rd out of 209 cities in terms of cost of housing, transport, food, clothing, household goods and entertainment. For comparison in the region, Riyadh ranked 35th in terms of affordability, while Muscat ranked 103rd and Cairo 166th. Compared to more international cities, Abu Dhabi was more affordable than Tokyo (2nd), Seoul (4th), New York (9th) and Los Angeles (18th), but was more costly than Washington, DC (42nd), Miami (44th), Milan (45th), Paris (47th) and Boston (49th).

Spending Power

The new home ownership framework is expected to have implications beyond the real estate sector. If Abu Dhabi is successful in encouraging wealthier expatriates to purchase properties while they are working in the emirate and remain in those homes after their employment contracts, then the wider economy stands to benefit. However, some international employers encourage staff in Abu Dhabi to take out shorter-term rental contracts. “We have seen an increase in oil and gas companies putting their employees in serviced hotel apartments,” Matthew Dadd, partner at real estate consultancy Knight Frank, told OBG. As such, instead of apartments many expatriates stayed at serviced facilities, such as Staybridge Suites Abu Dhabi on Yas Island, which has 164 apartments with full kitchens, and Park Residences by Rotana, which has 200 one-, two- and three-bedroom apartments.

Employment Pool

The success of real estate reform will be affected by the number of expatriate workers coming into the country in search of the kind of well-paid employment that would enable them to invest in property. In recent years, many international employers have preferred to send younger staff without dependants abroad, whereas in the past more generous family allowances were given to cover education and travel costs. Additionally, new arrivals are coming from a broader range of countries, some of which have lower average salaries than in the US or Western Europe. The net effect is that many expatriates are not spending as much time in Abu Dhabi as they did in the past.

An example of the shift in the expatriate community can be seen at Khalifa Industrial Zone Abu Dhabi, where Chinese companies are investing in new manufacturing plants. In October 2019 work began on new accommodation for 5000 Chinese staff inside the industrial zone itself. The project will house four staff quarters, one management dormitory and two supporting rooms, as well as community living infrastructure. Because the accommodation is cloistered, it is anticipated that its new workers will have a more modest consumer imprint.

Foreign Landlords

Although the new freehold laws only apply to specified investment zones, and as such may have a somewhat limited impact in the short term, over time an influx of overseas investors has the potential to result in foreign landlords who lease their properties to citizens who choose to live in those investment zone communities. This may be an unintended consequence of the regulatory change, but it could also be an ingredient of a maturing real estate market in the emirate.

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The Report: Abu Dhabi 2020

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