Property Dilemmas

Economic News

22 Jul 2010
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Expectation has been mounting in Abu Dhabi lately that a new law is now on its way to allow foreigners to buy land in the emirate. Speculation on this was increased this week when a top government official reportedly hinted that having already allowed the purchase and sale of land in the emirate by nationals, the Abu Dhabi Executive Council is indeed contemplating further liberalisation.

Until recently, foreigners were unable to own land across the United Arab Emirates, but in May 2002, Dubai declared that foreign nationals could buy property within certain real estate developments, most notably the fabled palm islands, which are under construction off its coast. Whilst there seemed no shortage of buyers for these developments, lawyers began to express concern at the legal status of these titles. What did freehold mean in the UAE compared to Europe and the United States? Who would inherit the property if the owner died? Were there restrictions regarding to whom an owner could subsequently sell or lease the property? What were the costs and obligations of ownership? With so many unknowns, banks also became cautious about mortgage lending, with no regulatory framework for the practice and additional confusion over repossession rights.

Almost two years later, confusion in Dubai is still rife, and whilst there remain plenty of people willing to take the risk, many commentators warn against investment in the property market until there is legal clarity at a federal level.

Under the UAE constitution, land law actually comes under the jurisdiction of the individual emirates. This is what prompted Dubai, which wants to encourage foreign investment in its economy, to make its unilateral move towards liberalisation. But the Constitution also states that local laws should not come into conflict with Federal Law. On foreign ownership of land and property, however, the Federal Law is unclear.

In Abu Dhabi, foreign ownership of property has never been allowed and, until last month, even property transactions between UAE nationals have been discouraged. The government of Abu Dhabi, by far the richest of the emirates, has traditionally provided plots of land for its people, even financing the construction of houses or commercial buildings upon it. This "gifted" land has not been transferable. In part this is a result of the paternalistic nature of Sheikh Zayed, the late ruler of Abu Dhabi and President of the UAE, who sought to protect his people from the boom and bust cycle, and to avoid situations in which families who lost their homes came back for another land grant.

The new leadership, under Sheikh Khalifa bin Zayed, has decided that the time is right to allow nationals to leverage themselves and their businesses against property they effectively own. The government is keen to energise the private sector and empower entrepreneurs, but is also taking steps to reduce the welfare dependency of its citizens. Last month a new law was passed, setting up a land registry for property in the emirate. The law grants citizens the right to buy and sell residential, commercial, and agricultural property, although industrial property leased by the municipalities is exempted. Citizens may only sell property they have been in possession of for five years and, crucially, may not demand another plot to replace the one sold.

The new land rights of citizens should have a profound effect on the Abu Dhabi economy. However, the experience of Dubai and Ras al-Khaimah, which has also allowed foreigners to buy freeholds within certain developments, has prompted some to suggest the new law should be extended to foreigners as well. In Dubai, interest in the first two palm islands was so great that a third has been planned off the Deira district. Meanwhile Ras al-Khaimah, which is keen to attract foreign investment and long term residents, saw 75% of its $272m al-Hamra Village development sold off-plan, mainly to Europeans and locals, when it opened the sale to foreigners.

With a new publicly listed Abu Dhabi real estate firm, Aldar, drawing plans for a $15bn residential and commercial city development at al-Raha beach just south of Abu Dhabi Island, there are many who would welcome similar moves in Abu Dhabi. Many here are convinced that some change in the law is imminent, at first for Gulf Cooperation Council (GCC) nationals and later for other foreigners.

However, such high hopes may be premature at this stage. Sheikh Khalifa had plenty of time to formulate plans for his leadership during his long tenure as crown prince, and has acted swiftly in certain areas of legislation - not least in allowing nationals to register, buy and sell property. However, he is likely to remain cautious of such radical moves as allowing foreigners to own slices of the country, freehold. Having already decreed one property law, he may let it sit for a while before further liberalisation is announced.

Abu Dhabi does not have the same urgent need for foreign capital as Dubai and the northern emirates and can afford to play it safe and slow. There is also a feeling in the more conservative emirate that while Dubai's experience is instructive, it should not be a role model for development here.

Moreover, the status quo has allowed many Abu Dhabi families to become rich from high rental income. Liberalising the property market would allow foreigners to bypass these inflated rents, resulting in a loss of income among national landlords.

Any government decision on foreign ownership of property will also have to consider the political implications of such a move. At present, nationals probably represent less than 10% of the population of the UAE. The other 90% form an imported labour force that is forced to return home once they retire. Whilst this remains a sore point for those that spend their whole lives living and working in and for the country, it tips the balance of power between nationals and foreigners. Given the demographic imbalance, allowing foreigners to own and develop a stake in the country could have dangerous implications in the future for the vastly outnumbered national population.

The question is: "When will foreigners that have invested their family capital in the country, and hence have a stake in its future, begin to demand the full rights of citizenship or to participate in the political process?" At present, under a benign and wealthy autocracy, the call for political reform is marginal. Nationals are provided for, and foreigners, who make tax-free money in one of the most socially liberal countries in the region, complain only that they are unable to participate in the booming economy. At present everybody gains from the government's largesse and nobody is asked to contribute to the state. But should the steady top-down flow of money dry up - when oil revenues begin to slow, the national population expands, or for some other reason - stakeholders (taxpayers) may begin to demand a say in how the country is run. A country where the indigenous population is outnumbered by foreigners to such an unprecedented degree has a long-term interest in restricting who those stakeholders will be. The timeframe for these considerations may be 50 years or more, but the seeds of the future are sown in today's decisions, and a government looking to its long-term legacy will be weighing these outcomes as it contemplates its next move.

Nonetheless, it may be that Dubai has forced the issue and let the cat out of the federal bag. Abu Dhabi has a great deal invested in its neighbour's real estate projects and will not want to jeopardise them. Legal foreign ownership is therefore likely to be clarified in Dubai and the immediate visible economic benefits will mean pressure on the government in Abu Dhabi to follow suit, although long leases may be its preferred option, rather than outright freehold, allowing more time to decide on the rights and obligations of property ownership. Don't expect an announcement too soon, but for would-be investors, perhaps it is more a matter of when, rather than if.

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