We turn again this week to
, head of the property practice at
Ashurst
.
He writes a very interesting piece about the interactions between developers and master developers. These relationships are under increasing pressure because of the property slowdown. Neither side wants to start building until the other starts - so it can stall with a kind of stalemate sometimes. Mr Hooton writes, "There is an undeniable incentive for the master developer to help their sub developers in recapitalizing to enable completion of the mega projects."
He also answers a question from a distraught buyer of a property in Abu Dhabi who isn't really sure what they bought. Mr Hooton says that the arrival of a strata law in the coming months will explain exactly how their 99-year lease or 50-year mustaha will work.
See the answers after the jump ...
Question:
Are developers still the masters?
Matthew Hooton
: Investors are still grabbing all the headlines when it comes to the real estate market. Some are speculators, who have been left over exposed as the heat has come out of the real estate market. Their practices contributed to the exponential and unsustainable rise in prices and now some of them are left to reap what they have sown. Other investors were genuine end users. They may have been caught out by the freezing of the debt market or by the questionable practices of their developers.
One group that has not really been in the limelight is the well-funded master developers. They are viewed by some individual investors as Goliath to their David. However they too can find themselves in difficulties due to the activity, or more likely, inactivity of others.
A master developer will typically hold a plot of land which is too large for it to develop out on its own. Having put together a master plan identifying uses, building densities and other base line parameters, the master developer will retain some plots to develop out itself but sell the majority of the plots to sub developers. These smaller, less capitalized, sub developers will ordinarily be obliged to make staged payments for the land and associated infrastructure to the master developers. They will also be obliged to develop out their plots in accordance with the master plan and to a schedule.
When the investors stop paying and the sub developers stop developing there is another party in all of this who is often forgotten; the master developers. Not only would the illiquid sub developer not be able to continue to make the staged payments to the master developer (as it is getting no money from the investors) but, just as significantly, the sub developer is not building out its plot. This can have a highly detrimental effect on the master developers' project. Its amenity value is severely compromised as the areas sounding the master development project remain underdeveloped. These undeveloped areas form wastelands which blight adjoining property. The integrity of the master developers' projects is therefore dependent, to some extent, on the sub developers' ability to complete their projects in accordance with the master plan.
Where this is proving difficult master developers may be reluctant to step in to the sub developers' shoes and build out as they too don't wish to be spread too thinly (although this, ultimately, may be the only recourse available). Master developers should be looking at how they may be able to help their sub developers fulfill their contractual obligations; there is a commonality of interest here. In essence what the under performing sub developers need is an injection of liquidity to get the projects back on track. This could come from a variety of sources which the master developer may help the sub developer tap into. Bank finance is the most obvious source but perhaps not the most accessible. Joint venturing, private equity and funds may be more accessible as the greater appetite for risk exhibited by these types of investors may bring them into this market ahead of the banks. There is an undeniable incentive for the master developer to help their sub developers in recapitalizing to enable completion of the mega projects.
Question:
Now that I can't resell my unit, can you tell me exactly what I bought?
Matthew Hooton
: Investors are forever talking about what they have bought (much like us Brits with the weather!). Before October of last year such discussions were held in the manner befitting a prosperous and savvy player in the market. These discussions now take place in darker corners of the room with hushed tones. It is interesting to note that in most property markets people buying a villa or apartment would be called "buyers". Here, due to the speculative nature of the market before the crash, everyone buying property is called an investor. I suppose it is reflective of the fact that most people in the real estate market were buying to make a profit not a home.
Investors will usually refer to their acquisitions as "a five bed Villa at Al Raha beach" or "a two bed apartment at Al Reem Island": But if you look at it in any real detail what have they actual paid over their hard earned cash for?
Well to start with, at the moment, the actual physical property has not, in most cases, been built. Accordingly, what most investors have is a right for the property to be transferred to them once it has been completed.
Let us (with hope in our hearts) move the clock forward a few months. The developer has now completed the building and your apartment is ready to be transferred. If you are a non-GCC foreign national, having bought in an investment zone, what are you going to have transferred to you? The property, yes, but what legal interest in that property ? Freehold is the "best" class of title available. It represents absolute ownership in the land, unlimited in time. This is what you want but is it what you will get? Sadly the answer does not seem to be available right now. Under the current law non-GCC foreign nationals can own, in investment zones, either a 99 year usufruct (which is similar to a lease), a 50 year musataha (similar to a building lease) or a "right to own floors, excluding the land itself" and they "shall be entitled to all interests therein. Implementing regulations or decisions by the Executive Council shall determine the purview, terms and conditions of ownership". No regulations have been issued leaving developers and investors uncertain as to exactly what will be available to investor once the properties have been completed.
It is hoped that Abu Dhabi will shortly be introducing a strata law which will deal with this (and other) questions. In essence strata title is a quasi freehold title developed, initially, for multi level apartment buildings. Each strata title owner would, ordinarily, hold a quasi freehold title to their apartment and hold an undivided share in the common parts and fabric of the building. There would be a statement setting out how the common parts would be utilised and paid for by the strata title owners. A similar holding structure can be used for villas forming part of a compound. If strata title comes to Abu Dhabi in a similar format to the one found in Dubai then it is hoped that non-GCC nationals will be able to own a strata title of their properties in the investment zones. A number of developers have set up their developments to operate on such a basis in anticipation of this coming into effect.
If strata title is not in place it is unclear what interest will be given on completion of the properties. A 99-year usufruct could be used and could achieve a similar effect to strata title (regarding controls and contributions relating to the fabric of the building and common parts) but the usufruct interest would be a wasting asset. There is currently no absolute right to renew this interest once it expires. This makes it clearly less attractive the investors.
Many contracts envisage that the developer will transfer to the investor the best title available at the time of completion. It is hoped that they would upgrade the title if strata title became available subsequently. In the meantime the lawyers, developers and investors all wait to see what law or regulations will be issued to govern non-GCC ownership in Abu Dhabi.
