Cancellation fees a windfall for Dubai developer

One of Dubai's biggest developers earned more than Dh656 million (US$2.4 billion) from cancellation fees last year as people who bought at the market peak were unable to pay for their homes.

One of Dubai's biggest developers earned more than Dh656 million (US$178.5m) from cancellation fees last year as people who bought at the market peak were unable to pay for their homes.

Dubai Holding Commercial Operations Group (DHCOG), which owns Dubai Properties Group (DPG), earned Dh656.4m from cancellation penalties and late-payment charges - an almost tenfold increase on 2010.

Dubai property developers are rushing to finish developments on which work was well advanced to raise desperately needed revenue while shelving projects that are less-than-halfway completed. At the same time, many investors who bought at the peak of the market are seeking to escape contracts binding them to properties that have lost as much as half of their value.

"The irony is that the last thing the market needs at the moment is all that extra stock," said Craig Plumb, the regional head of research at Jones Lang LaSalle in Dubai. "But the financial realities are that they will complete those properties, putting further downward pressure on prices."

Some 3,000 units were finished in Dubai in the first three months of this year, while 28,000 additional units are expected to be finished by the end of the year, according to research by Jones Lang LaSalle. That is an 8 per cent increase in the current stock of homes. Most of the handovers will take place in Dubailand, where DPG has already delivered thousands of new apartments and villas in the past year.

Cancellation fees and late-payment charges have become a thorny issue between developers and investors seeking to minimise their exposure to the downturn in property prices.

"Dubai law allows a developer to cancel an agreement and retain a portion of money paid depending on what stage construction is at on a development," said Brent Baldwin, a property lawyer at Hadef & Partners. "We get a lot of cases where the developer is not building or the purchaser is not paying."

But while some buyers have taken their cases to court, others have chosen to pay the fees demanded by developers so as to avoid potentially lengthy and costly litigation.

"For the smaller investor, the cost of going to court can be prohibitive," said Mr Baldwin. "A lot of developers are relying on the unwillingness of a purchaser to go the whole way." Like many developers in the emirate, DPG is moving away from generating income from property sales, focusing instead on steady lease revenue.

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