Dubai will see its first foreclosure auctions as banks move to put dozens of defaulted homes under the hammer for first time since property prices began to tumble more than 18 months ago. The planned sales could put further pressure on a market where prices have already fallen by as much as half since late 2008, top lawyers told a conference yesterday. Jody Waugh, a partner at the law firm Al Tamimi and Company, said he was overseeing as many as 70 foreclosure cases from 12 different banks. And hundreds of buyers have received cancellation notices from the Dubai Land Department on behalf of developers that claim they are in default of their obligations.
"The first public auction should happen shortly," Mr Waugh said, adding that his team had secured 10 judgments from the courts on foreclosed property. As many as four of these are expected to be auctioned within two months. He expects the auctions will allow opportunistic investors to pick up apartments and villas at highly discounted prices - potentially leaving banks with heavy losses on their loans.
Dubai property prices may fall a further 15 per cent, after already dropping by about 50 per cent from their peak, Bank of America Merrill Lynch said in a report last month. "Even if all qualifying expatriates from Abu Dhabi and Sharjah relocated to Dubai tomorrow, we estimate that there would still be 44,000 vacant units in 2010," the report said. However some prime areas, such as the Palm Jumeirah and Jumeirah Beach Residence, have seen modest gains in Dubai, brokers say.
Auctions are "not a tried and tested vehicle for property disposals in this economy", said Ron Hinchey, a partner at the consultancy Cluttons. "Unless it's handled in the right way it could have a very negative impact on the market," he said. "It really depends on the volume. The whole process needs to be carefully thought through. I feel it would be in the banks' interest to all meet up and decide on a strategy for the auction process, rather than jump on the bandwagon and put all these properties into the market at the same time."
Lisa Dale, the head of the property practice at Al Tamimi, said that fears of low bidding in the auctions was leading developers who were repossessing properties from defaulting buyers to consider holding on to them as rentals, adding to their recurring income. The first public auction will mark a pivotal moment in Dubai, which has seen its property economy devastated by the global financial crisis and inflated prices. It has taken nearly two years from the beginning of the slowdown for these homes - some still only on paper - to make their way back to the market.
The top regulators - Dubai's Real Estate Regulatory Agency (RERA) and Land Department - have issued a series of new laws, amendments and regulations since late 2008 to clarify the responsibilities of developers and buyers, as well as the processes for cancelling a contract or a project. Lawyers for the property buyers who have received cancellation notices have vowed to fight them on the grounds that the developers have not met their own obligations. Among the developers who have filed the notices are Emaar Properties, Deyaar Development, Omniyat Properties and Al Fajer Properties.
Once a cancellation notice is sent out, a buyer has the right to respond with reasons why they have not made payments on their unit. The Land Department has set out several reasons why buyers can stop paying and not be liable to cancellation, such as developers delaying obtaining approvals to start construction without "good reason" and failing to register the project with RERA. The law sets out a sliding scale of refunds for buyers who default. For instance, if a developer has completed more than 80 per cent of a building and the buyer defaults, it can keep only 40 per cent of the property's value. However, in some cases this may include all the money paid by the investor.
But in its latest iteration of the law - Executive Resolution 6, which added to and ratified the regulations of Law 13 of 2008 - the Land Department has given developers a second option aside from putting the property to a public auction. If a developer has completed at least 60 per cent of the project, it can deduct 40 per cent of the unit's purchase price and terminate the sale agreement. The developer can then rent it out, with the remaining portion of the buyer's down payment refunded.