Saving the Dubai real estate market: the rise of RERA

The tiny Emirate of Dubai, part of the seven-state federation called the United Arab Emirates, has seen an unprecedented boom in its real estate market over the past 10 years. What caused this increase were new laws that allow expats to own property in certain areas and developments. What almost killed him was the lack of regulation in the market.

In any booming economy, especially a relatively immature one like Dubai, there will always be cracks and loopholes in government ministries and laws. However, the gaps in property law were significant: prior to the introduction of RERA there was no standard sales agreement, no training was required to be a property broker, and there was no authority to oversee the property industry. Considering how important the real estate industry has been and continues to be to Dubai’s growth, regulation in this sector was critical.

To understand why confidence was eroding and why RERA’s impact continues to be so great, it is important to understand the process of buying property in Dubai.

To sell or buy a home, the buyer and seller would sign an agreement, called an Agreement of Sale or MoU (Memorandum of Understanding). In most cases, the MoU would be drafted by one of the brokers and could be anywhere from 2 paragraphs to a 20 page document. There was no standard form, no standard clauses, and no legal requirement for a lawyer to assist or supervise the process. The brokers had no government-mandated training or documentation proving they were licensed brokers (in fact, there was no system to certify a broker). An individual could join a company on Sunday and be selling on Monday with no knowledge of the market or how a real estate transaction works. This is somewhat frightening considering that for most people their home is their largest investment.

The buyer would pay a deposit to the seller, typically 5% to 10% of the value of the property, as a commitment by the buyer to purchase the property. The seller made no reciprocal commitment other than a clause in most memorandums of understanding that he would return the deposit, plus an additional penalty, if he backed out of the deal. In most cases, the buyer would lose his deposit, or a substantial portion of it, if he backed out of the deal.

Once the MoU was signed, there would normally be a 4-8 week wait while financial documents and other paraphernalia were organised. After that, both parties would go down to the developers’ office to finalize the transfer. The buyer would pay a transfer fee to the developer, normally 2%, and in most cases a 2% broker fee to the agent, and the property would be transferred.

It doesn’t take long to see the problems with this deal: how does a buyer get their deposit back if the seller backs out? What if an agent doesn’t know what he’s doing, or “quickly hooks” an unsuspecting buyer or seller? Who do you complain to or ask to investigate if something goes wrong?

The answer to all these questions was the introduction of the Real Estate Regulatory Agency, also known as RERA.

RERA was essentially created with the introduction of Dubai Ordinance No. 85 of 2006. Its role is to serve as the regulatory authority for real estate in Dubai. RERA’s mandate includes many diverse requirements, including:

– Certifying bodies, agents and promoters
– Arbitration of disputes between the parties.
– Recommend new property laws to the Government
– Establishment of processes and documentation for standardized procedures related to property.
– Provide information and statistics on the Dubai real estate market to both the Government and the public.
– Monitoring and authentication of real estate contracts, including rental contracts.

In short, the purpose of RERA is to professionalize the real estate market in Dubai. So how is he doing this?

RERA has engineered several changes to the Dubai real estate market:

– He ensured that all companies involved in real estate were registered with the Land Department.
– Made sure all developers used escrow accounts to hold customer money.
– Introduced training and certification of both real estate agents and agencies. This ensures that an agent with a broker card knows Dubai property law and how to make a transfer. It also ensures that the agent knows how to use the specific RERA forms.
– Standard forms for sellers (Form A), buyers (Form B) and the sales agreement (Form F) were introduced. It has also introduced several other ways to handle common processes.
– Changed the way agents and agencies work. We will go into this in more detail in the next few paragraphs, as it deserves significant attention.
– Introduced developer accreditation.
– Prohibited developers from charging a transfer fee. In most cases this was 2%, and it is now illegal for a developer to charge this; in fact, it is only legal for the Dubai Land Department to charge a transfer fee. However, it should be noted that many developers will change this to a “management” fee to ensure they can continue to charge.

The work that RERA has done to professionalize the way agents and agencies work has been considerable. In order to sell your property, the agent must have a Form A signed by you and must present it at the transfer; otherwise, the transfer will not take place. Also, if an agent is acting on behalf of a buyer, they must have a signed Form B. Again, the transfer will not be processed if you do not show up. Form F, the purchase agreement between the two parties, must also be signed and presented at the time of transfer. Finally, the agent must have a RERA broker card; without this, you cannot sign the RERA forms nor can you make the transfer.

Another interesting change has been in the area of ​​remuneration. Previously, the agent fee was generally 2%, and in a transaction involving 2 or more agents, that fee was split between the agents. With the new RERA system, each agent works on behalf of their party (either seller or buyer) and can charge them individually, rather than a single charge to the buyer. This is to ensure that the broker only works for their own client (seller or buyer). The amount charged to the buyer or seller can vary, however it is generally in the range of 2% for each party.

Under the RERA system, the buyer’s deposits are now also held by the real estate agency instead of the seller. This is significantly more secure than the old system where the seller held the deposit. However, it is still not perfect and many real estate agencies are hoping that RERA will introduce trust accounts for the agencies to use. This again will help take confidence in the real estate market to a higher level, with many real estate agencies acknowledging that confidence is a key factor in keeping Dubai’s market buoyant.

Finally, on the agent side of RERA’s activities, if an agent, or an agency, mishandles a transaction or simply does something that is illegal or unethical, a complaint can be filed with RERA. If the complaint is upheld, RERA can take various steps, from adding a black mark on the agent/agency name to canceling the agent/agency’s license, thus preventing them from doing business altogether.

It is worth noting that, at the time of this writing, many of the new RERA processes and procedures remain voluntary and not mandatory. Many of them would become mandatory on June 1, 2008; however, this date was pushed back to the end of 2008. Again, at the time of writing, only about 30% of agents in Dubai are RERA certified, further raising the possibility that the use of RERA processes and procedures be further delayed, perhaps as far back as 2009. In some areas, this has caused significant market disruption and confusion, both at the developer/agency/agent level and at the buyer/buyer level. seller. However, this kind of turmoil is to be expected as RERA introduces its policies and modifies them according to reality, with the end result being a professional real estate market in Dubai that overcomes the short-term pain to achieve that goal.

Despite the difficulties, many forward-thinking real estate agencies in Dubai have adopted RERA’s new policies and procedures, and in some cases this is already paying off. There have been several cases of agents and agencies brought before RERA due to complaints from buyers or sellers or indeed other agencies. There have also been several buyers and sellers reported to RERA for breach of contract, with the respective clients and agents receiving their deposits/fines/commissions in accordance with the new regulations.

The Real Estate Regulatory Agency has proven to be a positive step forward for the Dubai real estate market. Once its rules and processes become mandatory, many of the unethical real estate agents, developers and agencies will be forced out of the market, leaving behind a professional market with a set of checks and balances that will allow real estate investors to buy in Dubai. with constant confidence. If you are buying or selling in Dubai, make sure you use a fully RERA certified broker to handle the transaction.

Helpful Links:
RERA.ae – Dubai Real Estate Regulatory Authority
dnrd.gov.ae/DNRD?lang=en-GB: English version of the Dubai Department of Naturalization and Residency website. Information on all types of visas and requirements, including investor visas, can be found here.

(c) Copyright: Paul J. Allen. All rights reserved throughout the world.