The global financial crisis of 2008-2009 led to the crisis in Dubai’s real estate market because the value of properties and developed projects reduced significantly, and investments in many projects were ceased.
Projects Stopped during the Financial Crisis
The 2008 financial crisis made developers and investors stop or postpone a range of projects because the unexpected changes in the real estate and financial markets affected the development of new projects significantly. Abdulla Mohammed Rafia as Assistant Director General for Engineering & Planning at Dubai Municipality mentioned Dubailand, the Lagoons, and the Arabian canal among the largest projects that were stopped during the period of 2008-2009 because of problems with investments (A. M. Rafia, personal communication, March 10, 2015).
The construction processes related to these projects as well as to Dubai Exhibition City and Dubai Towers were planned to be started again in 2010-2011 (Naini, 2011, p. 129). Such projects as Burj Al Alam, Jumeirah Gardens City, Palm Islands, Pentominium, and Al Salam City were also stopped in 2008 because of the lack of investment and resources. The problem was in the fact that developers had no opportunity to continue construction because of the lack of electricity, water, and materials.
The full recovery from the damage caused by the changes in the market was observed only in five years. Thus, in 2013, the economic growth in Dubai allowed focusing on the postponed construction and infrastructure projects because of new involved sources of funding and revised approaches to regulating the construction and building processes in the Emirate (Government of Dubai Land Department, 2015). From this point, the full economic recovery in the real estate area was observed only in 2013, after investors had received the opportunity to get refunds from developers and proposed new plans for projects’ completion. The recovery of stopped projects was a result of the overall stabilization in the real estate market and recommencement of investing into the sphere. In addition to the private investment, the projects were recovered because of the governmental support and renewed residential transactions.
Regulations Working during the Financial Crisis
In order to address the collapse in the real estate market observed in Dubai in 2008, the Emirate’s authorities focused on elaborating stricter regulations on developers of the housing projects and on the buyers. The problem was in the fact that the lack of strict regulations and the focus on the free market principles led to the situation when property buyers needed to pay to developers in advance, but projects were not developed appropriately, and the construction progress was low. As a result, there was a risk of losing money for investors who did not see any guarantees for the successful end of the funded projects (Al-Malkawi & Pillai, 2013, p. 117).
The development of the financial and associated real estate crises also influenced the situation negatively. In response to this problem, the RERA made the attempts to propose stricter regulations for off-plan units and projects in form of trust accounts. Dubai Law No. 8 was developed in 2007; and in 2008, it was revised as the law on trust accounts that could control the process of the off-plan sales in the Emirate. Law No. 8 of 2007 provided the banks in Dubai with the opportunity to open specific escrow accounts. As a result, the Law became referred to as the Escrow Law (Khamis & Semlali, 2010, p. 124). The regulated process included the opening of the escrow accounts, the stage of obtaining RERA’s approval, and the discussion of the developer and buyers’ details.
In spite of the fact that the Escrow Law was introduced in 2007, it played the key role even after the end of the financial crisis because of the necessity to provide new basis for the traditional trust account law. Furthermore, the law was effective to promote regulations regarding the mortgage defaults that became the sign of the post-crisis period. According to Marwan Bin Ghalaita as the CEO of RERA, it was important to guarantee the returns and security for investors funding the uncompleted projects in order to rely on the further investment in the area (M. B. Ghalaita, personal communication, March 11, 2015).
Therefore, during the period of the crisis, the authorities also referred to Law No. 26 of 2007 on Regulating Relationship between Landlords and Tenants in the Emirate of Dubai and to Law No. 27 of 2007 on Ownership of Jointly-Owned Properties (Government of Dubai Land Department, 2015). All the mentioned regulations were oriented to protecting the interests of the vulnerable parties participating in the sale and rental contracts. As a result, the focus on protecting the rights of investors and on the provision of principles for regulating the relationship between the landlords and tenants led to making the real estate market in Dubai safer even during the period of crisis.
Situation in the Real Estate Market during the Crisis
Referring to the sphere of the real estate market in Dubai, it is important to state that the financial crisis of 2008 was characterized by the housing bubble because the pre-crisis investor-friendly regulations made Dubai attractive for a lot of funding and the prices for construction, renting, and purchasing increased significantly (Al-Malkawi & Pillai, 2013, p. 116). It was the period of the oversupply, and effective regulations were necessary in order to stabilize the situation in the real estate sector of the Emirate’s economy. Furthermore, significant problems with employment and decreases in employees’ salaries were observed in the economic sphere. As a result, it was almost impossible to provide the comparative salaries for employees and it was impossible to respond to the demands of the buyers (Renaud, 2012, p. 52). These problems led to stopping many promising projects and to increasing the level of unemployment in the Emirate.
Changes in the Regulations after the 2008 Financial Crisis
If the authorities of Dubai made the first attempts to stabilize the situation in the real estate market with references to regulations during the crisis of 2008, the more crucial steps were observed during the post-crisis period.
Situation in the Real Estate Market since 2008
The financial crisis of 2008 affected the real estate market of Dubai negatively because the most profitable construction projects were postponed, the prices for properties were extremely low, and the level of investment in the sphere decreased significantly. Investors did not perceive the real estate market as the sphere safe for funding because the risk of stopping the project was high, and there were no guarantees that the completed project would be interesting for other purchasers (Renaud, 2012, p. 53). As a result, the number of investors operating in the market decreased significantly (Tawfik, 2012, p. 54).
Moreover, many investors and developers were oriented to leaving the market illegally, while not following the contract’s terms and conditions. In this context, the effective regulations were necessary, and RERA played the crucial role in formulating the regulatory framework for the real estate sector in Dubai. However, in spite of the effects of the crisis, Dubai Mall as the largest shopping mall in the world was opened in 2008. In addition, Burj Khalifa started in 2004 was completed in December of 2009 and such a large scale project as Dubai Metro was also successfully completed in 2009. The completion of these projects indicated that the economy of Dubai had significant resources to recover from the crisis.
Changed Regulations in Dubai
After the 2008 financial crisis, it was still important to accentuate the security of off-plan sales, and the trust accounts were proposed by RERA as the guarantees to facilitate the construction progress in Dubai in spite of the controversial financial situation in international and local markets. According to Marwan Bin Ghalaita, the main accent was put on the trust account law as the approach to regulate the credible relationship between developers and investors (M. B. Ghalaita, personal communication, March 11, 2015).
In this case, the activities of developers were regulated more efficiently. In addition, the revised approaches to the trust account law were associated with the idea that investors could provide payments only with references to the construction progress. Thus, payments were expected to be provided only for completion of the concrete parts of the project, and these payments were made in accordance with the process of building (Naini, 2011, p. 122).
The law associated with the trust account law was Dubai Law No. 13 passed in 2008 (Government of Dubai Land Department, 2015). This law was developed in order to regulate the interim register for the off-plan sales. The proposed law was discussed as the effective regulation to control the procedure of purchasing incomplete construction projects or investing in them. From this point, the Interim Real Estate Register was planned to be used for recording all off-plan units.
The other regulations that were developed in order to address the problems within the post-crisis real estate market were the changes in the land registration; changes in the approaches to identifying areas for purchasing properties and buildings by non-locals; changes in the law regulating relationship between landlords and tenants; changes in the law regulating ownership of jointly-owned properties; and changes in the law regulating rentals. Law No. 26 of 2007 on Regulating Relationship between Landlords and Tenants in the Emirate of Dubai, or the Rental Law followed during the crisis, needed changes to address the controversial economic environment.
Therefore, Law No. 33 of 2008 that amended some provisions of Law No. 26 of 2007 Regulating Relationship between Landlords & Tenants in the Emirate of Dubai was proposed in order to improve the approach to controlling landlords and tenants’ relationship with references to formulating advanced conditions for the effective collaboration. In 2008, Law No. 27 of 2007 on Ownership of Jointly-Owned Properties in the Emirate of Dubai was finally passed in order to control the management of strata developments and aspects of the ownership in the Emirate (Government of Dubai Land Department, 2015).
In this context, Law No. 9 of 2009 Amending Certain Provisions of Law No.13 of 2008 was developed as the reaction to the necessity of determining more appropriate regulations regarding the relationship between developers and buyers in relation to off-plan sales. Thus, the proposed amendments focused on the procedure of determining the compensation for a developer who completed the certain stage of the project and did not receive the payment according to the sale contract. Law No 27 of 2007, Concerning Ownership of Jointly Owned Property in Dubai became known as the Strata Law, and it was changed in April of 2010 with the focus on implementation of specific regulations and directions to the Law (Government of Dubai Land Department, 2015).
The approach to dividing the property into privately owned and jointly owned areas was followed, but a range of directions were added to make the law clearer and protect transparency. Marwan Bin Ghalaita stated that much attention was paid to regulating the cancellation process as related to the project development process (M. B. Ghalaita, personal communication, March 11, 2015). Thus, Executive Council Resolution No. 6 of 2010 provided the principles according to which a buyer or investor could claim for termination of the contract if a developer did not follow the points of the contract. Finally, in May of 2012, the regulation on the Protection of the Property Investor in Dubai was proposed in a draft form in order to protect the interests of investors who planned to sign the sale contracts (Government of Dubai Land Department, 2015).
Green Dubai
One of the most positive effects of the financial crisis on the development of the real estate market in Dubai was the shift in the authorities’ focus to the problem of sustainability and to developing the principles and rules of the sustainable construction and green building. The authorities started to develop the Green Buildings Regulations in 2010 (Government of Dubai Land Department, 2015). The main focus was on the sustainable consumption of energy resources and water resources. The process of developing the Green Buildings Regulations was divided into stages, where 79 regulations were expected to come into force, as it is noted by Abdulla Mohammed Rafia (A. M. Rafia, personal communication, March 10, 2015).
The purpose of the Green Buildings Regulations is correlated with the main purpose of developing Dubai as the sustainable city where much attention is paid not only to the efficient consumption of energy and water but also to the use of alternative energy, principles of recycling, and waste management (A. M. Rafia, personal communication, March 10, 2015). Abdulla Mohammed Rafia also concentrates on the effectiveness of using the building information modeling method for constructing green sustainable buildings (A. M. Rafia, personal communication, March 10, 2015). This modeling method is relevant to assess the readiness of the construction and the appropriateness of the building to fit the major requirements of sustainability.
In addition to the Green Buildings Regulations, Executive Council Resolution No. 46 of 2014 came into force as the regulation that is directly related to the green building in Dubai. In spite of the fact that this resolution provided the control for only one aspect of energy resources for constructed projects, this resolution is effective to illustrate the progress made by the authorities in Dubai in order to state the principles of sustainability in the Emirate. From this point, the principles of the sustainable development are the basic standards according to which different projects can receive the permit for construction and then the certificate in which the appropriateness of the new building is stated. As a result, the green building laws are directly connected with the procedures of receiving the permit for construction and building certificates (A. M. Rafia, personal communication, March 10, 2015).
Situation in the Real Estate Market in Dubai Today
After 2009, the residential and property prices were rather low, and they started to increase during the period of 2013-2014. In his interview for the BBC, Sheikh Mohammed Bin Rashid Al Maktoum stated that Dubai was able to recover from the crisis because of many factors including the orientation to quick recovery and the support for investors (Full interview, 2014). In spite of the fact that the observed increase in prices is rather extreme, the experts state that the developed and followed regulations are effective to control the prices and direct the further positive changes in prices according to the needs of the real estate market (Tawfik, 2012, p. 156).
The strict regulations proposed by the authorities in Dubai in response to the financial crisis of 2008 were discussed as rather conservative in comparison with the previously enacted laws, but these regulations were effective to make the real estate market stable during the period of 2009-2014. In addition to the re-started projects that were postponed during the period of the crisis, a range of new projects began to develop in the Emirate. Today, the development of the real estate market is closely associated with increasing investments into the sphere of green building because of the necessity to make all construction in Dubai sustainable (A. M. Rafia, personal communication, March 10, 2015).
The economic and financial environment in Dubai is characterized by the stable growth today, and these processes directly influence the real estate market’s development. According to Abdulla Mohammed Rafia, the real estate market is in a good situation today, and crisis helped develop regulations effective enough to stabilize the situation in the financial and real estate spheres (A. M. Rafia, personal communication, March 10, 2015). As a result, the current real estate market can be regarded as sustainable because of the extreme focus on developing construction projects that can respond to the principles of green building (Khamis & Semlali, 2010, p. 112).
In this context, the real estate market of Dubai unexpectedly benefited from the financial crisis as the period for revealing the weak points in followed policies and regulations. Currently, the regulations changed as a result of the crisis in 2008 can be discussed as efficient laws to solve all the questionable tasks related to the real estate market and parties’ relationships.
Timeline for 2008-2014
Conclusion
Although financial crises are traditionally discussed as challenges to the economies and markets, the financial crisis of 2008 played another role in influencing the real estate market of Dubai. The global financial crisis became a kind of a win-win situation for Dubai and its partners from the Middle East and Asia because the decreases in real estate prices attracted countries that could pay and invest during the period of the crisis. Thus, the countries from the Indian region were oriented to invest into Dubai because they were modestly affected by the crisis. On the one hand, the crisis reduced prices in the real estate market of Dubai.
On the other hand, new interested investors were attracted to the Emirate. The potential for the growth was significant because the companies from the Indian, Middle Eastern, and Asian regions continued to invest in Dubai as the top attractive region for the foreign direct investment in 2008-2009. As a result, the authorities of Dubai needed to focus on these advantages and propose the plan for the intensive recovery. Thus, the implementation of such projects as Dubai Metro, Burj Khalifa, and Dubai Mall in 2008-2009 supported the idea about the balanced plan for overcoming the crisis. The financial crisis demonstrated the economic stability and powers of Dubai in the real estate market in comparison with the other countries of the world.
Today, the real estate market of Dubai can be considered as developing actively because of the positive effects of a series of regulations that were proposed during the post-crisis period. The reason is that the financial crisis revealed the aspects in the legislation base and regulations of Dubai that were not perfect to make the market area stable under the pressure of the housing bubble and changes in the property prices. The authorities in Dubai chose the effective strategy to address the problem because they focused on enhancing the regulations adopted before 2008, and they used a chance to make the real estate market stronger with references to tighter regulations adopted during the crisis and after the crisis of 2008. The main focus was on the provision of security and safety for investors and their funds and on the sustainable construction projects.
References
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Full interview with ruler of Dubai Sheikh Mohammed Bin Rashid Al Maktoum. (2014). Web.
Government of Dubai Land Department. (2015). Web.
Khamis, M., & Semlali, S. (2010). Impact of the global financial crisis on the Gulf Cooperation Council Countries and challenges ahead: An update. Washington, DC: International Monetary Fund. Web.
Naini, A. (2011). Assessment of Dubai real estate trust accounts law and issues of business: Evidence from Ontario and Utah. The Journal of Business Inquiry, 10(1), 120-134. Web.
Renaud, B. (2012). Real estate bubble and financial crisis in Dubai: dynamics and policy responses. Journal of Real Estate Literature, 20(1), 51-64. Web.
Tawfik, A. (2012). The global economic crisis and consequences for development strategy in Dubai. New York, NY: Palgrave Macmillan. Web.