New escrow account law likely to dampen new property launches

From now on freewheeling Dubai developers will be firmly under government control, and money will be allocated as a project proceeds based on official certification of the stage reached.

What impact is this going to have on the Dubai property market? The obvious conclusion is that it is likely to significantly dampen new project launches. And there have been so many over the past year that this may well mean an end to new projects for a while, at least from smaller developers.

International property experts have been increasingly alarmed at the ease with which property projects could be established in Dubai and off-plan deposits accepted with no guarantee that these funds would in fact be used for the purpose intended.

New era for development

The fear is that even honest developers might lose the money in unwise investments, quite apart from being an open invitation to the dishonest to promote fictitious projects.

Many in the property industry will breathe a sigh of relief and conclude that the constant round of project launches is now over. But they are still concerned that the law applies only to projects launched after the law was decreed, and wonder how existing projects will stack up.

It may be that the Dubai authorities are planning further legislation to protect existing off-plan buyers. Certainly there has been considerable frustration among some buyers with late project starts and an absence of evidence of physical construction work on a number of projects.

But Law No8 shows that the Dubai Government is aware of the situation and taking action. And it would be strange if such a proactive government stopped short of taking appropriate steps to ensure that the cooling of the Dubai property boom is an orderly process and that as many people as possible become happy Dubai home owners.

Realty reality

Dubai certainly has come a long way since freehold property ownership for foreigners was first allowed five years ago. Property prices have trebled in that period, and yet property still produces rental yields that are high by global standards.

High rental yields mean that house prices will likely go higher over time, unless rents unexpectedly fell. There is no reason why Dubai should have cheaper real estate than comparable global hub cities. The market will surely correct this anomaly over time.

However, governments also have a role in property markets in ensuring fair play and protecting investors. Law No8 should therefore be welcomed in that light.