The introduction of the suspended/cancelled project list by the Dubai Real Estate Regulatory Agency (Rera) has increased visibility on the number of real estate projects in Dubai where construction works have either not commenced or have subsequently been suspended.
While there are likely to be a variety of issues that have contributed to the suspension of such real estate projects, it is likely that the recent cooling in the off-plan sales market has been a determining factor.
Notwithstanding current market conditions, there has been an increase in potential purchasers seeking to acquire or enter joint venture arrangements, in relation to distressed projects.
While a distressed project sale may provide an opportunity to purchase below market value, it is important for a potential purchaser to identify and consider the specific factors that led to the project becoming distressed, at the same time as assessing the potential benefits.
Features and benefits of a distressed project sale
In addition to wider market conditions, there are likely to be a variety of circumstances, which give rise to a distressed project sale. These could include an owner identifying in the early stages of a project lifecycle that it will not be able to comply with its financial obligations, e.g. the owner being unable to repay an upcoming loan in relation to the project, or its legal obligations, e.g. a master developer insisting that the owner commence construction of the project within an upcoming timeframe or be liable to pay penalties.
A potential purchaser seeking to acquire a project at a distressed sale price may in turn be able to offer the existing owner either the necessary cash funding, the required delivery/sale expertise or both.
To help bring together owners and investors interested in reviving stalled projects, the Dubai Real Estate Investment Promotion and Management Centre has established the Tanmia scheme, which aims at revitalising incomplete projects. Owners can approach the centre for inclusion of their distressed project and investors can approach the centre to register their interest in funding or acquiring a distressed project. The centre has also established the Tayseer scheme, which is a guaranteed funding initiative for certain pre-qualifying, distressed projects.
We recently advised a prominent sub-developer based in Dubai who had acquired a distressed project in an up-and-coming master community. A number of the units in the project had already been sold to third-party purchasers. The sub-developer was able to sell the remaining units and terminate or settle with purchasers who were in default of their payment obligations, ultimately completing and delivering the project, to the benefit of all stakeholders.
What to consider
Some of the key considerations include:
• Ensuring that the entity presenting itself as the owner of the project is in fact the Dubai Land Department (DLD)-registered owner.
• Ensuring that the land interests have been fully secured, both in relation to the full payment of the land and registration of the land interest at the DLD.
• Ensuring that the project has not actually been cancelled by Rera, as once Rera has cancelled a project, the special judicial committee at the Dubai Courts is then responsible for overseeing the liquidation process, which would prevent a further sale of the asset, unless by way of a court-sanctioned public auction.
• Enquiring as to whether the land is encumbered by any third-party interests, e.g. by way of mortgage, as such interests may continue to encumber the land unless restructured or removed.
• Enquiring whether any off-plan sales have been registered at the DLD, as registered owners can then enforce their rights against the new owner.
• Considering that any off-plan sales may not yet be registered and registration fees on the Interim Real Estate Register may be payable as the new owner of the project.
• Ensuring that the contracts entered into with third-party purchasers, design and construction contractors and/or the master developer are effectively assigned to the new owner, along with a careful review of the new owner’s rights, financial and legal obligations under those agreements, and whether the potential purchaser has the capabilities to fulfil those obligations.
• Undertaking full financial due diligence to ensure the feasibility of the project, having considered: a) the remaining amounts that are likely to be received, both in relation to sold and unsold units within the development; (b) the existing third-party interests that encumber the land/project; and (c) the outstanding liabilities in order to complete the project.
While a distressed project sale can be an attractive prospect, it will likely carry certain financial or legal risks and, therefore, the necessary due diligence should be carried out and legal advice obtained to ensure that those risks are mitigated as much as possible.
