The International Comparative Legal Guide to:

Real Estate 2009

A practical insight to cross-border Real Estate work

Published by Global Legal Group, with contributions from:

Arias & Muoz Ashurst LLP Babalakin & Co. Barbosa, Mssnich & Arago Advogados Blake, Cassels & Graydon LLP Clayton Utz Dittmar & Indrenius Drakopoulos Law Firm Gmez-Pinzn Zuleta Abogados S.A. King & Spalding LLP Law Chambers Nicos Papacleovoulou Law Firm Eversheds Saladzius
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Nishimura & Asahi Pachiu & Associates Pepeliaev, Goltsblat & Partners Pestalozzi Attorneys at Law Philippi Yrarrzaval Pulido & Brunner Ltda. Porobija & Porobija Law Firm Raidla Lejins & Norcous Schoenherr Strauss Scher Inc. Trowers & Hamlins Wikborg, Rein & Co.

LOGOS legal services M. T. Miskita & Company Makarim & Taira S. Marval, O'Farrell & Mairal McCann FitzGerald Meredith Connell Mijares, Angoitia, Corts y Fuentes, S.C. Molitor, Fisch & Associs Muscat Azzopardi & Associates Advocates

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Chapter 2

Middle East Real Estate A Comparative Review

Trowers & Hamlins

Abdul-Haq Mohammed

Peter Greatrex

Introduction
Whilst recent developments in property laws in the Middle East have been overshadowed by the effects of the global financial crisis on the regional real estate market (especially in Dubai), it is still useful to consider the steps that have been taken over the last year or so to take the market forward and increase its attractiveness to investors. This chapter takes a tour of various countries within the region and extracts recent developments of note. The countries within the GCC (as compared to the remainder of the Middle East) remain the most active in developing their real estate framework, with some taking several strides ahead of others. For example, there is now a considerable dichotomy between property law regimes in place in countries such as Dubai and Bahrain when compared to the likes of Saudi Arabia and Kuwait. It will be interesting to see the extent to which the tremendous effects of the financial crisis trigger a response from Governments of GCC countries to push forward plans for bolstering their regulatory frameworks in the context of property, and whether they will take this opportunity to heed the lessons coming out of the fall-out from the crisis in places such as Dubai. In hindsight, it is probably fair to say that some of the more impressive steps taken by the Dubai Government to deal with various holes within the property law system came a little too late to fend off the crisis that had developed for all to see. Nevertheless, once the market stabilises, these changes that have been made over the last year will surely have a positive effect on the property market. Our chapter on Dubai highlights the considerable strides that have been made there to produce a system, which, on paper at least, is now the most sophisticated of all regional property law regimes.

outside designated investment areas, to confirm that GCC nationals can own properties within designated investment areas through their corporate vehicles and to confirm that foreign nationals who own leasehold interests within designated investment areas (they cannot own freehold interests) can own the structures that they develop on such leasehold land. Since then, the Government of Abu Dhabi has introduced a general right for tenants to enjoy a minimum tenure of three years. An independent tenancy disputes settlement committee has also been established. There has been a revision to the law on rent caps, preventing rent increases over 5%. As with all recently introduced rent cap measures, however, there are considerable difficulties in implementation and widespread concern about the abuse of available loopholes. These are very much the first stages and it is important that these principles are followed up by detailed implementing regulations to enable practical effect to be given to these policy moves. There have been suggestions that the Emirate is likely to establish further laws dealing with the common ownership of apartment buildings and the establishment of owners syndicates or associations. The question is to what extent Abu Dhabi will transplant the laws developed in Dubai over the last two or three years as opposed to establishing a different regime entirely. The chapter on Abu Dhabi by our colleagues Mark Orman and Jane Dalton goes into more detail about the real estate laws in Abu Dhabi. Note in particular the reference to various official announcements which suggest that these might include the introduction of strata title laws, escrow laws and the establishment of a real estate regulatory authority.

Bahrain
Bahrain has undergone significant growth over recent years, particularly in the degree of foreign investment in the country. Real estate has become an increasingly important element of Bahrains investment profile and some of the regions most well-known projects are based on this small island. The law regarding nonBahraini property investment and development is quite fluid, although nothing of immediate note has occurred in the last year or so. There is undoubtedly a need to establish some more sophisticated laws to bolster the system as more and more end-user units come to completion. It should also be noted that Bahrain does not currently have a system for registering leases and this certainly limits the options available to developers when they market their projects, as end-users are unlikely to be interested in - or be able to obtain finance for - leases that cannot be registered and create no interest in land.

Abu Dhabi
Abu Dhabi is keen to establish itself as a centre for real estate investment within the region. Until now, it appears to have adopted a wait and see policy and in recent years, Abu Dhabis property laws have been more restricted than those of its sister state, Dubai. It has, however, introduced the concept of designated investment areas within which more relaxed laws are in place. Various announcements have recently been made to the effect that Abu Dhabi intends to introduce sophisticated property laws to create a firm regulatory framework within which owners and investors will be protected. The first stage of Abu Dhabis strategy to overhaul its property framework was to permit the Executive Council of Abu Dhabi to allow companies not wholly owned by UAE nationals to own land

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Middle East Real Estate - A Comparative Review

title community ownership in the United Kingdom, Australia and elsewhere. Implementing regulations are still awaited and therefore the effectiveness of the law is somewhat uncertain at present.

GCC citizens have always had wide rights, broadly equivalent to those of Bahraini nationals, to own property in Bahrain. Legislative Decree No. 2 of 2001 provides that non-Bahrainis (both individuals and companies) may own built properties and land in the Kingdom of Bahrain in any manner prescribed by earlier legislation and subject to conditions prescribed from time to time. The land that is available for foreign ownership is limited by the Kingdom to certain areas and is dependent on the intended use of the land by the proposed buyer. It is worth noting, however, that these areas are often areas of prime real estate showing considerable economic growth. In 2003, Bahrain enacted further legislation to enable foreigners to own real estate on a freehold basis in areas designated for foreign ownership. The most recent update to the law was in 2006, pursuant to Ministerial Edict No. 67 of 2006. This permits the ownership by foreigners of residential units of certain types anywhere within the Kingdom. There is also a specific power for the Government to designate from time to time certain lands for tourist and investment projects of a special nature. Projects so designated will then permit unlimited foreign ownership. Note that if the foreigner is a corporate entity, ownership of built property and land must either be one of the companys objects or it must adopt a board resolution approving the ownership of built property and land in the Kingdom of Bahrain.

Egypt
Egypt has been witnessing strong economic growth in recent time and there is now an appetite for real estate investment that was not present a few years back. Various Middle Eastern developers (such as Dubai developers Emaar and Al Futtaim) have established Egyptian entities and are in the process of developing projects comparable to those in the Gulf. Egypt has always had a well established legal system in theory, although perhaps some of the practice has left a lot to be desired. For example, whilst a mortgage financing law has been in place since 2001, mortgages have never taken off because of the concerns banks have had about enforcing their security. The critical factor behind this low uptake is the fact that banks have been unable to use unregistered properties as collateral. Only 9% of properties in Egypt are registered and Government land registration fees have been prohibitively expensive. In an effort to deal with these significant hurdles, the Government has established a special office within the real estate registry for recording property subject to a mortgage. At the same time, a special division has been established within the Enforcement of Judgements Department of the Ministry of Justice with the specific purpose of enforcing foreclosures on properties. These measures come on the back of recent efforts to cut the costs associated with the property business. For example, in 2005 registration fees for property purchases were cut from 12% of a propertys price to 3% and capped at 2,000 Egyptian Pounds. On the investment side, the Cairo Alexandria Stock Exchange (CASE) has been working to increase investor appetite in the Egyptian market. A series of Ministerial Decrees have been enacted to allow the creation of various funds including real estate or realty funds. These will be tradable on CASE.

Dubai
2008 was the year that the Government of Dubai introduced a raft of new legislation designed to create a sophisticated and robust real estate regulatory framework. Highlights of the new framework include the introduction of a preregistration law, which allows for interests in off-plan properties to be registered on an official land registry. This could grant buyers significant protection in an otherwise uncertain market, as off-plan purchases occupied a significant element of the property business in Dubai. There is also a mortgage law requiring mortgages to be registered with the Lands Department and also permitting the registration of charges over contractual interests as opposed to just legal title. Again, this is designed to grant protection to buyers and facilitate property finance during the early stages of an off-plan development. There is a new landlord and tenant law (introduced in 2007) which requires all leases to be registered with the new Real Estate Regulatory Authority (RERA). RERA has also introduced standard forms that must be used on the secondary market for residential property. These forms can only be used by licensed real estate brokers. Part of the aim here is to remove undesirable practises and provide for more certainty in the residential market. Prior to the introduction of this Authority, there had been increasing concern about the activities of unscrupulous brokers and agents operating within an unregulated environment. A real estate database and rental index has been introduced providing details for average rents in various districts which tenants and landlords can use when agreeing rents. This index is revised on a regular basis and provides a useful tool for gauging the open market value of properties. An escrow account law was passed requiring developers to place a certain portion of monies received from buyers on escrow, to protect buyers from failures to deliver on projects. A strata title law has also been introduced which provides for the common ownership of communal areas and facilities within large scale developments. Previously, common ownership has really only been available in apartment blocks. This law, whilst relatively simple, takes on the principles utilised for commonhold and strata

Oman
Omani Law contains a concept of integrated tourist complexes, within which special rules apply allowing for foreign ownership. From time to time, new projects are accorded integrated tourist complex status and there has been a push towards allowing for bespoke regulatory regimes to be allowed within such complexes. For instance, in 2008 the Wave project was the subject of a Ministerial decision giving the developer the authority to establish internal rules and regulations for the project. These regulations, whilst fairly simple by international standards, do set out a series of principles essential for the regulation of a master planned development of this kind. They deal with issues such as the requirement to abide by development wide rules, the obligation to pay service charges, the right of the developer to enforce sanctions against owners and occupiers of the project for failure to pay such service charges and restrictions on disposals if the regulations have not been adhered to. There has been a significant amendment to Omans legislation dealing with leases, with the implementation of the Royal Decree No. 72 of 2008, which applies to all lease arrangements (whether residential, commercial or otherwise). There are some important provisions within this Decree including a cap on rent increases of 7% every three years. There are also now strict notification and registration procedures for situations where a landlord sells property which is tenanted and there is now an implied obligation

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Middle East Real Estate - A Comparative Review

law is its restriction on granting pledges over construction during the projects term. As a result, it is likely that investors will need to find other collateral to obtain financing as a result. It is possible that the BOT rule might be used for developing certain types of real estate projects, although it is perhaps better suited to the industrial projects with which BOT has always been associated. Clearly, BOT will not work for the development of residential projects, where end-users expect to be granted either freehold or long lease interests in their units.

on landlords to renew annual lease contracts. To give practical effect to this new Decree, the Muscat Municipality will be amending their standard form lease contract. In the context of corporate ownership, Ministerial decision No. 249 of 2008 now allows wholly GCC owned companies with the necessary objects to own land for property development in Oman. This ties in with the general aim of all of the GCC countries to allow freedom of ownership of land for their citizens in other GCC countries to enable them to freely practice their economic activities and businesses.

Kuwait
Kuwait has for some reason failed to establish itself as an investment destination for real estate projects. Indeed, it is common for Kuwaiti investors to plough their money into assets elsewhere in the region and around the world. Some of the major regional players in real estate market are Kuwaiti and very little of their projects are implemented in Kuwait itself. Despite this, Kuwait City has some of the highest property prices in the entire region, although it is suggested by some that this is simply owing to a dearth of quality commercial space. There is a general perception that real estate development in Kuwait is a costly and time consuming process. Very little has happened in the way of new real estate regulation although there was a recent announcement about the development of the City of Silk project, at a value of approximately $58 billion over 250 square kilometres of land. It remains to be seen whether this project will increase investor appetite for Kuwait and whether the downturn in the market in places such as Dubai will have an impact on the delivery of the project. The nature of the project is such that it is likely to require a multitude of sub-developers to take on sizeable zones within the project. There is a general concern that the infrastructure is not yet in place to make real estate attractive to potential investors and of course there is very little legislation permitting foreign ownership. If the City of Silk project is to be a success then it must be accompanied by an overhaul of the real estate regulatory framework. Just about the only movement in the regulatory regime for real estate projects in Kuwait in recent times relates to Build-OperateTransfer (BOT). Traditionally, the Government of Kuwait has obtained financial investment into projects by offering developers and investors concessions to build and operate a project for a fixed period, with ownership ultimately reverting back to the Government. Kuwait has had a BOT rule in place for some time and this was updated last year. The original rule was considered to be far too restrictive, although there are questions as to whether the new rule will improve things substantially. The previous BOT law stipulated a maximum BOT concession period of 20 years. Under the new law, larger projects can be granted a longer concession by the Government on a case-by-case basis. Importantly, BOT projects will also now be coordinated through a new body called The Central Authority under the chairmanship of the Ministry of Finance. The intention is that this will provide consistency and transparency. The new BOT law requires that a public shareholding company is created for new projects with shares held by the Government. The law was ratified on 29 January 2008 and entered into force on 10 February 2008. No Government agency can enter into agreements for BOT projects involving state owned land without obtaining the approval of The Central Authority. Upon expiry of a BOT term, it must be handed back to the Government for no consideration and without any compensation being paid to the operator. One difficulty with the

Qatar
Qatar has taken several steps in the last few years to increase its real estate investment profile. There are some major projects currently taking place on the island, with investors coming from around the region including Abu Dhabi and Bahrain. Qatar operates a designated areas system similar to those in Bahrain, Abu Dhabi and Dubai. Foreigners may acquire both freehold and leasehold interests in certain designated areas and there is a wider range of areas within which they can acquire 99-year leasehold interests. There is also a law in place (Law No. 2 of 2006) permitting residency permits to be issued to non Qataris subject to certain conditions where such foreigners have acquired property in Qatar. The Foreign Investment Law of 2000 contains a range of measures that remain applicable. For foreign developers, there is a right to enter into leases of up to 50 years for the implementation of an investment project, with rights of renewal (subject to agreement) and rights to transfer such leases to other investors. A law was also passed (Law No. 4 of 2008) in relation to leases. This law introduced a series of measures to curb escalation in rental prices. The lease law is a wide ranging piece of legislation providing for the establishment of Lease Registration Offices and a Rental Dispute Committee. It applies to all forms of leases (except for certain categories such as farmland, industrial land and tourist apartments and particular designated residential units). Leases must now be registered with the Lease Registration Office to be enforceable. It appears that this applies to all leases and that an annual fee of 1% of the rent is then payable to the Lease Registration Office. There are penalties for failing to register leases after execution. The Rental Dispute Committee will be chaired by a judge with two other members appointed by the relevant Minister. It will be able to resolve all disputes between landlords and tenants. In terms of rent control, the law states that for a period of two years there can be no rental increases on contracts executed after 1 January 2005. It sets out a formula for rental increases for contracts executed before that date. The law also automatically extends leases already in existence to provide more protection to tenants, although the landlord may apply to the Rental Dispute Committee to seek vacant possession in certain circumstances. Note, however, that leases executed after the date of the law are exempted from the caps and this is likely to have a significant impact on and greatly reduce the efficacy of the law. It is probable that landlords will find ways to get rid of their current leases and, therefore, avoid the restrictions under the current rent law - these are similar to problems faced with rent cap laws elsewhere in the region. Another key exemption is that the law does not apply to residential companies compounds leased by companies for the use of their employees, which remains a very common practice in Qatar.

Saudi Arabia
The key piece of legislation within Saudi Arabia over the last year

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Middle East Real Estate - A Comparative Review

Conclusion
There are interesting times ahead for the real estate market in the Middle East. Property has been an incredibly buoyant part of the regional economy over recent years. The recent downturn - with the dramatic drop in investor sentiment and the reluctance of banks to finance property development and purchases - has had an obvious effect on those markets that were previously most active and most subject to speculative activity. It is to be hoped that, once the dust settles, the regional market will emerge as more mature, better regulated and longer-term in its thinking. In the meantime, we might expect to see a refocusing of emphasis towards social infrastructure and affordable housing projects. This would replicate trends seen in Western markets, where the public sector picks up when the private sectors experiences a dip. The returns from affordable housing might not be as spectacular and might require longer-term investment, but they could provide an attractive alternative for real estate developers feeling the pinch from the dip in the commercial market. Of course, this will only work if it is approached in a considered and strategic way with the support of government.

has been a mortgage law. This has been in the pipelines for many years and is considered critical to the development of the real estate market in Saudi Arabia. Whilst mortgages have technically been available in Saudi Arabia, they have traditionally been refused registration by notaries public. The idea behind the new law is to remove any such uncertainty, thereby creating a formal framework for the registration of mortgages over title and providing security for banks. There are concerns as to how effective these provisions will be in the short-term because of the recent downturn in the housing market; many investors are already at the limit of their borrowing capacity. There are currently also concerns that it will only benefit large real estate developers because of the limited capacity of the law. There is scope for foreigners to own real estate in Saudi Arabia although a range of restrictions do apply. The foreigner in question must be a legal resident of the country and must only purchase the property for his own use. Foreign ownership of large scale development projects require special approval. There are specific exclusions to rights of foreign ownership. For example, foreigners may not own any property in Makka or Madina.

Abdul-Haq Mohammed
Trowers & Hamlins 9th Floor, The Tower Sheraton Commercial Complex PO Box 3012 Manama Bahrain

Peter Greatrex
Trowers & Hamlins
9th Floor, The Tower Sheraton Commercial Complex PO Box 3012 Manama Bahrain

Tel: Fax: Email: URL:

+973 17 515 607 +973 17 535 616 amohammed@trowers.com www.trowers.com

Abdul-Haq is a partner in Trowers & Hamlins Bahrain office and the head of its Middle East Real Estate team. He specialises in all aspects of real estate work, advising developers and investors on major property projects throughout the region. He is currently working on a range of projects in Bahrain, Qatar, Abu Dhabi and Oman. Before moving to Bahrain in 2005, Abdul-Haq spent several years in the Commercial Property department of Trowers & Hamlins in London.

Tel: +973 17 515 627 Fax: +973 17 535 616 Email: pgreatrex@trowers.com URL: www.trowers.com Peter is a lawyer at Trowers & Hamlins based in its Bahrain office, and is a member of its Middle East Real Estate team. Peter previously worked in the Housing Projects team in Trowers & Hamlins London office. Peter has experience in acquisitions and disposals of both freehold and leasehold property including development work, a range of landlord and tenant matters and the charging of large portfolios of residential property. He is currently advising on a number of large-scale mixed use development projects in Bahrain.

Trowers & Hamlins is a modern, international law firm. Our principal office is in the City of London. We also have five offices across the MENA region: in Abu Dhabi, Bahrain, Cairo, Dubai and Oman as well as a co-operation agreement in Saudi Arabia. In addition, we have two UK regional offices, in Manchester and Exeter. We have more than 100 partners and over 700 staff. We are ranked in the top 40 (by turnover) of the UKs law firms. We are ranked in the top 15 (by turnover) of the UKs law firms for real estate. We were awarded Law Firm of the Year at the 2007 Lawyer Awards. Trowers & Hamlins is consistently ranked highly by legal directories for our Middle East practice and has thriving corporate, commercial property, projects and construction, banking and finance practices operating across the region. We advise our clients in relation to Middle East matters from both our local offices and from London. Each of our Middle Eastern offices advises on matters both in its relevant jurisdictions and also across the region. We have, for example serviced our Saudi based clients from Dubai and Bahrain as well as London. The London office has also been very active in Kuwait and Jordan. The work undertaken by each of our offices is a broad mix; we provide a wide range of corporate, regulatory and commercial services to our clients including, mergers and acquisitions, private equity, joint ventures (both corporate and commercial), commercial property, banking and finance, intellectual property (in particular protecting IP rights) and information technology and general commercial matters such as supply and distribution agreements.

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