Business | Analysis

Real estate sector law desperately needs to be updated

Artificial charges helping to create an unfavourable investment climate

  • By Mohammad Al Asoomi Special to Gulf News
  • Published: 13:20 March 20, 2013
  • Gulf News

The GCC’s real estate sector has always been a major component of local economies. It currently represents 7 per cent of the GDP of the countries of the Gulf Cooperation Council (GCC). It also represents a strong attraction for private investments.

The real estate sector witnessed a boom in the past decade, which has contributed to turning Gulf cities into modern cities with world-class services and modern lifestyles, quality of housing and public utilities, leading to attracting huge local and foreign capital, especially after some GCC countries allowed resident and non-resident foreigners to own property.

The decision came after long years of limiting freehold of properties to Gulf citizens only, a move that led to the creation of new cities where lifestyle is different from the lifestyle that prevailed in the Gulf for many years after oil was discovered.

The establishment of joint stock property companies listed on local stock markets has helped speed up real estate investments and the emergence of high-quality commercial buildings and stores, thus attracting the savings of small investors, including citizens and expatriate residents. It has also boosted the real estate sector with huge investments that have increased the pace of its growth, especially in the UAE and Qatar.

Due to this growing significance, the real estate sector is expected to grow faster in the coming years. As a natural result of the mammoth surge in population numbers, including new arrivals from abroad, the legislative and legal structure of the real estate sector desperately needs to be updated so as to keep pace with its rapid growth.

Taking for example fees levied for property services, we will find the absence of regulations that govern the process of imposing these fees, as each real estate company imposes fees as deemed appropriate for it in order to increase its revenues, regardless of the property value or its annual return on the investor or the level of services provided by the relevant company.

This has created a huge gap between these fees, as well as a competition between companies with regard to raising service fees without commercial or legal justifications.

At the same time, real estate regulatory bodies either do not pay attention to what is happening or they agree to raise fees annually at high rates without examining each case individually, Considering the high percentage of such fees, compared to the annual return of 25 per cent in most cases -- is very high and unjustified.

In addition, real estate companies have introduced artificial charges, such as withdrawing electricity and water services from providers, acting as a broker or intermediary in providing these services in exchange for deducting large amounts from landlords or tenants, noting that these companies do not have any electricity or water stations, and thus having access to these services do not require their intermediation.

This poor situation, unlike to any other, helps create an unfavourable investment climate, requiring the enactment of laws that determine the quality of services provided by developers and the value of these services, as a percentage of annual income, that does not allow any company to manipulation these rules. This would be exactly as the case in European countries, which apply general rules and regulations to all real estate development companies and do not leave it to the estimation of each company trying to maximise their profits at the expense of the investor.

It has become necessary to pass such laws and regulations to maintain the stability of the real estate sector and attract investments for its development, while maintaining the rights of landlords and investors, who may be caught unawares by annual fee increases or acquisition of existing services and artificial increases by developers.

It is the responsibility of real estate regulatory agencies to carry out this task and take into account the effects of such gaps not only on the real estate sector, but also on the overall economic situation, which requires better organisation that would have positive impact on other sectors.

Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.

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