Pre-escrow investors get the jitters

Though there is no official list out as yet, it is only prudent to assume that there are some developers out there who are on the verge of bankruptcy.

Around 30 have already filed for project cancellations, but the uppermost question on everyone's mind is, ‘How will the investors be compensated?'

Their concerns would get more acute if any of the cancelled projects date back to before the time when the escrow account came into retroactive effect.

Fate of off-plan projects

“Now that developers don't have the money to pay, as they have taken it before the escrow came, will investors get it back?'' questions Walter Hart, an independent real estate advisor.

“The deck of cards is going to come down — I worry about people who bought into off-plan projects which are not even under construction, never mind those under construction.''

For this very reason, RERA officials insist that the Escrow Law is a retroactive one. Marwan Bin Ghalita, RERA's CEO, reassures that all the collected monies are very much intact.

“The developer's monies are in escrow accounts and we hold their land as a collateral,'' he states. “They paid very little for the land at the time they bought it, we could sell it on and pay investors back should a project collapse.''

It sounds simple, but does not quite allay fears yet. Hart points out that the late introduction of the escrow requirements could still see some money having gone amiss.

Inappropriate way of building

“In South Africa, the trust account releases little by little to any project being built on the scale like they are done here. When I came here six years ago, I couldn't believe what I saw was happening here — it was an inappropriate way of building. Introducing escrow was right, but where was RERA for the four years before that?''

RERA, it must be said, is working hard to make up for lost time. One can check a developer's registration, complete with the escrow account number of a specific project on their website. And if missing, contact RERA for clarification. Escrow money is releasable according to construction progress.

However, investors and lawyers doubt whether the funds developers collected in the past have indeed ended up where they should have.

“I don't believe that all the money is in escrow accounts,'' says Ludmila Yamalova, Partner at M A C Davidson & Associates. “Not just smaller, but larger developers used investors' money from one development and invested it into land, design and marketing of another project. So, that money isn't really in the pot.''

Whether true or not, one can see where the doubts originate. Many investors have paid over half or more towards a property in some of the older developments.

They have every reason to be concerned when they don't see much activity on-site and developers refuse to return the payments made.

“There are a lot of unanswered questions,'' adds Yamalova. “For example, developments that have sort of started — how do you define that by putting a crane and digging a few holes?''

Self-finance rule

The latter has been common practice, but the 20 per cent self-finance rule for developers to start construction should see more than just the deployment of the odd machinery on-site.

RERA is keeping a close eye on developers now, carrying out monthly independent audits of their accounts and only allowing a 5 per cent maximum justified expense for management and marketing. Profits made are non-payable unless the building is over 60 per cent completed. Best of all, as long as an investor has registered his unit, he can get a look into the developer's escrow accounts via the Land Department.

“We have dealt with developers' irregularities, such as hiding the project's escrow account number or depositing funds outside the escrow account, pursuant to the provisions of the law,'' reassures Bin Ghalita.

While this is good news, what remains unknown is whether developers who have been asked to return money to escrow accounts have actually done it, especially if they are on their way to bankruptcy. Should this hypothetical event occur, investors could call upon the law.

“The bankruptcy law is similar to other parts of the world — secured, unsecured assets, etc. will be liquidated. But, it hasn't been tried and tested here yet. We'll see what happens as we go through the next twelve months,'' says Lisa Dale, Partner at Tamimi & Company.