Dubai: The newly announced Trust Account Law is likely to present problems for developers as they will not be able to use buyers' money to construct projects, according to experts.
"In Dubai, the negotiating power of contractors means the newly announced Escrow Law is likely to present problems for developers who normally release staged payments from purchasers to pay contractors," a statement by the international law firm Trowers & Hamlins, said yesterday.
Delay in delivery of projects have been a major issue in Dubai. With the new law, this could worsen and developers might be forced to seek bridge financing from banks. Dubai's government has launched the Real Estate Regulatory Authority (RERA) to fix those problems.
"Issues related to the delays will be governed by the purchase contracts that should specify the penalties. However, RERA will investigate the delays whether they were caused due to external factors such as a change in road networks or a delay in electricity or sewage connections," said Marwan Bin Ghalita, RERA chief executive.
The value of all Gulf real estate projects announced last year (2006-07) has leapt 59 per cent to $143 billion, Trowers & Hamlins said, which, "shows that the oil-fuelled construction boom in the Gulf region has no signs of slowing down".
The new law requires developers to keep buyers' deposits in escrow accounts rather than allowing them, without some form of independent certification permitting release of funds, to pay this money early to contractors as the project progresses.
This could lead to contractors refusing to continue work until the payments they were promised, tied up in escrow accounts, were made to them.
In the previous 12 months (2005-06) the total value of new commercial and residential real estate projects announced has still been an impressive $90 billion.
Trowers & Hamlins says the construction boom is causing problems over and above the well advertised shortages of steel and sand.
Nigel Truscott, a partner at Trowers & Hamlins said: "There is now a shortage of capacity among engineering firms, skilled contractors and subcontractors. That means that they are able to negotiate some contracts where far too much of the risk is left with the developer."
"In some cases contractors are forcing developers to pay for their professional indemnity insurance. There are cases where a subcontractor has stopped work on one development so they can start on a bigger, more prestigious project."