Impacts of the crisis on the real estate sector in the United Arab Emirates

Impacts of the crisis on the real estate sector in the United Arab Emirates

Written by Raphaël François-Poncet and Nigel Hartridge, partners at LPA-CGR avocats Dubai office

What government measures have been put in place in Dubai to help real estate operators face Covid-19? This article, co-written by Raphaële François-Poncet and Nigel Hartridge, partners at LPA Dubai, provides a few pointers.

The real estate sector, both in the professional and retail areas, is a key sector of the economy in the United Arab Emirates (the “UAE”) and, in particular, for the Emirate of Dubai which does not have the benefit of the same extensive oil reserves as its neighbour, Abu Dhabi. The hotel industry and increasingly expanding real estate developments in particular fueled rapid economic growth in Dubai in the aughts and remain, despite the 2008 crisis and the sharp slump in the market observed since 2014,   strategic assets in the Emirate’s economic setup.

The Emirate’s authorities, aware of the market’s frailty, were counting on the 2020 World Expo to bounce back, but the Covid-19 disaster has hard hit an already struggling profession. In response to this troubling situation, a series of legislative and regulatory measures were recently passed and, for the most part, implemented since mid-March to provide support to the real estate sector. In addition, certain key operators in the industry have also put in place certain mechanisms designed to support their partners and clients and recapitalization plans are beginning to emerge.

General measures in response to Covid-19

Since 5 April 2020, the UAE adopted a series of strict lockdown measures,   significantly reducing and for an unlimited period incoming flights from abroad, but also travel within the Emirates. These restrictive measures are applicable to all, except for professionals working in so-called “essential” sectors. There are no federal regulations defining a list of these essential sectors, however both the Emirate of Abu Dhabi and the Emirate of Dubai have included real estate construction in their list of strategic activities, in the same way as the health and food sectors. Thus, the decision of the authorities not to interrupt building sites shows their willingness to place real estate at the heart of the measures supporting the economy.

Government measures to support major real estate operators

In response to the slump in the stock market observed for major operators in the sector such as property developer Emaar, whose stock has lost nearly 40% since December 30, the Dubai Financial Market enforced, since March 18, a suspension of trading that applies as soon as the drop in prices in a single trading day exceeds 5%.

As part of an AED 1.5 billion emergency plan in response to the crisis, the Dubai government has also taken a series of measures (the “stimulus package”) to support the hotel sector which has been hit very hard by the decline in tourism. These measures are reflected, among other things, in the reduction of taxes levied by the municipality on stay fees from 7 to 3.5 percent and the suspension of levies on online booking fees. However, with tourism at a virtual standstill, the impact of such measures is questionable. The emergency plan also includes a freeze on all taxes and permits in the leisure and events sectors.

A 10% reduction on water and electricity bills, including for residential accommodation, has also been decreed by the Dubai government for a period of three months.

In parallel, an AED 126 billion emergency plan adopted at the federal level is being implemented by the central bank to counterbalance the effects of the recession resulting from Covid-19 and provides for:

• a 5% increase in the loan-to-value ratio for first-time buyers;
• a review of the level of exposure of banks in the real estate sector which allows, under certain conditions, when exposure reaches 20% of a bank’s loan portfolio (measured by risk-weighted assets), to increase exposure to 30%.

These measures should help maintain appeal in the housing market without increasing the speculative risks inherent in its structure.

Specific measures in Dubai’s free zones

The Dubai Land Department (“DLD”) has issued a decree suspending eviction measures for commercial and residential leaseholders for the months of March and April. In parallel, the Dubai Free Zone Council has adopted a series of measures to support companies during the crisis, including in particular, a deferral of rents for a period of six months, the reimbursement of security deposits and facilities for rent payments.

Measures adopted by property developers and investment holding companies

In parallel to the government measures, key operators in the industry such as Nakheel and Meraas have taken certain initiatives to support the sector.

Nakheel, whose clients include both landowners, retail businesses, hotel operators and SMEs, has announced a plan to temporarily suspend rents for these clients for AED 230 million. Nakheel has also suspended the payment of management fees for three months.

For their part, Dubai Holding and Meraas have together launched a support plan worth AED 1 billion to relieve their clients and suppliers most affected by the crisis. A task force is studying the specific needs of certain clients and providing support on a case by case basis.

In parallel, recapitalization and financing operations for certain marketplace operators are being studied.

These support measures put in place by the authorities and property developers appear vital to enable the real estate sector to weather the crisis. Before Covid-19, the real estate sector was already somewhat anemic and without this support many groups would likely not recover from this new crisis.