Out-Law Analysis | 22 Jan 2018 | 1:30 pm | 3 min. read
The project status tracking services and introduction of a suspended/cancelled project list by Dubai's Real Estate Regulatory Agency (Rera) has highlighted the number of real estate projects in the emirate where work has not begun or has been suspended. At the same time, there has been an increase in potential purchasers seeking to acquire or enter joint venture arrangements in relation to distressed projects.
It is likely that the recent cooling of the off-plan sales market has been a determining factor behind the number of suspended real estate projects. However, potential purchasers should take time to identify and consider the specific factors that led to the project becoming distressed, at the same time as assessing the potential benefits.
While a distressed project sale can be an attractive prospect, it will likely carry certain financial or legal risks and, therefore, the necessary due diligence should be carried out and legal advice obtained to ensure that those risks are mitigated as much as possible.
Features and benefits of a distressed project sale
In addition to wider market conditions, there are likely to be a variety of circumstances which give rise to a distressed project sale. These could include an owner identifying that it will not be able to comply with its financial obligations, such as an upcoming loan repayment, in the early stages of a project lifecycle; or difficulty in complying with legal obligations, such as where a master developer insists that the owner commences construction of the project within an upcoming timeframe or be liable to pay penalties.
A potential purchaser seeking to acquire a project at a distressed sale price may in turn be able to offer the existing owner the necessary cash funding, the required delivery/sale expertise, or both.
The Dubai Real Estate Investment Promotion and Management Centre has established the 'Tanmia' scheme to help bring together owners and investors interested in reviving stalled projects. Owners can approach the centre to have their distressed project included, while investors can approach the centre to register their interest in funding or acquiring a distressed project. The centre has also established the 'Tayseer' scheme, which is a guaranteed funding initiative for certain pre-qualifying distressed projects.
Pinsent Masons, the law firm behind Out-Law.com, recently advised a sub-developer based in Dubai who had acquired a distressed project in an up-and-coming master community. A number of the units in the project had already been sold to third-party purchasers. The sub-developer was able to sell the remaining units and terminate or settle with purchasers who were in default of their payment obligations, ultimately completing and delivering the project to the benefit of all stakeholders.
What to consider when purchasing distressed projects
Some of the most important things to consider when purchasing a distressed project include:
Nayab Aziz is a real estate law expert at Pinsent Masons, the law firm behind Out-Law.com