Real estate watchdogs have said they would not hesitate to investigate complaints about developers seeking to buy back unfinished properties from investors.
The warning from Dubai’s Real Estate Regulatory Agency (Rera) came after Damac attempted to shelve plans for the Palm Springs development, prompting an investigation by the agency.
Investors in the Dh300 million waterside project at the Palm Jebel Ali threatened legal action after the developer announced a buy-back programme. Homes in the project were sold more than five years ago but construction has yet to start.
Emirates Business spoke to a number of developers who confirmed they were buying back apartments from investors due to soaring construction costs. The companies – mostly small and inexperienced ones – launched various projects in 2006 but are yet to start work on them.
In the past, developers have bought back flats and then relaunched them at higher prices. But Rera CEO Marwan bin Ghelaita told Emirates Business that the only complaint received so far concerned Damac.
“We have not received any other complaint from investors about developers buying back properties. But if we do, we will definitely investigate the issue,” said bin Ghelaita.
However, several other properties in the emirate, including Al Arefi Marina at Dubai Marina and the A1 Tower at Jumeirah Village South, are reported to have been either put on hold or cancelled. The 50-storey A1 was originally scheduled for completion this year but work has yet to begin.
The increase in building costs is said to be the main reason for the cancellation of projects. Costs in the Gulf have risen by almost 30 per cent over the past year – forcing several small- and medium-sized developers in the UAE to suspend work.
Many projects marketed and sold between 2004 and the first quarter of 2007 for between Dh480 and Dh800 per sq ft are now being sold for Dh1,500.
As a result, projects where construction work is yet to begin or is half-complete have been severely affected, with contractors unable to continue without suffering substantial losses.
A senior sales representative dealing with the 31-storey Al Arefi Marina confirmed to Emirates Business that construction work was on hold, but said the company had yet to decide if it would buy homes back from investors.
“The apartments were sold for Dh800 per sqft but today the rates in Dubai Marina range from Dh1,700 to Dh2,000,” said Mohammed Ali. “We are asking our investors to visit our office and we are working on a solution to the problem. The company has already approached the Land Department.
We have the relevant documents about the increase in construction costs and will show them to our investors.”Officials dismissed speculation the project had been sold to Abu Dhabi-based Iskan. The building was expected to be completed this year, but to date only 18 floors have been built.
A senior sales official at Ali Moosa and Sons Contracting Group – which is developing the A1 Tower – said all transactions had been put on hold until the company applied for an escrow account.
Another official at the company said: “At present we cannot reveal any more details about the progress of the construction.”
Developers who spoke anonymously to Emirates Business said they would not hesitate to buy back properties if they could not cope with rising costs.
“There were several problems that prevented us from starting work on one project,” said a developer operating in Jumeirah Village South. “Although the completion date of the project is 2008, construction is yet to begin there. It just does not make business sense to build something for Dh1,000 per sqft that you have sold for just Dh600.”
An EFG Hermes report said construction cost inflation is being driven high by rising costs of building materials as well as labour.
A serious shortage of labour and raw materials and strong demand as well as the mandatory adoption of green building codes and health and life insurance are likely to increase construction costs in the UAE even further this year.
Over the past year the cost of cement, concrete and rebars has increased by up to 30 per cent. Steel prices have risen dramatically from Dh1,983 per tonne in 2004 to between Dh3,800 and Dh4,000 today.
A severe shortage of cement has led to black market supplies being priced at Dh450 per tonne compared with Dh328 from factories in Ras Al Khaimah – which has put a number of projects under pressure. Similarly, tender returns have risen by almost 15.5 per cent over the past year because of the increase in material costs.
Imad Al Jamal, vice-president of the UAE Contractors’ association’s higher technical consultative committee, said: “Nobody expected costs to go up so dramatically – the increase has overtaken all our estimates.
“Today it is very difficult to build a quality structure for less than Dh750 per sqft. In 2006 the average cost of construction per sqft stood at less than Dh250. However, today you can only build an average project for about Dh350 per sqft.”
Property consultant Rakhee Desouza said: “Buy-backs have happened several times before. Deposits are handed back and the projects are later relaunched at a higher price.”Strict rules introduced by Rera and the launch of escrow accounts have reined in the erring developers.
But Al Jamal said: “Some developers, however, try to avoid the law by buying back properties. Such a practice should not be encouraged at any cost. Anyway, gone are the days when developers dictated the terms in the market. Today it is the contractors who determine the price of property.”
Rera probes buy-back complaints