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Real estate developers adopt hardline on payment delays

The problem is magnified for those investors who have bought properties from the large developers including Emaar and Nakheel.

Emaar is the world's largest property company and Nakheel is one of the leading developers in the region with investments of $12 billion in local real estate projects. Other large developers are also said to have adopted a zero-tolerance stance towards payment arrears.

The industry practice is for the buyer to make a 10 per cent down payment, based on the value of the property, with monthly instalments to be paid thereafter. If buyers fail to pay these instalments, they are hit with a penalty fee on any outstanding amount.

This penalty differs from developer to developer. If buyers fail to pay these fees, the developer cancels the contract immediately without refunding any of the paid instalments and refusing to negotiate a new instalment package.

This happens even if the developer has failed to meet the completion date as agreed with the buyer at the outset. Consequently, many small investors are stretched financially trying to meet the repayment terms.

This may be because they struggle to meet ongoing and unplanned accommodation costs or because they are speculative investors who fail to derive rental income from the property when expected.

"Many of my clients budgeted their investment for a wrong completion date, which brought them into trouble," said a real estate agent of many years who prefers to remain anonymous. He also said that smaller developers are usually more flexible and willing to re-negotiate payments than the top developers.

Nakheel, for example, has postponed the completion date for its Discovery Gardens project for one year, causing financial problems for many smaller investors, real estate agents confirmed.

"Although the termination of the contract is the last point of interest," said John Stevens, property manager and general manager of the Asteco office in Sharjah, he confirmed the case of a client who defaulted on the second and third payment of his property, prompting the developer to terminate the agreement immediately without refunding any of the instalments.

He also confirmed that if the amount paid accounts for 30 per cent or less of the agreed selling price then the developer will retain all payments.

Industry sources said that developers justify their actions by claiming that the completion date stated on the pre-sales agreement is not legally abiding. It is only an estimated timeframe.

By failing to keep up repayments, developers argue that the buyer has violated the contract, thereby annulling the contract.

One buyer who failed to keep up his instalments on a property at the Discovery Gardens development said that when the completion date was delayed, he was unable to keep with the repayment schedule.

He said: "The developer sent me text messages and e-mails demanding that I recommence paying the instalments. I was told that if I didn't pay, my contract would be cancelled."

Adel Lootah, executive director of the Dubai Property Group, a non-profit industry watchdog that works closely with the government to implement regulations for the market, said that people should do their homework and understand the market dynamics and the risks of investing.

"Dubai is a fast-developing market, and as is the case anywhere else, the fast growth leaves holes in the system," he said. The watchdog consists of six real estate companies operating throughout the region.

Among other services, it gives recommendations on market developments to help prospective investors.