The real estate sector in Dubai is growing at a swift pace, having recorded its best sales transactions during the first half of 2022. To further bolster the interest of prospective investors, the Dubai Ruler, Sheikh Mohammed bin Rashid Al Maktoum has issued a new law (Dubai Decree No. 22 of 2022), which provides setting up real estate investment funds. The main objective of this fund is to incentivize and increase the money supply in the property sector, in addition to greater regulation and transparency. In this article below, we will discuss the defining features of the new law, its perks and the future effect on the local real estate sector.

General Overview of Dubai Decree No. 22/2022

As stated by the Dubai Media Office, Decree No. 22 of 2022, announced back in July 2022, is applicable to all real estate investment funds regulated and licensed by the respective authorities, including the Dubai International Financial Center (DIFC) and the Securities and Commodities Authority. That being said, a new register has been set up at the Dubai Land Department (the DLD), which grants registered funds specific rights to ease their investments in the emirate. The key change is that the registration mechanism now allows registered UAE funds to acquire and own real estate assets in those areas in Dubai which have limitations on foreign ownership. The fund will not be allowed to sell those property assets in the districts restricted for foreign ownership without the preliminary approval of the special committee.

In more detail

Besides the property funds mentioned previously, the new decree applies in respect of all real estate in Dubai, including those in special development zones and all freehold areas, excluding the DIFC In order to register a fund in the register, you have to take into account the following requirements:

<ol><li>The fund is obliged to have a valid licence from the competent authority.</li><li>The value of the property assets owned by the fund when submitting the registration application has to be AED 180M (USD 49M).</li><li>At the time of the application submission for the registration, the fund must not be suspended from trading its shares in Dubai’s financial markets.</li><li>A registration fee of AED 10K (USD 2.7K) is to be paid to the Dubai Economy and Tourism Department (DED).</li></ol>

As soon as you submit the application, the DLD will verify that the fund meets the conditions with the help of a valuation specialist accredited by the Real Estate Regulatory Agency (RERA). This step enhances the transparency of the entire procedure. As a result, the registered property real estate funds will be allowed to purchase freehold, usufruct and long-term lease rights in Dubai areas, which are prohibited for foreign ownership. Note! All rights of a property investment fund may be suspended if it does not comply with the conditions mentioned above, dissolution and liquidation of the assets, bankruptcy by a final judgement or restriction of the fund’s activities by virtue of a final judgement.

Conditions for Property Acquisition in Areas not Designated for Foreign Ownership

For properties situated in non-freehold areas, the committee will consider the following points:

<ul><li>The market value of the property is at least AED 50M (USD 13.6M).</li><li>The property is required to have an investment yield in accordance with the DLD standards.</li><li>In case the property is granted, it is in line with the provisions of <a href="https://dlp.dubai.gov.ae/Legislation%20Reference/2022/Decree%20No.%20(25)%20of%202022%20Amending%20Decree%20No.%20(4)%20of%202010%20Regulating%20the%20Transfer%20of%20Title%20to%20Granted.html" target="_blank" rel="nofollow noopener">Decree No. (25) of 2022.</a></li><li>Any other considerations determined by the DLD.</li></ul>

Note! In July 2022, Sheikh Mohammed bin Rashid, Vice President and Ruler of Dubai, introduced a new law, which aims to regulate the use of commercial land in Dubai by granting Musataha to develop property projects. The agreement can be extended for a maximum of 50 years.

Fees for Property Dispositions

The property purchase, sale, usufruct/long-term lease and waiver of right/benefit of long-term lease, registered by the real estate fund, are subject to the DLD fees found below:

<ol><li><strong>Purchase</strong> (whereby a real estate investment fund acquires a property asset and registers it under its name) – a 2% registration fee.</li><li><strong>Sale</strong> (whereby a real estate investment fund sells a property asset within its portfolio and registered it under the third parties) – a 4% registration fee.</li><li><strong>Usufruct/long-term lease</strong> (whereby a real estate investment fund registers the right of usufruct/long-term lease) – a 2% registration fee.</li><li><strong>Waiver of right /benefit of long-term lease</strong> – a 4% registration fee.</li></ol>

These fees are applicable exclusively to the disposition of property assets and not to the disposition of property shares by the fund’s shareholders.

Property as In-Kind Contribution of Capital

During the setup of a real estate investment fund, the founders are allowed to provide the property owned as an ‘in-kind contribution’ to the fund capital and register it. The DLD will mention in the real estate certificate that the property owner is a real estate investment fund under establishment. Once the fund establishment is completed and the licence has been issued by the competent authorities, the DLD will make amendments to the certificate, making the property owner as a fund. Please note that a fee of AED 50K (USD 13.6K) rather than the standard 4% fee applies to the ownership transfer of every property owned by the founder to the real estate investment fund. Subsequently, the DLD will issue a title deed in the fund’s name.

Benefits of the Property Investment Funds Law

Undoubtedly, the new decree is set to attract multiple real estate funds to Dubai, which will subsequently bring with them income generation and the development of previously undeveloped areas, in addition to opening up a new market for retail investors, particularly with the possibility of purchasing properties in the areas previously designated as non-freehold. Note! Investment funds are eligible to seek exemption from the corporate tax system, which will be effective from 2023. This procedure is to be executed through the Federal Tax Authority (FTA), responsible for the authorization of the exemption for investment funds that meet the conditions. According to Sameer Lakhani, Managing Director of the commercial lender; Global Capital Partners, the formation of property funds is essential to the development and maturity of not only the property sector, but also capital markets. By attracting foreign asset managers and global institutional investors, a beneficial environment will be created, which will promote liquidity regarding the development of specialised commercial property segments and provide access to both institutional and retail investors. At the same time, while Dubai continues to break records in terms of foreign direct investment (FDI), the latest decree will bring in even more foreign capital and lead to a multiplier impact on the economy in general. Not forgetting that amidst the incentives offered to those funds, which invest in the local commercial real estate, the demand is set to grow stronger and, in turn, price levels, subsequently benefitting retail investors.

How Can We Help?

Our award-winning real estate agency; Metropolitan Premium Properties will gladly provide legal advice to those individuals considering establishing a real estate investment fund, in order to ensure a smooth and successful application process. In addition, our brokers can help you choose the most suitable property options to enter your portfolio and increase its potential. During the acquisition process, we will handle every stage, from negotiations with a potential seller and handling paperwork, to the ownership registration and paying the fees on your behalf.