New Saudi property rules could tempt UK firms

Saudi Arabia has recently moved towards closer management and regulation of its booming real estate development industry. This has been done by creating a system of registration of developers and developments and a guarantee account regime. The added clarity and structure provided by the new system will likely give UK based developers and contractors greater confidence to involve themselves directly in developments in the Kingdom. Here’s how it works.

With an eye to some of the excesses and unsuccessful property developments seen in other GCC countries, Saudi is introducing laws and a regulatory committee to ensure that the major real estate boom underway has proper oversight and planning.

The first step was the publication on 9 March 2009 of the Council of Ministers Resolution No. 73 (the “resolution”). Interestingly, from the content of the resolution, it would appear that the Saudi Arabian authorities seem to a large extent to be working on a model of regulation similar to that developed during the past two years in Dubai.

Central to the resolution is the establishment of a committee to regulate real estate developers as well as their business practices (the “committee”). The committee will be made up of representatives from various governmental bodies, all of whom have a vested interest in the sector.

Registrations

The committee will create a register of qualified real estate developers and require developers to make available financial records in order to ensure they are of good financial standing. A credit checking system will be introduced for developers, including a basic pass/fail system.

These regulated developers will in turn require a licence for each of their developments. This is a familiar system to anyone who has been involved in recent years in the real estate development sector in Dubai. In Dubai, the Dubai Land Department, through the establishment of the Real Estate Regulatory Agency, has imposed considerable quality and credit control verification with respect to those involved in the business of real estate development in the emirate. Key to the new regulatory regime in the kingdom is a prohibition on off-plan sales (of all types) without the permission of the committee. There are also restrictions on the timing of marketing and promotion of developments.

Further, the resolution looks to create a register for sale and purchase agreements between developers and purchasers. The main aims of the Saudi Arabian register are to prevent the same property being sold more than once and to give prospective secondary purchasers a history of the property from the entries on the register. In Dubai this system was introduced in 2008 in order to bring official recognition and order to the multitude of contracts which had been entered into between developers and off-plan purchasers.

Presumably the register will also provide security for a purchaser’s rights in the event of the bankruptcy of the developer, but this aspect is as yet not fully clear. In Dubai, this benefit of registration is becoming more and more important as the property market corrects itself.

Further, with the expected imminent introduction of a new mortgage law in Saudi Arabia, it is probable that purchasers will be able to register a mortgage over their interest in the register.

Guarantee accounts

One of Dubai's legislative reforms was the introduction of a mandatory escrow/guarantee account system for off-plan sales in 2007. By ring-fencing monies paid in by purchasers to protect them from default by developers it was hoped to provide greater confidence to investors. In the resolution, the Saudi government aims to create a similar system.

The exact details are not yet clear (further legislation is expected to be passed governing the Saudi guarantee account regime at the end of 2009), however it is likely the procedures adopted will be similar to those in use in Dubai. If so, then the developer will be required to deposit into the guarantee account all development finance and off-plan sales receivables, and will then be able to request release of guarantee account monies for development costs on the achievement of proven development progress milestones. The developer will be able to obtain profit release from the guarantee account after further specified milestones are met.

This is an exciting time for the Saudi property market. A challenge for the kingdom's authorities is to learn from their neighbours' experience of rapid and extensive property development. With the introduction of the resolution and the widely anticipated mortgage law, it would appear they have made a good start.