'Please allow me to introduce myself, I'm a developer of wealth and taste...' as Jagger almost said. And with those words agents fell over themselves to market off-plan properties that investors bought and traded with dreams of easy riches. But as those dreams faded and the harsh economic realities set in, the tide of public opinion turned against developers who now stood accused of having stolen many a man's soul and faith.
The charge list included completion delays, payments not linked to construction, hidden charges and moving of goalposts on issues like visa entitlement. Shocking. But are we right to paint the developers as the villains of the piece, or should we have some sympathy for these devils?
Developers (and here I am referring to sub developers as opposed to master developers) have found themselves caught between a rock and a very hard place. On the one side, they have usually entered into agreements with master developers under which they are obliged to pay for and develop plots of land in accordance with strict guidelines. Such was the inequality of the bargaining position of the parties at the time, the agreements often imposed onerous duties on developers. On the other side, they have entered into agreements with buyers to build and hand over completed properties by certain deadlines in return for payment. In an ideal world all players would perform as anticipated and the back-to-back plan would come together, as Hannibal might say. But things rarely work that way in the post economic crash environment.
At the height of the boom, RERA, with noble intention, saw it was time for a change. It responded to widespread investor concerns with a rash of legislation designed to protect buyers. Developer registration became necessary with hefty costs payable to ensure compliance with new rules. Payments of purchase price now had to be brought into line with construction progress, regardless of what had been agreed previously. Escrow accounts had to be opened, and all payments diverted into those accounts, ready for drawdown and payment to contractors only on certification of completion of defined milestones. In addition, immigration policy changed and the entitlement to long term residency status based on property ownership was effectively removed.
In many cases these changes had a devastating effect on developers. Financial models work on the assumption that development costs can be fairly accurately quantified. A profit margin is factored in and the resulting figure is then used as a starting point for unit pricing. Payment timing is also considered, and payment schedules (income) are structured to reflect anticipated payment obligations (outgoings). So when RERA introduced its new legislation and regulations, it threw the financial models out of the (yet to be fitted) window.
Take just one financial change – the requirement to link payments to construction. All very sensible, you may say, but that sense should have been exercised by buyers at the time of purchase. Instead they gladly signed up for payment plans linked to dates, not construction. And in a situation where parties are free to strike whatever bargain they like, you may say you make your bed and now have to lie in it (whether you have a bedroom or not). Forcing developers now to adhere to what buyers should have insisted on at the time of purchase is not without consequences, and in this case that's the imposition of a heavy financial strain on the developers. Those who can't bear it go under, invariably leaving the buyers without a practical remedy.
Also, it is interesting to note that the linkage of payments to construction progress is one sided. If the payment plan provides for 20% up front and 80% on completion, a developer cannot ask the buyer to start paying additional instalments as construction proceeds. Of course not. That would be grossly unfair, to ask a buyer to pay on a different basis to that which had been agreed. But on the same analysis, why is it deemed fair to ask developers to receive funds later than was contractually agreed?
Visas have been a source of much discussion. The entitlement was attractive to many property investors, but when it became clear that some buyers were more interested in passport stamps for extended family than bricks and mortar, the government intervened. This wasn't the developer's fault – visas were never something they could control or guarantee and were always subject to governmental change.
And what of delay, the dreaded disease afflicting almost every project in the country. In many cases master developers have been slow in completing infrastructure. That in turn has made it difficult for developers to access sites, and to hand over properties. We have seen a number of high profile developments where developers are trying to comply with their obligations to buyers by completing units, but where master developer delays have effectively prevented them from honouring those commitments. That leaves the developer exposed to legal action by buyers for late delivery, with in many cases little chance of passing liability up the line to the master developer either due to the wide nature of the force majeure clause in the main contract or the "deny everything they will never sue us" attitude of some master developers. We would all rather be playing golf on our estates in Jumeirah than suing master developers, but for many that is now the only option open to them.
The only solution in many cases is compromise. Developers are expected to accept delays on the part of master developers, and buyers may in turn have to accept delays on the part of developers. Of course some private developers have been guilty of mismanagement and have caused unjustified delay in clear breach of their own Sale and Purchase Agreements. But in many cases there is another side to the story. So before you wash your hands and seal their fate, have some sympathy for the developers.
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