Real estate investment funds ("REIF") are currently a topic on everyone's agenda given the introduction of new regulations aiming to attract more foreign capital to the REIF's industry as part of the Government's plan to strengthen the United Arab Emirates position as a global destination for real estate investments. The Decree No 22 of October 2022 in respect of REIFs in Dubai (the "Decree") is relevant since it allows a REIF registered in an electronic register (the "Register") maintained by the Dubai Land Department (the "DLD"), to acquire:
(a) ownership rights over properties located in areas where non-UAE nationals are allowed to acquire real estate properties (the "REP"); and
(b) freehold ownership rights, without time restriction, or usufruct and lease rights for a maximum of 99 years (the "Rights"), in real estate properties outside the REP, as determined by a committee responsible for determining the areas existing outside the REP, where non-UAE nationals may acquire Rights.
The Decree applies to (a) all REIF licensed to operate in Dubai whether on shore, in special development zones ("SDZ") or in free zones ("FZ"), including DIFC; and (b) all properties in Dubai, including properties located on shore, in SDZ and FZ, except for properties located in DIFC. The REIFs which are eligible for availing of the privileges provided for by the Decree will be registered in the Register.
To be eligible, a REIF shall:
(a) be licensed with a competent authority;
(b) hold real estate properties whose value is, at the time of applying for registration, equivalent to at least, AED 180 million;
(c) not be suspended from trading its shares in Dubai's financial markets, at the time of submitting the application for registration.
The consequences of removing a REIF from the Register should be analysed from the investors' perspective, mainly from the non-UAE investors angle. Indeed, under the current provisions of the Decree, the rights of all of a REIF's investors cannot be equally protected. Since a REIF removed from the Register can no longer hold Rights in real estate properties outside the REP, non UAE investors' rights are not legally protected in this scenario: the Decree is silent as to the measures which will follow the removal of a REIF from the Register.
Since the rights of non-UAE investors should not be affected by this removal, efficient solutions should be considered for foreign investors not to lose interest in investing in REIFs on the grounds of the possible lost of their invested amounts. The solutions proposed to mitigate this risk are of great importance to ensure that the Government's plans are not doomed to fail.
Further, UAE and non-UAE investors' rights should also be protected in case of bankruptcy of a REIF. The segregation of the assets of the REIF's manager (the "Manager") from the investors' assets represented by the units they hold is relevant. The UAE laws and regulations governing on shore REIFs, are based on the civil law system and do not provide for a tool dedicated to efficiently operate a segregation of assets.
Therefore, the protection of REIFs' investors should be dealt with in the absence of a specific legal mean dedicated to implement a segregation of assets. A combination of methods should be structured by creative legal advisors with the aim to protecting REIFs' investors in this scenario.
The DIFC regulations which are based on the common law system have a great advantage from this perspective as they recognise the trust concept. The REP would be held by a trust and as a result, would be efficiently segregated from the Manager's assets. Any claim lodged against the Manager would not affect the REP and the investors' interests would be protected. More complex structures may be developed for the purposes of strengthening the investors' protection and the enforcement of their rights.
Based on the current context in the UAE and the Government's plan to encourage foreign investments in real estate projects, any efficient proposal made by REIFs' specialists to optimise the REIFs regime would be welcomed by the competent authorities. In this context, all REIFs experts have a great amount of opportunities to develop their skills in a promising market.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.