By Henry Cort, Andrew Thomson and Julien Sweeting
The first step was the publication on 9 March 2009 of the Council of Ministers Resolution No. 73.
Interestingly, it appears that the Saudi Arabian authorities are working on a model of regulation similar to that developed during the past two years in Dubai.
The resolution requires the establishment of a committee to regulate off-plan real estate developers as well as their business practices.
The committee will be made up of representatives from various governmental bodies, all of whom have a vested interest in the sector.
The resolution indicates that the Saudi government aims to introduce a mandatory escrow/guarantee account system for off-plan sales, in order to protect purchasers from default by developers. This aims to provide greater confidence to investors.
The exact details of the new account system are not yet clear but it is likely that they will adopt procedures similar to those in Dubai.
The developer will be required to deposit into the guarantee account all development finance and off-plan sales receivables, and will likely then be able to request release of guarantee account monies for development costs on the achievement of proven development progress milestones.
The committee will, in addition, 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.
Regulated developers will 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.
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 off-plan developments.
The resolution also aims to register off-plan 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.
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, the benefit of this 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.
With the introduction of the resolution and the widely anticipated mortgage law, it would appear that the Kingdoms’ authorities have learnt from their neighbours’ experiences. A new chapter in the development of the Saudi property market has been opened.
Monday, June 1- 2009 @ 16:17 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.