Property Development in the Middle East

Some developers are starting to explore opportunities in overseas markets, such as the Middle East.

The region is not for the faint-hearted (for example Carillion is reportedly owed approximately £314m in Middle East contracts). There are also ongoing geopolitical tensions caused by conflicts in Yemen, uncertainty in Syria and Iraq about the resurgence of the Islamic State group and internal disputes in the region (Qatar being isolated by a number of players in the region and perceived proxy wars between Saudi Arabia and Iran) [1]. Coupled with instability due to lower oil prices, investor confidence has been dented.

However, those familiar with the region will know that this is nothing new; and the need for updated social and economic infrastructure in sectors including housing, education, healthcare and hospitality and tourism, make the Middle East a potentially profitable market.

Foreign investors (being non-nationals and non-GCC investors) are welcomed and various incentives are available to attract foreign capital, such as tax exemptions; but what legal issues are likely to arise when investing in real estate in the region?

Property ownership

(1) Are there restrictions on ownership of real estate?

The first hurdle that a foreign investor will face is that many countries in the Middle East restrict the ownership of real estate by non-national or non-GCC investors.

For example, although exemptions do apply, broadly speaking foreign investors may not invest in real estate or develop land in Qatar or some parts of the United Arab Emirates. At the other end of the spectrum, with the exception of in Mecca and Medina, Saudi Arabia allows foreign investors to develop land provided that they have a licence to carry out real estate investment and have a legal presence in Saudi Arabia.

(2) Do any exemptions apply?

In those countries which do restrict foreign ownership of real estate, a foreign investor may find that exemptions apply – namely the ability to own freehold title or "usufruct" rights in specific areas.

• Freehold ownership: Some countries, such as Dubai and Qatar, allow foreign nationals and/or companies to own freehold title in specific areas. Taking Qatar as an example, non-national and non-GCC nationals and/or companies are permitted to acquire freehold title in The Pearl, West Bay Lagoon and Al Khor resort projects. As part of the government's initiative to attract investment into the real estate sector, Qatar has also introduced a law governing the developing and financing of commercial and residential buildings where units are sold off plan – foreign developers with at least ten years' experience, a reputation for real estate projects and an office in Qatar or another GCC country (to name only some of the requirements) may be provided with a licence to develop real estate in areas where foreign investors are permitted to own properties.
• Usufructuary rights: Usufruct rights are real estate rights granting the recipient the right to use and occupy property belonging to another person for a defined period of time; they are akin to a leasehold interest in the United Kingdom. An example of their use is in Qatar, where foreign investors may be permitted to acquire usufruct rights in designated "investment areas".

Given the lack of hard and fast rules in the region, it is important that any developer considering investing in the region takes informed advice.

Setting up and doing business in the region

A developer looking to pursue an opportunity in the region must ensure that the appropriate business medium is adopted. Although this will differ between each country, a company is the normal vehicle.

Taking the UAE and Qatar as examples, the most common way a developer will set up is as a limited liability company - in this scenario a foreign investor will partner with a local who will own majority of at least 51% of the company (it is worth noting profit shares do not have to reflect the equity shareholding). Although 100% foreign ownership may be preferable, this route has the benefit of partnership with a local who is familiar with how that country operates; particularly useful when dealing with local ministries.

In other parts of the Middle East, 100% foreign ownership may be allowed provided that certain thresholds are met (i.e. minimum investment costs).

Knowledge is essential

The Middle East is a market in which local knowledge is essential. Each country has its own legal quirks and the legal issues a foreign investor may encounter in the region can be quite different from the experiences they may have in other parts of the world.

[1] Gamble and Ellyat, "Middle East real estate tycoon warns of a rocky 2019 — but says region is ripe for investment", 8 February 2018.

If you require further information on anything covered in this briefing please contact Hannah Sissons or your usual contact at the firm on 020 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP,  March 2018