Foreign investors to benefit from Dubai’s REIF reforms

Senior associate Michèle El Khoury examines recently introduced reforms to real estate investment funds in Dubai, for Global Restructuring Review, which she says aim to strengthen the jurisdiction’s position as a destination for foreign capital, including by protecting the rights of overseas investors when REIFs are faced with bankruptcy.

REIFs are currently a topic on everyone’s agenda in Dubai given the introduction of the United Arab Emirate’s Decree No 22 of October 2022, which allows REIFs listed in an electronic register maintained by the Dubai Land Department (DLD) to acquire ownership rights over properties located in areas where non-UAE nationals are allowed to acquire real estate properties (REP).

The regulations also allow non-UAE nationals to acquire freehold ownership rights, without time restriction, or usufruct and lease rights for a maximum of 99 years, in real estate properties outside the REP, as determined by a committee responsible for determining the areas existing outside the REP.

The decree applies to all REIFs licensed to conduct the activity of investing in real estate properties in Dubai, whether onshore, in special development zones (SDZ) or in free zones (FZ), including the DIFC. It also applies to all properties in Dubai – including properties located onshore, in SDZ and FZ – except for properties located in DIFC. The REIFs that are eligible for availing of the privileges provided for by the decree will be listed in the electronic register.

To be eligible, a REIF must be licensed with a competent authority; hold real estate properties whose value is, at the time of applying for registration, equivalent to at least AED 180 million (US$49 million); and must not be suspended from trading its shares in Dubai’s financial markets at the time of applying for registration.

The DLD will audit REIFs on a regular basis to ensure they continue to meet the registration requirements.

If a REIF ceases to meet any of the eligibility requirements, it will be removed from the register. A REIF will also be removed from the register if it is declared bankrupt or its activities are restricted pursuant to a final court decision, or if it is dissolved and its assets are liquidated. Once a REIF is removed from the register, all privileges granted under Decree No 22 will be automatically suspended.

Investor rights
In light of the UAE’s aims to attract foreign capital, the consequences of removing a REIF from the register should be analysed from the investors’ perspective, mainly from the non-UAE investors’ angle.

Under the decree’s current provisions, the rights of all 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. As the decree is silent regarding the measures that will follow the removal of a REIF from the register, efficient solutions should be considered for foreign investors to ensure they don’t lose interest in investing in REIFs on the grounds of the possible loss of their invested amounts. The solutions proposed to mitigate this risk are of great importance to ensure 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 a REIF’s manager’s assets of from the investors’ assets represented by the units they hold is relevant. The UAE laws and regulations governing onshore REIFs are based on the civil law system and do not provide for a tool dedicated to efficiently operate a segregation of assets. The protection of onshore REIFs’ investors should consequently be dealt with in the absence of a specific legal means dedicated to implementing a segregation of assets. A combination of methods should be structured by creative legal advisors with the aim to protecting non-UAE investors’ interests in this scenario.

Unlike the UAE laws and regulations governing onshore REIFs, which are based on the civil law model, the DIFC regulations are based on the common law system and have a great advantage from this perspective as they recognise the trust concept. In a REIF established in the DIFC, the REP would be held by a trust and, as a result, would be efficiently segregated from the fund 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 a REIFs’ specialists to optimise the REIFs regime would be welcomed by the competent authorities. In these conditions, all REIFs experts have a great amount of opportunities to develop their skills in a promising market.

This article, written by banking lawyer Michele El Khoury, focuses on Real Estate Investment Funds in Dubai. 

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