Risks of Dubai housing boom surface with empty Palm island plots

For 14 years, Muhammad Azam has been waiting for construction to start on a five-bedroom luxury villa he bought on the largest — but least developed — of Dubai’s famous palm-shaped artificial islands that jut out into the Persian Gulf.

An unexpected email from Nakheel PJSC in September confirmed it never would. Dubai’s real estate regulator apparently had decided months earlier to cancel the project on Palm Jebel Ali, and the government-backed developer told him they would refund less than a quarter of what Azam had paid for the villa in the secondary market shortly before construction had got off the ground.

Cypriot businessman Azam, 44, wasn’t alone. He’s among hundreds of investors who bought homes on Palm Jebel Ali that have never been built. While many owners swapped their purchase for an alternative Nakheel property years ago, hundreds are now being offered a refund for the amount the developer collected from primary investors until it stopped working on the project in 2009, according to interviews with seven investors and documents seen by Bloomberg.

Investors told Bloomberg they’re among just over 400 who own more than 700 properties in The Palm Jebel Ali Fronds and The Palm Jebel Ali Water Homes developments who are being offered about 850 million dirhams ($231.4 million) in total from Nakheel.

Owners say they should be compensated for the delay of over a decade and the jump in home prices since then. Canceled real estate projects often have messy fallout, but this case of buyer beware is playing out in the midst of one of the world’s biggest housing booms. It also raises questions over the legal framework surrounding real estate in the city, even though foreigners have been allowed to buy homes in the emirate since 2002.

Nakheel — chaired by Mohammed Ibrahim Al Shaibani, the managing director of the emirate’s sovereign wealth fund, the Investment Corporation of Dubai — says it’s giving back what it received from the development’s original investors and can’t help if people bought at higher prices in resale deals over the past two decades. The developer also says it has offered voluntary refunds for years and is also offering owners a bonus credit note toward a new Nakheel home. It’s also telling some owners that it will restart a revamped version of the project early next year.

“It’s so unfair,” said father-of-two Azam who owns a property management company. “I would have accepted the cancellation if Nakheel went bankrupt in 2009 and the project was canceled back then. But to do it now when the market has recovered and waterfront villas are selling at a high premium is just absurd.”

Eighth Wonder

Nakheel unveiled The Palm Jebel Ali Fronds and The Palm Jebel Ali Water Homes in 2003. In a sales brochure, the developer called Palm Jebel Ali the eighth wonder of the world. At roughly the size of London’s Heathrow airport, the development — about 50 kilometers from downtown Dubai — has 17 palm leaves. It was meant to host marinas, a theme park, beachside villas and a thousand homes on stilts that spelled out a poem by Dubai ruler Sheikh Mohammed bin Rashid Al Maktoum, according to reports at the time.

Nakheel originally sold the off-plan villas on Palm Jebel Ali for about 1.8 million dirhams to 5.6 million dirhams. They were then resold many times in the boom years that followed without a single brick being laid. Prices had more than doubled by the time some of the current owners — including Azam — invested five years later.

Dubai-born Azam says he took out a 10-million-dirham mortgage to pay for the 14.8 million dirham, 13,000 square-foot so-called Signature Villa. He fully repaid the mortgage to Noor Bank in 2016, according to a copy of a bank letter. He was told that Dubai’s Real Estate Regulatory Agency had canceled the two projects because of Nakheel’s inability to complete them and that a judicial committee in May had ordered the developer to distribute a refund to owners.

Now, he says Nakheel is offering to pay him 2.8 million dirhams or a credit note for 4.2 million to repurchase a home once the project restarts. The value of the credit note represents 50% more than the amount Nakheel collected from buyers but the developer has only made the offer verbally and not in writing, according to Azam.

“Nakheel is being ordered to repay the amounts it collected nearly 20 years ago, but as they restart the project they will earn a lot more,” Azam said. “We’re only entitled to the amount Nakheel initially collected from original buyers and not secondary buyers. No interest, no loss of opportunity, no loss of rental income.”

On top of regular payment installments from owners, Nakheel collected money each time the villa (or plot of sand) changed hands in the secondary market. Azam says when he bought his villa he was charged 119,590 dirhams as a transfer fee by Nakheel, which isn’t being refunded.

A comparable villa to the one Azam purchased is now selling for at least 30 million dirhams on Palm Jumeirah — the first and smallest of three palm-shaped islands Nakheel is developing in Dubai, according to Property Finder. Palm Jebel Ali is almost twice the size of the completed Palm Jumeirah where demand and the price of waterfront homes, in particular, have soared.

Dubai’s property market is benefitting from an influx of newcomers including bankers fleeing strict Covid restrictions in Asia, crypto investors and wealthy Russians escaping their sanctions-hit country after its invasion of Ukraine. Prime real-estate prices surged 89% over the past 12 months through October, making it the biggest gainer on Knight Frank’s global index, which focuses on a city’s most desirable and expensive homes.

To tap the high demand for beachfront real estate, Nakheel is now planning to build 1,700 villas and 6,000 apartments on Palm Jebel Ali, the Financial Times reported in September.

The developer “is probably calculating they can wipe the slate clean and start over with new investors, but this shows that the old system is still very much there despite all the effort to present a fairer one to protect investors’ rights,” said Ryan Bohl, an analyst at risk intelligence consultancy Rane Network. “If you put money into the Emirates or any Gulf country, except Kuwait, you have to be prepared to take a loss because investors’ rights are always going to be at the pleasure of the ruler.”

A representative for RERA referred requests for comment to Dubai’s Media office. A representative for Dubai’s Media Office said: “Judicial independence is guaranteed under the constitution and laws of Dubai and the UAE.”

$10 Billion Lifeline

Construction on Palm Jebel Ali halted when the global financial crisis hit Dubai. Nakheel, along with Emaar Properties PJSC, had led a building boom before that, until it almost defaulted on repaying about $4 billion in bond payments. Nakheel, along with then-parent Dubai World, was given a $10 billion lifeline by Abu Dhabi.

At the time, the developer offered homeowners on Palm Jebel Ali two options: swap their investment for completed properties in other Nakheel developments or wait for their original purchase to be ready. Several investors said that the company repeatedly reassured them that Palm Jebel Ali wouldn’t be canceled.

Despite a market rebound between 2011 and 2014, the project stood untouched. In a 2015 interview with Gulf Business, former Nakheel Chairman Ali Lootah said: “It is very costly, with regards to infrastructure and everything. But we have a commitment to it, and will not cancel the project.”

The Palm Jebel Ali project “was based on a masterplan developed over 15 years ago. It required extensive planning and redesign to meet the current standards for master planning of modern waterfront living,” Nakheel said in a statement. “Accordingly, after extensive consultation, the project was officially cancelled earlier this year.”

Not far from Palm Jumeirah, apartment owners have been petitioning local authorities to recoup money tied to a stalled 20-year-old project called the Dubai Pearl. They say they should be entitled to more than their original investment now the land is worth more than it was in 2002. The government has said it is holding talks with master developer, state-owned Dubai Holding, to relaunch the project but hasn’t disclosed further details.

Homeowners in Dubai aren’t the only real estate investors facing risks that can extend to delayed developments and multi-million dollar losses. In China, a mortgage boycott is ongoing among angry buyers waiting for stalled apartment buildings to be completed and some creditors are taking developers to court seeking wind-up petitions.

‘Safe With Us’

Like Azam, Palestinian investor Ahmad Mahmoud Mahmoud, 55, only found out that his dream retirement home wouldn’t be built when he received an email from Nakheel that read: “The Palm Jebel Ali project is officially cancelled; however we would like to reassure you that your investment in Nakheel is protected and safe with us.”

Saudi resident Mahmoud, who works in the oil and gas industry, says he also bought a Signature Villa for 6.7 million dirhams in 2005. He says he paid 2.7 million dirhams worth of installments to Nakheel and 1 million dirhams directly to the seller. Nakheel, he says, is now offering him a 2.7 million refund or a 4 million dirham credit note.

“Contracts in Dubai aren’t worth the ink they’re written with,” he said. “What’s the value of a contract if it can be cancelled without even informing us?”

Mahmoud and British national Aarti Chana — who sold her house in London to buy a garden home on Palm Jebel Ali in 2005 — are now among a group of 30 investors who have lodged an appeal with the Dubai Ruler’s Court, Sheikh Mohammed’s office where Nakheel Chairman Al Shaibani is director general.

“The ruler is our last hope,” said Chana, who’s lived in the UAE for about 30 years. A representative for Al Shaibani declined to comment.

Since 2011, Nakheel has “proactively contacted owners of units in Palm Jebel Ali and ran highly visible public communications offering to repay the full investment paid to the company by the original investors,” the developer said. “Following this initiative, the investments made by many of the owners of Palm Jebel Ali units have been repaid in full by Nakheel.”

The developer has also “offered a multiple of up to 1.5 times the initial investment paid to Nakheel, to be used as credit towards an investment in upcoming projects at the new Palm Jebel Ali,” it said. The company is “working with the remaining investors to complete the financial formalities, with funds set aside for such repayments.”

The claims made by a group of individuals “are for premiums they paid for units on Palm Jebel Ali to original investors and not to Nakheel,” the developer said. The company “continues to be committed to working with this group; but all settlements will be based on the full amount received by Nakheel, and not based on secondary market transactions which did not involve the company.”

Since the 2009 crisis, Nakheel has largely recovered. Last week it said it raised a $4.6 billion loan from local lenders to refinance debt and to develop another set of man-made islands called Dubai Islands and other large waterfront projects. The company secured the loan at a significant time. Interest-rate hikes have battered other property markets around the world, making it more expensive for developers, that mainly rely on loans and bonds, to raise funds.

And while demand for property in Dubai is now strong, and the city’s current resurgence dates back more than a year, previous boom times that fueled a wave of ambitious construction projects have often been followed by sudden downturns.

“The bigger question is with interest rates rising and the strengthening of the dollar, are macro-economic conditions as good as Nakheel hopes?” said Bohl. “This could be a double miscalculation. One, the market may not be as strong as they think it is and two, by burning investors now, prospective investors may decide the returns aren’t high enough if it all goes belly up again.” – BLOOMBERG