From an obscure destination for expat oil workers just a few decades ago, the Gulf States have exploded into the public consciousness in the West in recent years, becoming synonymous with sumptuous hotels, luxury airlines and statement architecture.
But away from all seven-star tourist treatment, away from the mega-malls with ice rinks, aquariums and ski-slopes, a real economy, built for and serving not just the rich but a more ordinary kind of resident and traveller is emerging.
"I've been in the region for nine years," says Sallie Bowtell, real estate partner in Trowers & Hamlins' Dubai office, "and in the early years, we worked predominantly on transactions; the market was hot. Then the financial crisis hit, and suddenly lots of developments stalled, a few deals started to fall apart. It quickly became clear those early deals that had been done with little or no documentation were not going to fly moving forward and a more solid legal infrastructure would be required in the future."
Hardly a blessing, but the financial crisis at least gave investors the opportunity to start structuring things along more internationally- recognised lines, Bowtell explains.
"When market interest revived, we started to notice that the deals were different," she says. "Before, most real estate transactions had been marble this, gold that, biggest whatever, and now investors were looking at more modest deals, which were easier to get off the ground, quicker to build and easier to sell."
The move to more modest projects was also down to a change in demand. "When the first expats started coming here, it was seen as a hardship posting, most of the jobs were highly technical and compensation packages were high," Bowtell says. "That gave expats a great standard of living and drove luxury development. But as the economy developed, more service-orientated roles – marketing, IT, accounts – started appearing and the packages weren't as high, creating a differential between an ever increasing cost of living and the earning capacity of ordinary workers. That has, among other things, driven the development of more affordable housing, education and healthcare."
Housing is a key priority for the GCC, where indigenous populations are growing quickly, in addition to the influx of foreign workers. "We're seeing a move towards creating more affordable units across the Gulf," says Bowtell, "and that's where alternative funding structures, of the kind we've seen in developed Western jurisdictions, can be helpful. For instance, in Oman, we've been helping the government use a structure similar to the UK's Public Private Partnership (PPP) model to develop affordable housing."
It's fair to say, though, that the progress of PPP in the Gulf has been modest to date (see separate article on Page 8). For while the change in investment climate and changing demographics have driven change in the real estate market, the legal and regulatory climate and the economic environment are not necessarily geared towards encouraging PPP-type structures. For instance, the kind of liquid market needed to drive growth in PPP projects (by cultivating secondary market investment) is not really there. With the introduction of the new PPP Law in Dubai in 2015, however, it is clear that the Government in Dubai at least is working to create that environment to encourage investment by the private sector, both local and foreign.
"A lot of the Gulf states operate 'hybrid' economies, with a dose of liberal market theory but also a lot of state intervention," explains Bowtell. "They will have a single ruler or ruling family, and usually a parliamentary structure below. In some cases, that parliament will have legislative power, but in other cases it is more advisory. The advantage with that system is that one person can make a decision on something quite major and the next day it is law via a one-page decree, so things can happen very quickly."
"But sometimes that can have unintended consequences and leave gaps in activity because investors and developers just aren't prepared. For instance, Abu Dhabi used to have a law capping private rent increases to 5%, but overnight that was just removed, and it had a dramatic impact on the housing market."
"The key is to be prepared for anything," says Bowtell. "The legislative and regulatory frameworks just aren't as elaborate as they are in more developed jurisdictions, so you don't get anything like the kind of documentation you'd get in more developed jurisdictions, fewer warranties, and a limited ability to conduct independent due diligence."
"Enforceability of contracts is still a big problem," she adds.
"We often cannot be sure that certain contracts are going to be enforceable and clients will rely on trying to adhere to market practice. While no-one ever really wants litigation, in some ways it is useful to see the appetite in litigation is increasing, because it gives the courts an opportunity to take a view on contracts and provide guidance for the next time".
Abdul-Haq Mohammed, international managing partner at Trowers & Hamlins says "The recent trend in places like DIFC and ADGM to adapt English law systems is interesting, as it could provide much needed certainty in interpretation and enforcement of contracts. This could align well with the common practice of using English law in many industries, such as banking."
Another issue is ownership, particularly of land, and this is where it is vital to get clarity from the start. "Foreign investors in real estate need to know whether it's possible to own land in the jurisdiction, and whether it's possible to obtain any form of proprietary interest on land. Those questions are vital," advises Bowtell.
"For instance, in Abu Dhabi, as a foreign investor, you can own something above the land, but not the land itself. And if you're investing in a mixed development, it could be that a shopping centre, apartments and a hotel are all on the same title. And in Abu Dhabi – as in the rest of the GCC – title documentation is private. So as a real estate lawyer I can't just check on title issues as I would usually expect to do. Sometimes it's impossible to find out whether the seller of a title actually owns it until transfer of title at the relevant lands department".
"We know that these GCC states are aware of these challenges and are working towards improving the system. These changes are focussed on creating more transparency and a more complete public record – both essential ingredients in creating investor confidence," says Mohammed. "Yes, the returns are there, but don't expect transactions to unfold as they would in more developed jurisdictions", suggests Bowtell.
"In spite of what may be challenges to investing in the region," Bowtell says
"It is worth remembering how far the legal infrastructure has come in such a short period of time. People often forget that the Gulf States are emerging economies, which is easily done when you are surrounded by every creature comfort imaginable. The respective Governments in the region are each drawing their focus on creating sustainable economies, aimed at improving their current infrastructure (both social and legal) and placing them in a position to compete on a global scale for foreign investment. The past 10 years have been an exciting and dynamic time in the Gulf, and it appears the following 10 years will be equally as exciting for residents and investors alike."
Dubai Expo 2020 and the Hotel Boom:
Prestige projects have continued to capture the imagination and to dominate the headlines as the GCC diversifies away from its reliance on revenue from oil & gas, and by far the biggest on the horizon is Dubai's hosting of the forthcoming Expo 2020, which is expected to generate an estimated $23bn in additional revenue for the emirate by 2021.
The promise of Expo 2020 has already kicked off a $545m canal project in the Business Bay, three hotel and residential complexes including the $3bn Al-Habtoor City, and the Dubai Parks & Resorts project, a $1bn leisure complex which comprises not one but three theme parks.
Expo 2020 anticipates bringing an additional 25 million visitors to Dubai, and in response, hotel operators are planning a staggering 35,000 additional rooms, taking the emirate's visitor capacity to 100,000 rooms by the time the exhibition opens.
"We've been involved in a number of hotel projects recently, particularly in Dubai and Oman, and one of the interesting things," says Bowtell, "is that the operators aren't just focusing on five or even seven-star hotels, far from it. They're looking at four-, three- and even some two-star accommodation. Of course, this is Dubai, so it will all be done to a very high standard, whatever the star-rating."