Jurisdiction Special Focus: Dubai - A Stately Business Dome Decreed

by InvestorsOffshore editorial staff, February 2011, 25 February, 2011

For decades to come, people will point to Dubai's 200-storey, 828-metre Burj Khalifa tower, the tallest in the world, as representing both the peak and the nadir of the city-state's adventurous grasp for regional leadership in a startling range of sectors: real estate, shipping, commodities trading, equities, Islamic finance, e-commerce, air transport and banking.

The investors who bought into Dubai's real estate boom in the last stages of the world's financial bubble, from 2005 to 2008, nursing their losses, will not be comforted at hearing that many parts of the city's complex web of commercial and financial operations are doing quite nicely, thank you, or at least have survived the crash more or less intact, and are now ready to rise again.

Not so for the real estate sector. We will examine it in more depth below; but even here there are signs of life among the ruins, and a general feeling among real estate professionals that the bottom has been reached. If that's the case – and it's a big if – then there are good investments to be made.

Where And What Is Dubai?

The city, one of the seven Emirates making up the United Arab Emirates, is a shimmering collection of skyscrapers and spectacular architectural structures rising out of the desert sands at the eastern end of the Persian Gulf, and until 2008 could easily be labeled the economic success story of the previous ten years.

Dubai lies on the south-eastern shore of the Persian Gulf near the strait of Hormuz, strategically located at the cross roads of Europe, Africa, the Middle East and Asia, making it a gateway to over 1.5 billion consumers located in countries surrounding the Red Sea and the Gulf.

The city has grown rapidly in recent years from little more than a fishing port to a wealthy and decidedly cosmopolitan and modern location. Local emiratees make up a mere 22% of the population with Indians, Pakistanis, Iranians and Southeast Asians and latterly westerners choosing to make Dubai their home. The population remains predominately Muslim. However, in contrast to growing hostility towards western values elsewhere in the Middle East, ethnic and religious tensions are rare and Dubai has gained a reputation as something of a safe haven where westerners can go about their business without fear of attack, and crime in general is very low.

Modern Dubai is the product of more than 20 years of intensive development. Prior to that, Dubai was a small trading port, clustered around the mouth of the Creek. It had grown gradually from a fishing village inhabited in the 18th century by members of the Bani Yas tribe. A flourishing Indian population settled in Dubai and was particularly active in the shops and alleys of the souk. The cosmopolitan atmosphere and air of tolerance began to attract other foreigners too: by the 1930s, nearly a quarter of the 20,000 population was foreign, including 2,000 Persians, 1,000 Baluchis, many Indians and substantial communities from Bahrain, Kuwait and the Hasa province in eastern South Arabia.

Dubai's population has increased tenfold since the 1960s to approximately 1.9 million, and now hundreds of hotels accommodate the expat workers and tourists who help run the economy.

This diversity discourages any real ethnic tensions and while war and the threat of war might simmer further north, it creates far less tension in Dubai than many might imagine it would. There are large groups of Indians, Pakistanis, Iranians and Southeast Asians. The population is, however, 95% Muslim. Arabic is of course the official language but English is widely spoken as are Urdu, Malayalam and from the Philippines, Tagalog.

Dubai’s desert climate ensures plenty of year-round sunshine, with temperatures regularly exceeding 40C in the summer, and 30C in the winter making the city and its locale a very popular choice as a second or holiday home location for Europeans and Americans, especially since ownership rules have been relaxed to allow foreigners to buy property in Dubai.

The city’s rapid growth as a financial and commercial powerhouse has also spawned the rapid development of impressive leisure facilities such as golf courses and hotels (including the world’s first seven star rated hotel, the Burj Al Arab). When combined with its coastal location and attractive beaches, Dubai has become one of the world’s premier tourist destinations. As a result, the city is served by good transport links, both by air and by sea.

Transport Is The Key

The spectacular growth of Dubai has been no accident. With what must have seemed like limitless oil reserves, the ruling family consciously set out to create a modern, diversified financial centre, beginning with the trading activities that had been its historical life-blood. Jebel Ali, home of a huge man-made port, has the largest free-trade zone in Arabia, housing an ever growing list of international corporations which use the zone for both manufacturing and as a redistribution point. Dubai's harbor is the most important port in the Middle East and is ranked among the world's top 15 in terms of container throughput. Following the success of the Jebel Ali free zone, the government has developed Dubai Internet City (DIC), which has a highly developed technical infrastructure. The DIC occupies 3,200 hectares in the South of Dubai, near the Jebel Ali Free Zone. It offers state of the art facilities and sites for manufacturing, offices, housing, and academic, research, distributions and logistics institutions.

More recently has come an equivalently grandiose airport. Dubai International Airport is second only to Tokyo in the number of daily transit passengers it handles and second only to Seattle as a sea-air hub. In November 2005, in anticipation of a huge increase in the numbers of tourists, business travellers and rising trading volumes, the Dubai authorities announced the launch of a project to build the world's largest airport in the Jebel Ali Free Zone.

The airport, initially known as the Jebel Ali International Airport (JXB), but since renamed the Al-Maktoum International Airport, will be a massive undertaking, with total infrastructure costs expected to hit USD33 billion. When completed, the airport will have six concourses, and be capable of handling more than 120 million passengers, and more than 12 million tonnes of cargo per year.

Like Jebel Ali, the airport has proven resistant to the downturn, clocking up increases in passenger and cargo volumes in the second half of 2009 and in 2010. Indeed, by 2015, Dubai International Airport is expected to become the world's busiest airport for international passenger traffic, with throughfare of 75 million passengers, up from 47.2 million recorded in 2010.

“Increased liberalization, GDP growth and increasingly affluent and mobile populations in emerging markets will combine to propel air travel growth worldwide,” said Paul Griffiths, Dubai Airports CEO. “Dubai is extremely well positioned to capitalize on that growth. We are eight hours from two-thirds of the world’s population and on the doorstep of two of the most dynamic markets in the world – India and China. The combination of rallying tourism and Dubai’s established role as a trading hub linking economies in the Far East, Europe, Africa and North America, are also key advantages.”

Dubai International is now ranked the world’s 4th busiest airport in terms of international passengers according to Airport Council International’s (ACI) latest annual published figures, ahead of Amsterdam, Singapore and Tokyo. The ACI international freight traffic monthly ranking for February 2012 also lists Dubai Airports Cargo as the world’s 4th busiest for international air cargo volumes, ahead of Tokyo, London and Frankfurt.

Then Came Finance

During the 1990s and the 'noughties', the Arab Emirate launched a series of tax-privileged and more or less self governing financial sectors, including the Dubai International Financial Centre (DIFC), which provides a legislative roof for six primary sectors of focus within the DIFC: Banking Services (Investment Banking, Corporate Banking & Private Banking); Capital Markets (Equity, Debt Instruments, Derivatives & Commodity Trading); Asset Management & Fund Registration (Fund Registration, Fund Administration & Fund Management); Reinsurance; Islamic Finance and Back Office Operations. The DIFC offers benefits such as zero tax on income and profits, 100% foreign ownership, no restrictions on foreign exchange or capital/profit repatriation, operational support and business continuity facilities.

By the end of December 2011, the number of registered companies operating from the DIFC reached just under 848. The free zone is currently home to 21 of the world’s top 30 banks, six of the world’s 10 largest insurers, six of the top 10 law firms and eight of the top 20 money managers

The DIFC also houses the The Dubai International Financial Exchange (DIFX), a bourse, the Dubai Metals and Commodities Centre (DMCC), incorporating the Dubai Gold And Commodities Exchange (DGCX), and the Dubai Mercantile Exchange (DME), focusing on energy trading starting with crude futures.

Real Estate

It may not have been the original intention of Dubai's rulers to create a major international real estate centre; but it happened to them nonetheless, originally because of the need to provide accommodation for the swelling numbers of expatriate workers sucked in by the infrastructure construction programs. Eventually the real estate sector took on a life of its own, and the financial problems which now beset the Emirate can be traced to this cause. The rulers created Dubai World as a quasi-state financing agency for real estate development, and when the Emirate was infected by the world-wide property collapse in 2008, it was Dubai World that was found to be over-extended.

As late as November, 2008, the authorities were maintaining a brave front, with Mohammed Alabbar, Chairman of Dubai’s Advisory Council, quashing fears over Dubai’s debt obligations which were estimated to amount to USD10bn.

In his first major public address as the head of the Advisory Council set up to manage the impact of the global financial crisis in Dubai, Alabbar said: “There has been a lot of talk about the debt obligations of Dubai. There is confusion and therefore concern about how much Dubai owes, and how this debt will be refinanced. Let us put an end to that speculation."

“Currently, the Dubai government’s sovereign debt obligations stand at USD10bn (AED37bn). While our key sovereign assets are currently being evaluated, I can give you a rough estimation of its value being over USD90bn. And this does not include our airports, bridges and the Metro.”

Alabbar also estimated the total debt obligations of affiliated companies at USD70bn, compared with assets valued at USD260bn. The total value of the assets of the government and affiliate companies in Dubai was put at over AED1,300bn.

“The government can and will meet all its debt obligations going forward. Let there be no doubt about this fact,” he told an audience of financial business leaders from the region and around the world.

On the state of Dubai’s real estate sector, Alabbar said: “Today, the real estate sector is witnessing a healthy correction. This is a consequence of global financial conditions – and is inherent to the very nature of the market. As we all know, real estate is cyclical. Monitoring supply and sales, the Advisory Council is managing this important sector of our economy, ensuring that new supply is properly managed and that current and future demand is adequately met.”

Investor confidence was bolstered in February by the forging of a deal between Dubai’s finance department and the UAE which would see the UAE purchase USD10bn in bonds from Dubai in order to provide the emirate with liquidity. The loan carried a 4% coupon.

“This issuance will provide Dubai Government with the necessary liquidity to substitute the liquidity that has dried up globally in the last 12 months and accordingly meet all upcoming financial obligations. This programme will secure the necessary funding for Dubai to meet its financial obligations and continue its development programme,” said the Finance Ministry in a statement.

But it didn't, and after property values fell by 50% in just 12 months, the chickens finally came home to roost in November 2009 when Dubai World announced a debt moratorium for at least six months.

The government said it intended "to ask all providers of financing to Dubai World . . . to 'standstill' and extend maturities until at least 30 May 2010". The total debt of Dubai World amounted to USD59bn, and it was one small short-term component of that, falling due in December 2009, which the company was unable to finance.

“This issuance will provide Dubai Government with the necessary liquidity to substitute the liquidity that has dried up globally in the last 12 months and accordingly meet all upcoming financial obligations. This programme will secure the necessary funding for Dubai to meet its financial obligations and continue its development programme,” said the Finance Ministry in a statement at the time.

World markets initially fell, but soon recovered, and as before Abu Dhabi, the richest of all the Emirates, stepped into the breach with further short-term financing.

Dubai World announced in May 2010 that an agreement in principle had been reached with the Coordinating Committee (CoCom) representing the company's financial creditors on the restructuring of USD23.5bn of its debt. The CoCom accounts for approximately 60% of the bank lenders.

“We are pleased that we have received unanimous support in principle of the CoCom on the headline economic terms to our restructuring proposal," said Aidan Birkett, Chief Restructuring Officer of Dubai World. "This is an important milestone and reflects our efforts to achieve the best possible solution for all stakeholders. The proposal puts the Company on a sound financial footing and reflects the continued support of the Government of Dubai and its lenders. It offers the Company the ability to maximise the value of its assets over the medium to long term.”

Dubai World said that the company's debt would amount to USD14.4bn after the restructuring comprising of two tranches of USD4.4bn and USD10bn with five and eight year maturities, respectively. As announced on March 25, 2010, the Government is converting USD8.9bn of debt and claims into equity while maintaining 100% ownership of the company. An agreement between Dubai World and its creditors was finally secured on October 2010.

Meanwhile, Dubai Holding Commercial Operations Group, the non-financial arm of Dubai Holding, the state-owned company through which the government finances its infrastructure projects, has also been stung by the financial crisis and collapsing property prices in the region, announcing in June 2010 a USD6.2bn loss for 2009. DHCOG said revenues had fallen by AED9.5bn with its property arm hit by falling property prices and project delays. At the time of the announcement, units of Dubai Holding were holding talks with creditors in order to obtain more favourable terms for part of the group's USD12bn debt. DHCOG itself later reached a deal with lenders to convert a USD555m revolving credit facility into a five-year term loan. However, on January 3, 2011, Moody's Investors Service downgraded to B3 from B2 the notes issued by Dubai Holding Commercial Operations MTN Ltd. under its Medium Term Note (MTN) programme. "Despite the limited information so far regarding the new terms, Moody's believes that the banks may now be in a preferential position vis-à-vis bondholders," says Martin Kohlhase, AVP-Analyst at Moody's in Dubai. "Moody's has accordingly reflected this by downgrading the debt instruments' ratings to B3," Mr. Kohlhase adds.

The problems of Dubai World and Dubai Holding have inevitably had a knock-on effect in terms of the local real-estate market. Consultancy Colliers International says that continuing uncertainty over the availability of financing, job-security worries and a general lack of transparency are hampering recovery, with prices having fallen to 2005 levels. According to advisory firm Jones Lang LaSalle, the value of transactions decreased by 65% while the number of transactions has decreased by 53% year-on-year from the third quarter of 2009 to the third quarter of 2010. Meanwhile, there was a 6% decline in asking prices and a 12% decline in achieved prices between Q4 2009 and Q4 2010. Oversupply remains a problem with several new projects due to come on stream.

There was a ray of hope glimpsed in early in 2011, when Knight Frank's quarterly survey showed that house prices in Dubai inched up 0.6% in the first quarter of 2011, and were up 2.1% in the six months ended March 31, 2011. And in February 2012, the real estate agents Cluttons, which has had a presence in the Middle East since 1976, asserted that the Dubai residential real estate market is "now more secure and transparent, enticing investment back to the city".

Cluttons has seen an upward trend of local buyers looking to invest in a property market. Proactive sellers, it said, are now looking to trade up as property prices have fallen and as a result, more serious buyers, as opposed to speculators, are once again searching for high-end properties. Interestingly Cluttons is now seeing more GCC nationals investing in the UAE, and seemingly these buyers are replacing investors from Europe or USA.

Since 2008, Cluttons has also seen a return to property financing by the banks. At that time, nearly 70% of lenders withdrew from this type of finance. Now 95% of those lenders have come back to the market, the firm says, led by Tamweel who returned to mortgage finance in November 2010.

According to the Dubai Land Department, the number of sales during the fourth quarter of 2011 reached 2,605 compared with 1,589 in the third quarter. This represents an increase of 64% quarter on quarter. Cluttons suggests that this a trend that is set to continue.

Mario Volpi, Head of sales and leasing for Cluttons Dubai comments: “Dubai has definitely learnt lessons from the past, and as such more and more transparent legislation is being passed at government or federal level, which can only improve the prospects of buyers and sellers alike. It is still a buyer’s market, since the global recession, however now with the return of accessible financing, sellers are now enjoying a high number of buyers in the market, therefore experiencing quicker sales”.

On the other hand, there are plenty of other experts that are of the view that property prices in Dubai have yet to bottom out. Alan Robertson, CEO, Jones Lang LaSalle MENA said in the firm's “Top Trends for UAE Real Estate in 2012” report that 2012 is set to be another difficult year for real estate investors, although he expects the Dubai market to become more polarised. "As the performance of the best quality projects will improve, average prices are expected to decline further in 2012 within this increasingly two tier market," he noted.

With increasing investor interest in the UAE market, Jones Lang LaSalle expects a higher volume of transactions in 2012, with this growth being driven by private investors and high net worth individuals rather than investment institutions. The majority of whole building sales will be in the residential sector, the firm predicts, with a preferred asset price of AED 30 – 70 million. There will remain few sales to institutional investors as this sector remains constrained by the shortage of investment grade stock and "unrealistic asking prices", it adds.

The Kuwait investment bank Global Investment House (GIH) is also not optimistic that real estate prices in Dubai will rebound in 2012. In a study published in January 2012, GIH said that it anticipates prices to reach a new low in mid-2012, with heavy supply likely to keep values down in the months beyond.

Both Jones Lang LaSalle and GIH also warn that political instability in the region may also have a negative effect on Dubai's real estate market. "The local real estate market will continue be impacted by regional and global events during 2012 as, the UAE is not immune from the on-going impact of the Arab Spring and the economic troubles of the Eurozone," says Robertson. "As we enter 2012, the real estate sector will inevitably be susceptible to any potential geo-political changes within the region, with the recent escalation of rhetoric between Iran and the West being the major cause of uncertainty. The worsening European debt crises and its impact on the global economy will be the other major external challenge to the UAE real estate market in 2012.”

Buying Property In Dubai

Buying property in Dubai is a relatively straightforward business, and there are many estate agencies and consultancy services catering for international buyers such as expats, those in search of a second home and investors hoping to earn rental income and/or capital appreciation. Financing a property purchase in Dubai will vary depending on which developer one buys from, one’s own budget and financing options available at the time. A typical financing structure from a Dubai-based developer might involve: a 10% deposit payable on signing; a further 10% after 30 days; five payments on each stage of construction; and a 20% final payment upon completion. Alternatively, if a more flexible payment term is needed, then it is possible to obtain a longer term mortgage. Some developers and agents will also have struck deals with locally-based banks to offer more favourable terms. In general, access to mortgage financing is more restricted than previously, as is the case just about everywhere.

For a fixed-rate loan, repayment periods typically vary from five to fifteen years in length, and rates usually rise as the term progresses. Floating rate mortgages are typically available on loans of between fifteen and twenty-five years. The UAE’s mortgage market has expanded rapidly in recent years, but, as elsewhere, the credit crunch forced lenders to up interest rates and apply stricter loan-to-value rules. However, as previously noted, lending conditions are starting to ease and in 2011, many banks began to slash mortgage rates as property prices began to stabilise. Mortgage interest rates tend to start at around 6.5 to 7%, but in mid-2011, Standard Chartered Plc cut its interest rates in the UAE to 4.99% - then the lowest interest rate offered in the country. In similar fashion, HSBC Bank Middle East Ltd. cut mortgage rates to 5.49% from a high of 9.5% in 2009.

Mortgage interest rates in Dubai have, in the past, followed key US Federal Reserve rates, because of the peg to the US dollar. However, successive interest cuts by the Fed prompted the Central Bank of the UAE to set its first benchmark interest rate (overnight repurchase rate) at 4.75% in September 2007. Overseas residents have traditionally paid a slightly higher interest rate than residents.

If employed, mortgage payments are made via a salary transfer while self-employed buyers meet payments by writing a post-dated cheque or by a standing order.

There are legal and geographical limitations on the ability of foreigners to own freehold property in Dubai. In March 2006, a long-awaited Dubai property law was issued, but Law No.7 of 2006 stipulated that freehold is limited to UAE and GCC citizens and companies wholly owned by them, as well as public shareholding companies. However, the law also stipulated that upon approval of Dubai's ruler, non-UAE nationals may be given the right to own properties in some parts of Dubai.

In August 2006, the Dubai International Financial Centre Authority (DIFCA) published draft legislation that would allow foreign freehold ownership of property in the DIFC. The laws included the DIFC Real Property Law 2006 and the Strata Title Law 2006. These laws, enacted in June 2007, allow for foreign companies and individuals to hold freehold ownership of real estate within the Dubai International Financial Centre.

The Governmental And Economic Background

The emirate of Dubai is strategically located between Africa and the Middle East and between the Far East and Europe, making it a gateway to over 1.5 billion consumers located in countries surrounding the Red Sea and the Gulf. It has a superb infrastructure with the consequence that it has become a key link in the global transport and distribution system.

Dubai is served by more than 170 shipping lines and more than 86 airlines offering links to over 100 cities worldwide. The strong shipping and transportation sector is composed of most of the leading regional and international freight forwarders, insurers and shipping agents. It has a rapidly developing high quality manufacturing sector and a buoyant and prosperous domestic market. In a nutshell its infrastructure and services match the highest international standards.

Evidently, most of the Emirate's wealth has been built on the back of vast mineral deposits. However, the rulers of this oil-rich territory were quick to realise that oil wealth will not last forever, and set about putting in place a series of investor-friendly tax, regulatory and legal policies to attract companies, individual investors and wealthy retirees from all over the global to live, work and do business in the city.

Partly as a result of these policies, economic growth over the early part of the past decade was experienced at rates that would be the envy of any pro-business western economy. Government figures revealed that the gross domestic product of the UAE as a whole grew by 15% to AED337 billion (US$91.7 billion) in 2004, whilst the economy of Dubai grew at an even faster pace as it GDP expanded by 16.7% to a little under AED100 billion. Dubai’s economy has grown by an average of 10% per year since 1995 – the fastest growth rate in the world, according to Dubai’s Department of Economic Development.

There are no elections or legal political parties in the UAE. Power rests with the seven hereditary sheikhs who control the seven traditional sheikhdoms (Abu Dhabi, Dubai, Sharjah, Ajman, Umm al-Qaiwain, Ras al-Khaimah and Fujairah) and choose a president from among themselves. Sheikh Khalifa bin Zayid al-Nuhayyan, the ruler of Abu Dhabi has been President since 3 November 2004, following the death of the UAE's Founding Father and first President Zayid bin Sultan Al Nuhayyan.

The Vice President and Prime Minister is the ruler of Dubai, which was Sheikh Maktoum bin Rashid al Maktoum until his death in January 2006, following which the role was assumed by his brother and heir, Sheikh Mohammed bin Rashid al-Maktoum. There is also a Cabinet, and its posts are distributed among the seven emirates. (The members of the Cabinet are the government ministers, such as Minister of the Interior, etc.)

The parliament is known as the Federal National Council (FNC). It was established on 13th February 1972 and is considered a landmark in the country's constitutional and legislative process. The FNC advises the Cabinet and the Supreme Council but cannot overrule them. According to the constitution, the FNC consists of 40 members who are drawn proportionately from each of the seven emirates. Each ruler appoints the members for his emirate.

The UAE was a founding member of the Gulf Cooperation Council (GCC) created at a summit conference in Abu Dhabi in 1981. The members of the GCC include Saudi Arabia, Kuwait, Bahrain, Qatar, the Sultanate of Oman as well as the UAE. The country is also a member of the League of Arab States, the Islamic Conference Organization, and the United Nations.

On January 1, 2003, the unified customs area of the Gulf Co-operation Council came into effect, covering Kuwait, Qatar, Oman, Saudi Arabia, Bahrain, and the United Arab Emirates (including Dubai). Yemen has been in negotiations with the existing member states for a number of years, and hopes to join by 2016.

One major selling point for Dubai is that its enormous oil revenues mean that the government has no need to raise income through direct taxation. Accordingly, the emirate is characterized by an almost complete absence of taxes. This means that there are no withholding or capital taxes and, with the exception of banks and oil companies, no corporate income tax is payable by businesses in Dubai. (Oil companies pay up to 55% tax on UAE sourced taxable income whereas banks pay 20% tax on taxable income).

Despite a relatively small population, total non-oil imports surpassed AED1 trillion in 2009 and soared by 20% in 2010 and by 43% in the first nine months of 2011. The reason is that Dubai is the major re-export centre for the region and the emirate accounts for about three-quarters of the UAE's total non-oil exports. Many of the economies of the region served by Dubai are still at a relatively early stage of development, so there is plenty of long term scope for diversification and expansion in the future. Another important consideration is Dubai's rapidly developing role as a supplier to such emerging markets as India, the CIS, Central Asia and South Africa.

There are no foreign exchange controls, quotas or trade barriers. Import duties are extremely low, and many products are exempt. The UAE dirham is freely convertible and is linked to the US dollar, the currency in which oil revenues are paid. The current exchange rate is AED3.6730 = USD1 and no revaluation has occurred since 1977. This has made investing in Dubai particularly attractive for European investors, given the US dollar’s recent weakness against the euro and sterling.

The Dubai International Finance Centre

In July, 2003, the Federal Cabinet of the United Arab Emirates (UAE) approved a Federal Decree allowing the Dubai International Financial Centre (DIFC) a large degree of sovereignty. The approval of the Decree, which allows for Financial Free Zones to be established in the UAE, marked a significant step forward for the Centre.

In January, 2004, the Dubai Financial Services Authority (DFSA) announced 12 new laws relating to operations within the Dubai International Finance Centre (DIFC), providing a wide-ranging corporate legal envelope.

In 2006, the Companies Law contained in the 2004 package was updated.

In April 2007, the Dubai International Financial Centre (DIFC) held an official inauguration ceremony for the DIFC Courts, an independent judicial system designed to deal with matters arising from and within the DIFC, and which is expected to raise the bar of legal standards within the region. An October 2011 decree from Sheikh Mohammed bin Rashid Al Maktoum, expanding the DIFC Courts’ jurisdiction to allow any businesses to use the English language DIFC Courts, was made following calls from the region’s business community for a common law English-speaking judicial option for all. The Court is now open to businesses from all over the Gulf Cooperation Council as well as the international business community.

The Real Property Law, enacted in June 2007, guarantees ownership of freehold land and buildings, and other interest in land, within the DIFC. The Law is based on the underlying principles of English common law, but also incorporates the Torrens system of land registration, well known in countries such as Australia, New Zealand, Canada and Singapore.

Under the Real Property Law, land transactions are registered in a central register administered in the DIFC. Once registered, the Law certifies them to be fully effective. Unlike some other systems of land registration, title interests registered under the Real Property Law are “indefeasible”. In practical terms, this means that persons buying real estate in the DIFC, lending on the security of real estate in the DIFC, or taking a lease of real estate in the DIFC, can be assured that their investment is backed by the full protection of the Law.

Dubai’s financial centre is regulated by the DIFC Financial Services Authority. The advantage Dubai has over other more established financial jurisdictions in this respect is that the DFSC has had the opportunity to draft a body of regulation pretty much from scratch. This has allowed Dubai to build on a framework of established international best practice, whilst avoiding some of the flaws and complexity inherent in the older jurisdictions where regulations have been constantly amended and patched up to keep pace with developments in the financial markets. The DFSA’s rules are written in English and have been drafted after extensive consultations with leading financial institutions.

The DFSA has also been accepted into the international capital market regulator IOSCO (International Organisation of Securities Commissions).

In January 2012, Sheikh Mohammed Bin Rashid Al Maktoum enacted changes to the Dubai International Financial Centre (DIFC) Law No 1 of 2004 (Regulatory Law 2004), under which the regulation of DIFC Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) requirements for Designated Non-Financial Businesses and Professions (DNFBP) in the DIFC is transferred to the DFSA.

Abdulla Mohammed Al Awar, Chief Executive Officer of DIFCA said: “This move further portrays the co-operation between DIFC bodies to ensure that the highest standards of compliance are achieved. It also comes in line with our commitment to the continuous development of DIFC’s legal and regulatory framework and providing the ideal platform for our clients to grow and prosper.”

The Dubai International Financial Exchange

The Dubai International Financial Exchange (DIFX, latterly rebranded NASDAQ Dubai - see below), opened for trading for the first time on September 26, 2005. The stated aim of the DIFX was to become the leading exchange in its region for equities, bonds, funds, Islamic products and other securities, and a gateway for international and regional investment, and in this it appears to have largely succeeded.

In August 2007, the Dubai Government announced the consolidation of its holdings in the Dubai Financial Market (DFM) and Dubai International Financial Exchange into a new holding company, Borse Dubai. The government stated at the time that the move was in line with the Dubai Strategic Plan 2015, and demonstrated its commitment to position Dubai as the leading capital market in the region.

DIFX and DFM continue to be regulated by the Dubai Financial Services Authority (DFSA) and the Emirates Securities and Commodities Authority (ESCA) respectively.

Explaining the role of Borse Dubai within the new structure, DFM Chairman Essa Kazim, who was appointed as the Chairman of Borse Dubai, said that the company is intended to be a facilitator, allowing DIFX and DFM to explore joint opportunities for the development of capital markets in the region and in the broader context of global exchanges.

He commented at the time of the announcement that: "Both exchanges will share best practices, maintaining operational efficiency at international standards. Borse Dubai will boost confidence among issuers, investors, and intermediaries who will benefit from a presence in both exchanges, as well as a broader and more varied range of services."

On November 20, 2008, the DIFX was rebranded as NASDAQ Dubai to reflect the growing links between the exchange and NASDAQ OMX Group. NASDAQ OMX acquired a one-third stake in NASDAQ Dubai in February 2008, with the remaining two-thirds owned by Borse Dubai. Then, in December 2009, it was announced that the Dubai Financial Market had made an offer (which was accepted) to Borse Dubai Ltd. and The NASDAQ OMX Group Inc. enabling DFM to acquire 100% of NASDAQ Dubai. The aim of this transaction was to widen DFM’s asset classes for investors, to allow the company’s shareholders to benefit from the future growth of NASDAQ Dubai and to further develop closer operational links between the two exchanges.

The DIFX has ambitions to become the exchange of choice for the listing of Islamic finance instruments, and took major steps towards this goal with the listing of over 100 Sukuks, or Islamic bonds, in 2007. In December that year, Dubai's Jebel Ali Free Zone listed a AED7.5 billion (USD2.04 billion) Sukuk on the DIFX, confirming the exchange’s status as the largest in the world for Islamic bonds.

The DIFX is also a significant draw for the listing of conventional bonds, and in February 2007 Dubai Holding Commercial Operations Group (DHCOG) listed bonds worth USD2.46 billion on the exchange, in the largest corporate bond issue in the Middle East under a European Medium Term Notes (EMTN) programme.

Commenting on the listing, Mohammed Al Gergawi, Executive Chairman of Dubai Holding, stated that: “The DIFX is a gateway for both regional and international investors. Following its rapid growth, the DIFX is the ideal platform for Dubai Holding to list this important issue of bonds, the first it has ever made. As an exchange that operates to high international regulatory standards, the DIFX provides expanding opportunities for the business and financial community.”

2008 saw the first dual listing take place on the DIFX, that of Netsol Technologies Inc., a California-based IT company with extensive interests in the Middle East, which is also listed on the US NASDAQ exchange. Furthermore, 2008 also saw the first Chinese company, (China Security and Surveillance Technology, Inc.) list its shares on the DIFX, as well as the mandatory reporting of all over-the-counter equities trades introduced.

The value of equities traded on the DIFX increased by 37% to USD97m in November 2010, from USD71m in November 2009, an increase which came after NASDAQ Dubai’s outsourcing of its trading, settlement, clearing and custody functions for equities to Dubai Financial Market (DFM) in July 2010, as part of a strategy to increase trading of its equities by individual investors and merge them in one liquidity pool with institutional investors.

However, the bourse suffered from a drop in business in 2011 in line with other exchanges in the region. The value of equities traded on NASDAQ Dubai in 2011 was USD674m dollars, down 48% from USD1.3bn in 2010.

Individual investors accounted for 5.8% of the traded value of all shares traded on NASDAQ Dubai in 2011. Arqaam Securities was the most active Member of the exchange in 2011, accounting for 25.1% of equities traded value, followed by Al Futtaim with 23% and Deutsche Bank with 17.3%.

The FTSE NASDAQ Dubai UAE 20 index ended 2011 at 1,374, down 4% from the end of November 2011 and down 24% from the end of 2010.
The index tracks 20 liquid stocks listed on DFM, the Abu Dhabi Securities Exchange and NASDAQ Dubai. It has been designed as a hedging and investment mechanism for GCC and international investors.

Commenting on the 2011 trading report, Jeff Singer, Chief Executive of NASDAQ Dubai, said: “NASDAQ Dubai is working with other UAE capital markets bodies to further strengthen the country’s listing and trading infrastructure, in preparation for an upturn in market sentiment. The exchange is also preparing for new product listings, including derivatives, and aims to expand its debt market.”

The Dubai Gold And Commodities Exchange (DGCX)

The DGCX commenced trading on November 22, 2005, and was the first international commodities derivatives market in the Middle East region. DGCX offers a range of commodities, commencing with gold futures, with electronic trading accessible from anywhere in the world. Transactions on the DGCX take place on a state-of the-art electronic trading platform.

The exchange is established within the Dubai Metals and Commodities Centre (DMCC), which is a strategic initiative of the Dubai government created to establish a commodity market place in Dubai. The DMCC is also a free zone authority offering 100% business ownership, a guaranteed 50 year tax holiday and freehold property options.

The DGCX is regulated by Emirates Securities and Commodities Authority.

Annual volumes for 2011 on the DGCX registered substantial growth of 110% from 2010 to reach just over 1 million contracts, representing a value of USD185.13bn, the highest level since the exchange's launch. By December 19, 2011, more than 10 million contracts had been traded on the exchange since it opened.

As with 2010, currencies drove the majority of volume growth on the exchange, accounting for 88% of total contracts in 2011. Indian Rupee futures continued its exceptional growth, with just under 3.2 million contracts traded in 2011, 563% more than in 2010.  

Precious metals accounted for the remaining 11% of the exchange’s total volumes, registering 443,889 contracts in 2011. Silver futures emerged as the strongest performer of the year in the precious metals segment, rising by 40% from 2010 to 44,870 contracts in 2011.

Stephen Gaterell, Chief Executive Officer, DGCX, said, “The Exchange’s performance in a year which saw increasing economic uncertainty is a testament to its ability to offer a unique platform to manage and mitigate currency and commodity price risk. As we embark on 2012, we aim to further develop our technology infrastructure as part of offering an even better trading environment for our Members. We will also be looking to expand our product offering and diversify our business across other markets. The Exchange is also considering measures to further increase liquidity and volume in existing futures contracts. With volatility high in today's economic environment, we expect greater trading volumes across precious metals, energy and
currencies on DGCX.”

The Dubai Mercantile Exchange

The Dubai Mercantile Exchange, which trades oil, reported in January 2012 record trading volume growth of 19% for 2011. In 2010 daily trading in DME Oman averaged 2,898 lots (equivalent to 2.9 million barrels per day), representing a year-on-year increase of 35%. The DME also announced that it delivered more than 145 million barrels of crude oil during 2011, with an underlying increase in Average Daily Volume (ADV) to 3,505 contracts per day. These were the highest figures seen by the DME since the exchange began trading in 2007, with new records on total volume being set in consecutive months during July and August.

DME says that the adoption of DME Oman as the basis for setting the Official Selling Price (OSP) for Dubai crude by the Dubai Department of Petroleum Affairs in June 2009 further reinforces the growing acceptance of the DME Oman contract as the third global crude oil pricing benchmark. DME contracts were migrated seamlessly onto CME Globex thereby allowing market participants to access the world’s three crude oil benchmarks on a single electronic platform.

As part of its proposition to provide market participants with a flexible and comprehensive suite of trading and hedging tools, the DME launched four new DME Oman related contracts in 2010:

The DME is regulated by the Dubai Financial Services Authority (DFSA). All trades executed on the Exchange are cleared through and guaranteed by NYMEX (a member of CME Group), which is regulated by the US Commodity Futures Trading Commission (CFTC) and is a Recognised Body by the DFSA.

Immigration And Visa Rules

Citizens of GCC countries (Gulf Cooperation Council: Saudi Arabia, Kuwait, Bahrain, Qatar and the Sultanate of Oman) do not need visas to enter the UAE. Everybody else needs a visa. However free visas, valid for 30 days are granted on arrival for:

Changes were made to Dubai's immigration rules in 2008, and there are now more than a dozen types of visas available depending on the purposes of the visit. General Directorate of Residency and Foreigners Affairs-Dubai, and the rules are subject to change so it is advisable to check with the visa authority (General Directorate of Residency and Foreigners Affairs - Dubai) before travelling.

The main visa types for individuals are the 30-day short-term and the 90-day long-term visas. Both require clear passport copies of the sponsor and the sponsored person, a copy of the salary certificate or employment contract of the sponsor, proof of family relationship and travel insurance. Fees are AED 610-620 (depending on the method of application) for 30-day visas and AED1,110-1,120 for 90-day visas (plus a AED1,000 deposit, refundable upon departure of the sponsored person).

A Mission Visa is issued to to businessmen and highly qualified professionals, entitling them to stay for 16 days from the date of arrival. Required documents include evidence of health insurance and a clear copy of the sponsor's passport. E-form fees are AED320 and a AED1,000 refundable deposit is also required, as with long-term visas.

In June, 2003, the government announced that it planned to allow expatriate residents to move freely among GCC countries by the end of the year, something which in any case became possible with the establishment of the GCC Common Market.

In 2003, Dubai, and the United Arab Emirates (UAE) started making a determined push to increase the participation of locals in the work-force under a policy known as 'emiratisation'.

Dr Omar bin Sulaiman, CEO of Dubai Internet City, noted at the time that while the Dubai Internet City was devoted to emiratisation, this would not mean that all UAE nationals would be guaranteed a job there. "Nationals must not take for granted that jobs are waiting for them at DIC, which will scour the market to hire the most dedicated individuals irrespective of nationality. Dubai is a cosmopolitan city and we will look at all individuals of various nationalities to recruit the best. You will secure a job not because you are a citizen but because you are a hard-working citizen."

In June 2005, the body responsible for administering the programme, the National Human Resource Development & Employment Authority (or Tanmia) announced plans to deny work permits and entry visas to firms that do not comply with their prescribed 'emiratisation' quotas. The Board of Trustees, chaired by Dr Ali bin Abdullah Al Kaabi, Minister of Labour and Social Affairs, decided to step up measures to deny firms not complying with the prescribed Emiratisation quotas the right to obtain work permits and entry visas for foreign labour.



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