Real Estate Developer's Obligation towards their Investors

 

Can developers make changes to an SPA once they have signed it with property buyers? In other words, can they make changes to the labelling of a property from ‘serviced apartment’ to 'residential' midway through a project?

Firas say’s: In principle, developers shall not ask investors to give away their rights to receiving a different type of property to the one that they paid for and they were promised to receive. Especially if it is a downgrade from “hotel apartments” to plain “Residential Apartments”.

Only inexperienced investors would accept such a proposal under the pressure of developers delaying handover. I anticipate a difference of at least 15% to 20% in value between “Hotel Apartments” and a simple “Furnished Apartments”. This what investors can lose by accepting the downgrade. A fair request from developers would be to offer investors a compensation of 15% to 20% of the original purchase price, in exchange for the investors approval to accept to receive a residential apartment and not a hotel apartment. Developers charged investors high premiums in line with their promises to deliver hotel apartments and not simply residential apartments.So when developers ask investors to sign on such agreement, developers must explain with all transparency the risks involved for investors, because there could be a severe financial damage as a result of signing such agreement.

 If property buyers do not want to be part of this, will they be able to cash out?

Firas say’s: Investors have the legal right to claim a full refund from the developer, if the developer fails to deliver the same type of properties they sold them.
Exiting from your property investment today however is not a good idea at all, unless you really have to. Cashing out on the resale market comes at a heavy cost, especially for investors who purchased units above market price from developers that were using heavy marketing to drive the sentimental and emotional aspect of property purchase decisions. This can be seen when developers offer luxury cars as incentives and investors need to be aware that such incentives are already built into the price of the property that are about to purchase. 

 Why are developers going in for such a change? Do they have RERA approval for such a switch?

Firas say’s: It is possible that such changes to the "type" of property being handed over to clients occurs when developers have been delayed in handing over their projects. Investors who take handover of Hotel Apartments have recently been made subject to VAT because “Hotel Apartments” are now subject to VAT. According to real estate law advice, investors have the right to claim back the VAT in full from the developer since it is purely the result of the delay in handover.  Hotel Apartments projects that were supposed to be handed over in 2015 and 2016, were not supposed to be subject to VAT by the first initial buyer.

The other possibility applies to developers who were unable to deliver quality hotel apartments that are in compliance with the schedule of finishing’s on their SPA and brochures or are not in compliance with the government standards by DTCM for hotel apartments, which can be a much bigger problem for developers than simply avoiding VAT.

 Are developers offering incentives of any kind – deferred payments, etc. – for those buyers willing to allow such a change?

Firas say’s: From the scenarios I have seen, some developers are taking advantage of inexperienced investors, because no incentive will amount to the severe loss that can be caused by the change from “Hotel Apartment” into a “furnished Apartment” on the title deed. In addition, I think the majority of developers are offering investors a certain level of payment flexibility without making them subject to such unreasonable and unfair requests.

Some Developers are informing investors that if they turn their property into a residential property then they will not be subject to VAT. However, three of the lawyers I spoke to have lead me to believe that VAT will still be charged and shall be claimed back from the developer because it is the result of their delay to handover their projects. Hence, I don’t see any recall incentive here.

 What sort of tax/cost benefits will developers get in these circumstances?

Firas Say’s: I answered above.

Do you know of instances where buyers have objected to the switch?

Firas say’s: Many buyers have approached me for advice and I have immediately advised them not to accept as it is not in their interest in any way shape or form. Another issue which I am hearing about in the market is that some buyers who have signed to accept the switch in property type are unable to obtain a signed copy of the “hotel apartment” waiver agreement from the developer. This may be because the developer is waiting to receive signed waiver agreements from their full client portfolio and this will indeed take some time. Simply putm unless all investors within the same project sign the same waiver agreement, it will be almost impossible for the developer to switch a property classification from “Hotel Apartment” to “Furnished Apartment”. This in turn means that if the investor is looking to sell the property it will have to be sold as a “Hotel Apartment Unit” and it will be subject to VAT.

All the above are based on my personal experience in the real estate market, but investors have to make their own decision based on their objectives and what they see as right and wrong.



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