DEC prepares policy paper on “access to land” and the investment behavior in Dubai

Dubai: Experts from the Economic Policy ‘&’ Research Center, the operational arm of Dubai Economic Council (DEC) has recently conducted an economic policy paper about the issue of access to land and its consequences on the firms’ investment in Dubai.

Broadly, the paper is based on the results of the latest Dubai Economic Council’s Enterprise Level Survey (2010 Dubai ELS), the project that carried in partnership with the Center for Global Development (Washington DC), Dubai Statistics Center and Economic Zones World/ JAFZA. The paper suggests that at least 53% of firms in Dubai find access to land as the major obstacle for their business operations. It, therefore, argues that this is likely to be associated with regulatory and institutional factors.

A formal econometric analysis confirms that firms in the Free Zone are constrained by the prohibition of commercial land ownership in the FZ and this appears to be a more binding constraint than the perceived uncertainty of the land market regulations in Dubai Main. However, de facto’ foreign-owned firms in Dubai Main (i.e. assumed to be those with Emirati sponsorship share at exactly 51%) are likely to be the most impacted. Instead, firms located in Dubai Main where there is an Emirati partnership are likely to resolve or at least contain the consequences of land market problems through the informal networks available to the Emirati business partners. Moreover, the paper finds that when access to land is a problem, this has adverse impacts on the investment behaviour of entrepreneurs. In particular, it seems that the probability of investing in physical and human capital drops by 22 and 35%, respectively, for firms claiming access to land to be a major obstacle in their operations.

Land – or its equivalent in the form of built up space for commercial use – is a fundamental input among the factors required to start up a business. Constraints on access to land, therefore, could become a major obstacle for regional and economic development, as they are likely to have adverse impact on the potential to create new enterprises or expand existing ones. In this context the evidence from the recent 2010 Enterprise Level Survey- where 51.3% of surveyed firms find access to land’ to be the major obstacle to their business operation- should merit careful consideration.

In mature economies with established infrastructures and possibly high population density there might be problems of land scarcity and high cost. However, the existence of robust institutions and efficient regulatory systems will likely ensure that the problem of urban and commercial land allocation be solved through the market mechanism. The population density in Dubai – that of the UAE in general -is low despite the huge entry of expatriate workers since the late 1950s. Likewise, the development of Dubai’s physical infrastructure has not yet reached a steady state. Moreover, the huge surge of Real Estate development that has accounted for much of GDP growth in the past two decades would lead one to think that the physical availability of land and/or built up space for industrial and commercial use is not scarce.

Therefore, that the problem of land access in Dubai, as reflected in the above mentioned survey, is likely to be associated with institutional and regulatory problems, given that its economy offers ample supply of commercial property to business. The paper, therefore, asks two fundamental questions: what are the regulatory and institutional factors that might have complicated firms’ access to land in Dubai? And equally importantly, what are the consequences of such declared constrain for the future economic development of the Emirate? There are three key aspects that underline a study of �land’ as obstacle for business operations in Dubai. First, the vast majority of entrepreneurs opening and running business in Dubai are foreigners: in fact, only 10% of the population in Dubai is local – i.e., Emirati or GCC nationals – and only about 2.5% of enterprises in Dubai are solely owned by locals.

The second aspect is that foreigners wishing to set up a business in the free zone are not allowed to buy land for commercial purpose, i.e., they can only rent land and/or land with built up premises; while they can do so in the free hold areas of Dubai Main. Therefore it is important to understand that for the vast majority of entrepreneurs in the free zones problems of access to land’ could imply access to buying land’; while in Dubai Main it is likely to be associated with access to rental land and/or property for commercial use’. The third important aspect refers to the sponsorship rules operating in the UAE non-Free Zone that ties each foreigner willing to invest in Dubai with a sponsor (the local’ partner) that acts as the legal representative of the entity in the UAE. In the case of public and limited shareholdings, the local sponsor owns at least 51% of the shares.

To forgo the rules implied by the sponsorship system foreigners can set up their business inside Free Zone’ areas where they are still unable to buy land but are allowed 100% ownership of their business – i.e., the physical installations, full share ownership and in full command of the profits generated by the firm. An advantage of setting a business in a Free Zone is that rules and regulations that underline the operations of the firm – e.g., regulations for the leasing of commercial property, the cost of leasing or even the fees attached to the leasing permit, among others – are well established and monitored by the Free Zone Authority.

Such certainty is not necessarily a characteristic of the land market in Dubai Main, where the lack of transparent and predictable land regulatory system, especially with regard to adjudication of disputes, adds risk and uncertainty to the operations of firms. In recent years there has been a tendency for the local government to reduce land uncertainty among the business community. One mechanism used in this regard is represented by the Rental Disputes Settlement Committee that belongs to Dubai Municipality. Other mechanism is the Real Estate Regulatory Agency (RERA) under the Dubai land department with autonomy to monitor and regulate Dubai’s real estate market, including with regard to monitoring rental price increases and resolving deputes between leasers and landlords. However, in the case of rental prices and despite the fact that rental increases are legally established and regulated, the implementation of these remains fairly ambiguous, which might give rise to potential abuses by both renters and/or local land owners in Dubai Main.

The paper undertakes econometric analysis using the Dubai 2010 Firms Survey data base. The determinants have been modelled of the probability that a firm will declare “access to land” as a major constraint, controlling for firms characteristics, sector and economic zone and nationality of ownership. Apparently, problems of land access appear to be more severe for firms located in the Free Zones. However, in comparison to all other firms in both economic regions, Dubai Main firms that are de facto’ owned by foreigners tend to face the most extreme constraints.

Finally, this paper also analyzes the potential impacts that access to land as an obstacle for operations’ might have on physical and human capital investments by firms. Thus, our estimates suggest that investing on assets would increase by 22% if access to land was not an obstacle to firms while investment on human capital – proxy by training provision – would increase by 35% if firms could expand their operations as result of an improvement in terms of accessing land’. Clearly, evaluating the laws and regulations that at this point reduce access to land’ for foreign entrepreneurs might lead to reducing uncertainty on investment, increase in capital and human investment and potentially allow for greater employment creation in the Emirate of Dubai.

Policy recommendation By way of policy recommendations from the perspective of maintaining Dubai industrial development in the future, the results suggest that the economic authorities in the Emirate should enhance the transparency and predictability of land market regulations and dispute settlement in Dubai Main as well as consider introducing access to commercial land ownership in the Free Zones.