Letters of credit (L/Cs) may well feature more in deals between property developers and contractors in Dubai, where the property boom that has witnessed surging real estate prices over recent years has ended.

Unfinished real estate projects are either being dramatically scaled down in scope or put on hold.

Changing environment

The traditional way in which real estate projects in Dubai have been financed is by buyers of off-plan properties paying stage payments to the developer before the developer needed to pay its contractor.

But, with the sudden dearth of buyers prepared to make payments on properties that they can only see on a drawing board means that developers and contractors have to find new ways to finance their activities.

More pressures

New regulations are also influencing the real estate financing environment. Sub-developers can no longer receive no more than 20 per cent of the cost of a property from purchasers if construction of the property has not commenced.

Another pressure on real estate is the current lack of liquidity.

More L/Cs

In the light of these circumstances, Dubai-based lawyers are saying that contracting parties may have to agree alternative forms of payment or related security in order for projects to proceed.

They therefore anticipate an increase in use in L/Cs, promissory notes or even the transfer of legal title to units of property.

Such forms of security, they say, should not only serve as an incentive to the contractors to lower their prices, but may also be used by contractors to secure credit facilities to finance the construction itself.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.