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Volume 20, No. 2 © 2012 The Metropolitan Corporate Counsel, Inc. February 2012

Real Estate Investing In The Middle East: Foreign Ownership Restrictions In The GCC

James R. England The Contractual Lease is a weak form of real estate ownership because it typically AKIN GUMP STRAUSS HAUER & does not survive in the event of bank- FELD LLP ruptcy, foreclosure or the establishment of a superior interest in the land. In contrast, Long-Term Leaseholds and Freehold Title Introduction are generally referred to as “in rem” rights Managers of real estate investment in that they are recordable, “run with the funds with international investors consid- land,” typically survive bankruptcy and ering investments in real property in the foreclosure and normally prevent the Gulf Cooperation Council (GCC) coun- establishment of superior interests in the tries of Bahrain, Kuwait, Oman, Qatar, land without the consent of the Long- Saudi Arabia and the United Arab Emi- Term Leasehold or Freehold Title owner. rates need to be aware of the property B. Nationality ownership regime in the region. Foreign For the purposes of this article, there investment in real estate within the GCC are three nationality categories. The first is a relatively new phenomenon, and the category consists, when referring to a par- real estate investment industry in the ticular country, of such country’s nationals region is still in its infancy. This is not James R. England (“Local Nationals”). The second category surprising because, prior to the turn of the consists of the citizens of the GCC states new millennium, the GCC states gener- collectively (“GCC Nationals”). The third ally prohibited foreign ownership of real strategy, as they can materially restrict an and final category consists of every other estate within their borders. However, investor’s options, flexibility, security nationality, excluding GCC Nationals within the last 10 years, the tide has and, very likely, the return on investment. (“Foreigners”). For clarity purposes, each slowly started to turn, and now all of the Set forth below is a high-level overview of the respective definitions of Local GCC states permit some form of foreign of the foreign land ownership restrictions Nationals, GCC Nationals and Foreigners ownership within their respective territor- in the GCC states. includes individuals and companies ial borders, albeit subject to substantial owned by them, and a company owned by restrictions. These restrictions have a sig- Key Terms Foreigners in any percentage is generally nificant impact on a potential investor’s Certain key terms as they relate to (i) considered to be a Foreigner for purposes types of real property interests, (ii) of the discussion below, unless a distinc- nationality and (iii) geographical restric- tion is made otherwise. James R. England is Counsel in the Abu tions are set out below. Dhabi and Dallas offices of Akin Gump. C. Geography His practice encompasses all aspects of A. Types of Real Property Interests For the purposes of defining foreign real estate & general corporate law, with In the GCC, there are three different ownership rights, many of the GCC states a particular focus on real estate develop- types of real property interests. The most divide their territories into two types of ment, finance, and M&A transactions. basic form is a contractual right, such as a geographic zones. The first type of zone Mr. England has represented buyers, sell- short-term lease (a “Contractual Lease”). consists of specially designated areas ers, lenders and investors across a broad The second is a long-term ground lease (“Investment Zones”) inside their borders range of industry sectors from real estate (of up to 99 years) with no true ownership specifically earmarked for foreign invest- development and real estate investment interest in the underlying land (a “Long- ment. Significantly, certain countries fur- trusts, to leveraged finance, telecommu- Term Leasehold”). The third is fee simple ther designate Investment Zones for nications, gaming and heavy industry. title or full ownership (“Freehold Title”).1 specific uses (i.e., residential, commercial, Please email the author at [email protected] with questions about this article. Volume 20, No. 2 © 2012 The Metropolitan Corporate Counsel, Inc. February 2012 tourism, industrial, etc.). The second type Financial Harbor, the Bandar Al Seef Area corporate persons, may own Long-Term of zone generally consists of the remain- and certain tourism developments, as well Leasehold interests (of up to 50 years) in der of the land within a given country out- as certain residential developments in Restricted Zones if the land will be used side of the Investment Zones, where greater Manama, including the diplomatic for the development of the country, and Foreign ownership of real property is typ- area. the amount of land is proportionate to the ically prohibited (“Restricted Zones”). State of Kuwait size of its use. Further, any land granted Land Ownership Restrictions Kuwait has some of the strictest for- under a Long-Term Leasehold will be eign ownership restrictions in the GCC. subject to the conditions set out in the Broadly speaking, the GCC states leasehold document (known as a nearly universally permit Local Nationals, Although there is no distinction between Investment Zones and Restricted Zones, “usufruct”), which typically restricts the GCC Nationals and Foreigners to hold use of the land for a fixed purpose. Contractual Leases. An increased level of and GCC Nationals are permitted to own Finally, any grant of a Long-Term Lease- restriction is placed on Long-Term Lease- Freehold Title, Foreigners are not permit- hold interest for Restricted Zones is sub- hold interests, and the greatest number of ted to hold any interest in real estate in ject to the approval of the Council of restrictions are placed on Freehold Title excess of a Contractual Lease. Addition- Ministers. interests. Predictably, Local Nationals ally, any company owned by Foreigners, have the greatest ownership privileges, even if commingled with Local National State of Qatar followed by GCC Nationals, with the or GCC National ownership, is similarly In Qatar, GCC Nationals may own fewest ownership privileges being prohibited from holding Freehold Title or Freehold Title of up to three real property afforded to Foreigners. Local Nationals a Long-Term Leasehold interest in assets in specifically designated residen- can generally hold Freehold Title to prop- Kuwait. Notwithstanding the foregoing, tial areas, provided that, in the aggregate, erty that is not reserved by the state. Addi- the law regulating direct foreign capital the properties do not exceed 3,000 square tionally, it is generally permissible for investment provides Foreigners the right meters. Additionally, GCC Nationals are GCC Nationals to own real property inter- to “allotment of lands and real estate permitted to own Freehold Title to real ests equal to those available to Local required for investment purposes in property within certain Investment Zones Nationals anywhere within another GCC accordance with the laws and regulations deemed “investment areas.” Property in state. However, certain GCC states applicable in the State of Kuwait.” these investment areas can be allocated restrict GCC Nationals’ (other than Local Although this law doesn’t explicitly set for myriad uses, including commercial, Nationals’) land ownership rights by (i) out the type of real estate interest pro- residential, industrial and tourism, among restricting land ownership only to Invest- vided by an “allotment,” it is presumed others. To date, 18 areas have been ment Zones; (ii) prohibiting the owner- that such allotment merely provides a deemed investment areas. ship of Freehold Title (as opposed to guaranteed right to use the land for as Foreigners are permitted to hold Free- Long-Term Leaseholds); (iii) permitting long as the business is operating thereon, hold Title interests only within three des- ownership of only a small number of rather than an “in rem” ownership interest ignated Investment Zones (which are properties in Restricted Zones; (iv) such as Long-Term Leasehold or Freehold separate and distinct from the investment restricting ownership to properties with Title. areas). These three designated zones are specific uses; and/or (v) a combination of Sultanate of Oman the Pearl-Qatar, West Bay Lagoon and the the above restrictions. Finally, ownership In Oman, GCC Nationals are treated Al Khor Resort Project. Foreigners are not restrictions placed on Foreigners are sig- on par with Local Nationals and may hold permitted to hold Freehold Title within nificantly more cumbersome. Although Freehold Title anywhere that Local the Investment Zones generally; however, the restrictions vary significantly from Nationals are permitted to own property. Foreigners can hold Long-Term Lease- country to country, a few common restric- Foreigners, whether natural or corpo- holds (of up to 99 years) over real estate in tions include: (a) prohibiting Foreigners rate persons, may acquire Freehold Title the “investment areas.” from owning real property interests to real estate in specific Investment Zones Kingdom of Saudi Arabia except in Investment Zones; (b) prohibit- designated by the Ministry of Tourism as GCC Nationals who are individuals ing ownership of Freehold Title and Integrated Tourist Complexes (ITCs), may own Freehold Title to up to three pri- restricting Foreigners to owning Long- subject to certain conditions and proce- vate residences in residential areas in Term Leaseholds; and (c) imposing sig- dures. Foreigners may acquire property Saudi Arabia but are prohibited from nificant use restrictions on all with existing improvements or undevel- owning property in the two holy cities of Foreigner-owned property. Set forth oped land for investment purposes in the Makkah and Madinah. Individual GCC below are brief country-by-country ITCs. However, if undeveloped land is Nationals cannot own more than 3,000 overviews of the land ownership restric- acquired, then the owner is required to square meters in aggregate area of resi- tions applicable to non-Local Nationals in construct buildings on the land within a dential space, must use the space only for the GCC states. period of four years of its acquisition, and residential purposes and cannot dispose of Kingdom of Bahrain the land may not be disposed of until the the property until four years after it is In Bahrain, GCC Nationals are permit- improvements are built or the four-year acquired and registered in the new ted to own Freehold Title to real property period expires, whichever occurs sooner. owner’s name. Additionally, GCC Nation- anywhere in the kingdom. Foreigners are If the owner fails to develop the land als that are corporate persons may also also permitted to own Freehold Title, but within four years, the Ministry of Tourism hold Long-Term Leasehold interests in only within designated Investment Zones. then has the authority (if it fails to grant real property for business purposes, pro- Examples of these Investment Zones an extension) to dispose of the land. Addi- vided the real property is exclusively used include, but are not limited to, the Bahrain tionally, Foreigners, whether natural or for conducting the business for which it is Volume 20, No. 2 © 2012 The Metropolitan Corporate Counsel, Inc. February 2012 licensed and the size of the property is the first time, non-resident individual For- owned by Local Nationals (or GCC proportionate to the actual business use. eigners and companies owned by them Nationals, as the case may be) is consid- Also, the property may not be disposed of may be able to own property in the King ered to be a Foreigner for purposes of the unless the business ceases conducting Abdullah Economic City project near Jed- ownership restrictions in the UAE. business activities. If the GCC National dah, but full details have yet to be Finally, in the UAE an important dis- company is licensed to conduct real estate released. tinction is made in respect of Long-Term sales, then the sale of the property United Arab Emirates Leasehold interests. Long-Term Lease- acquired by the company is permitted in In the United Arab Emirates (UAE), hold interests are divided into two distinct the normal course of business. each emirate is free to enact its own legis- types. A “musataha” is a long-term (up to Foreigners are also entitled to own real lation with respect to foreign ownership 50-year) lease with a mandatory develop- property in Saudi Arabia. However, own- of land. The applicable restrictions ment obligation, and a “usufruct” is also a ership is subject to a number of significant regarding the emirates of Abu Dhabi and long-term (up to 99-year) lease, but devel- restrictions. An individual Foreigner may Dubai are discussed herein. opment of the land is not permitted. It is own property in Saudi Arabia if he has In Abu Dhabi, only Local Nationals permissible to contractually “staple” a normal legal residency status therein and are permitted to obtain Freehold Title musataha and usufruct interest, so that a has a permit from the Ministry of the Inte- and/or Long-Term Leaseholds in purchaser can buy a property and develop rior. However, Foreigners cannot own Restricted Zones. GCC Nationals and it under the musataha and then hold it for land or property in the holy cities of Foreigners are restricted to holding Con- a further period of 99 years under a Makkah and Madinah, and there are also tractual Leases in the Restricted Zones. usufruct. restrictions regarding their ability to hold GCC Nationals are permitted to hold Final Thoughts Contractual Leases in these cities. Owner- Freehold Title to land only within certain The ever-changing political and leg- ship of Long-Term Leasehold or Freehold designated Investment Zones. Foreigners islative landscape in the GCC demands Title to residential property by individual, are never permitted to hold true Freehold that investors undertake careful diligence non-resident Foreigners remains prohib- Title, but they can hold Long-Term Lease- prior to soliciting investors, managing ited. Furthermore, significant restrictions hold interests in Investment Zones as well assets, conducting business or making exist for companies owned by Foreigners, as quasi-freehold interests in “floors” and real estate investments in the GCC in and all Foreigners seeking to own real units of buildings within Investment order to ensure compliance with all local property in Saudi Arabia must obtain a Zones, but ownership of such “floors” and laws. New real estate regulations are license from the Saudi Arabia General units does not grant an interest in the being debated every day by GCC govern- Investment Authority (SAGIA). A For- underlying land itself. The Investment ments, as these countries struggle to keep eigner-owned company Ð defined as a Zones in Abu Dhabi include, but are not their laws ahead of the pace of develop- company having “any” percentage of limited to, Sowwah Island, Lulu Island ment and seek to encourage foreign non-GCC National ownership Ð must and Masdar City, among several others. In investment to diversify their economies have a legal presence in Saudi Arabia. Dubai, Freehold Title rights are extended away from oil. This legal presence entails partnering to GCC Nationals as well as Local with a local Saudi company, and a new Nationals in the Restricted Zones. For- company will need to be established to eigners can own Freehold Title within hold the land on the Foreign company’s specific Investment Zones, such as certain behalf. The strict stance on Foreigner’s 1 For the avoidance of any confusion, if, in this article areas in the Dubai Marina, but cannot it states that a GCC National/Foreigner is permitted to ownership of real property appears to be hold Freehold Title in the Restricted hold Freehold Title, it should also be assumed that softening, albeit slowly. The Saudi gov- Zones. Additionally, it should be noted such person is permitted to hold lesser interests in ernment has recently announced that, for real estate such as Long-Term Leaseholds and Con- that any company that is not 100 percent tractual Leases.