Half-year review: VAT in real estate

Half-year review: VAT in real estate
Brokers discuss the first six months of VAT implementation and how it has affected tenants and homeowners

VAT’s implementation has been generally trouble-free six months on, although a closer inspection of its impact on property at the end of the year would reveal more practical insights

Six months into its implementation in the UAE, the 5 per cent value-added tax (VAT) has generally had a limited impact on real estate values, if average market prices in the second quarter are anything to go by. Villa and apartment sales prices retreated by an average 4 per cent over the quarter, while apartment and villa rents were down 3 per cent and 2 per cent respectively, according to Asteco’s second-quarter market report.
Various factors contribute to VAT’s muted impact on real estate, but analysts agree prevailing market rates have in a way helped belie fears of a tax backlash.

“I think the immediate impact of VAT was always expected to be limited and it’s proven to be so,” said John Stevens, managing director of Asteco, at this week’s edition of the PW Talk, a digital talk show produced by Gulf News Property Weekly. “We had VAT implemented at 5 per cent here in the UAE, obviously that’s one of the lowest rates in the world.”
Most people in a rising market would obviously try to offset whatever cost they would have to pay. But we’re not in that type of a marketplace. So if the landlord or the seller was looking to offset that cost and put the prices up, he would then not be in a competitive situation.

More than VAT, the market cycle has had a strong influence on existing pricing strategies and decisions of landlords and sellers.
“For the first six months, I think VAT has been fairly well received,” said Mario Volpi, sales and leasing manager at Engel & Völkers, who was also a guest at the show. He adds: “I think most people in a rising market would obviously try to offset whatever cost they would have to pay. But we’re not in that type of a marketplace. So if the landlord or the seller was looking to offset that cost and put the prices up, he would then not be in a competitive situation.”
VAT, however, will not inhibit developers from continuing to devise creative ways to attract buyers, including offering consumer-friendly payment terms. “For developments already under construction, I think that most developers were aware the VAT is coming and should have factored that into their construction costs,” said Stevens. “So I don’t necessarily think that VAT is going to have a direct effect on the offers that you are seeing in terms of post-completion payment plans.”
Who’s more affected?
VAT may affect some residents and businesses more than others. Tenants and homeowners, for instance, will feel the effects of the tax at varying degrees. “An owner of a property would be paying VAT on maintenance and operational costs,” said Stevens. “But as a tenant, I don’t think it’s necessarily going to directly have much of an effect on you.”
However, the more tangible consequences of the new tax scheme in the rental market and in tenant movement, if any, would be best assessed later this year. “Our record shows that peak time for new leases and renewals are May to November, so realistically you would be looking towards the fourth quarter to see if there’s a noticeable shift,” said Stevens.
Confusion
While VAT’s integration into the industry was generally trouble-free, there had been a few squabbles and confusion at the consumer level, mainly as a result of lack of awareness. “I think people either didn’t listen or didn’t read carefully and they just weren’t sure what VAT was all about,” explained Volpi. “At the beginning, we had people saying, ‘we’re not going to pay VAT, you pay it’.”
I’m aware of discussions at a regulatory and community level among those of us in the industry that are looking to see that we get owners’ associations not be subjected to VAT, because they are non-profit organisations.
– John Stevens

Still others are already pushing for some changes in tax law. According to Stevens, there are discussions within the industry about the practicability of introducing new VAT exemptions.
“Part of the clarification that we got very early on when VAT was implemented was in terms of owners’ association. So as an owner, service charges are being charged VAT,” said Stevens. “I’m aware of discussions at a regulatory and community level among those of us in the industry that are looking to see that we get owners’ associations not be subjected to VAT, because they are non-profit organisations.”
PW Talk excerpts
How can one verify that agents or businesses are registered to charge VAT?
Volpi: You have to have a tax number, that’s called a tax registration number, TRN. If somebody is being charged VAT and is not being given a proper invoice, my advice would be to question it or not to pay it at all. Or ask them to show that they are illegible to charge the tax.
Best areas to lease or buy property?
Volpi: Areas that are up-and-coming due to infrastructure spending such as Al Furjan, which is a bit of a hotspot for families and also individuals because there are also a lot of apartments there. The good thing about that area is that it will have not one but two Metro stations linking up to the World Expo site. It’s got some great family villas and town houses and of course apartments. You’re probably also looking at Dubai Sports City and some parts of Dubailand.
Rent-to-buy schemes
Stevens: We can see on the horizon there may be much more of the rent-to-buy schemes, but all of these will be developers looking at the returns that they are able to generate from the projects they are selling.
Volpi: That’s a very important part at the moment of our business. We’re developing rent-to-own, for sure, in Al Furjan, where perhaps a project wasn’t selling as much because people have difficulty to raise the 25 per cent deposit. So what is being offered now is the ability to live in a property from a rental point of view and the money is then put towards that 25 per cent deposit. The minute it hits 25 per cent, the person then gets a mortgage. This for me is a catalyst and I think you’ll find that there will be many more of these type of projects and offerings, irrespective of VAT.
10-year visa
Stevens: I think these initiatives are good and they will underline an improvement in sentiment in the marketplace. Obviously, we need to see more detail on how people will be able to secure the 10-year visas, whether it’s going to expand to property purchases as well rather than just the professions.
Off-plan prices and delivery
Stevens: When it comes to reducing prices further on off-plan projects, developers don’t really have much further to go down because that’s the cost of their construction. I think you’re more likely to see a slowdown in new releases and the delivery of these projects. But again, the delivery element is problematic for developers with a post-completion payment plan because they don’t get any money until they hand them over, so it’s actually in the interest of developers to hand them over on time and the payment plans kick in.
Advice to property buyers
Stevens: There a number of schemes in Dubai that are offering very high returns to an investor. You’re looking more in the medium term — where do you think properties are going to be demanded in three, five years’ time?
Volpi: If you are considering to move, now is a good time, at least to have a look, put your feelers out and see what’s out there and if what you’re looking for is out there, I would not necessarily wait too long. Maybe things might pick up next year and that being the case, 

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