Impact of VAT on UAE property: A halfway house

The resales of residential units are likely to be exempt from VAT. This may encourage activity in the secondary market.

While new tax is unwelcome for end-users, there is no escaping the levy of value added tax, come January 1, 2018. Even as skeletal details have emerged about the VAT framework and sectors that will be exempted and zero-rated, consumers and end-users must know that the devil lies in the details.

With property being a sector that affects all expatriates and citizens in the form of house prices and rents, we explore how VAT will affect the UAE's real estate industry.

What is known so far is that commercial property (sales and leases) will be subject to the standard rate of VAT (5 per cent), residential property (sales and leases) will be exempt from VAT, with the exception of the first sale of new residential property, which will be subject to the zero rate of VAT, and bare land will be exempt from VAT.

"Developers, sellers and landlords of commercial property will need to account for VAT at the rate of five per cent on their property transactions. Provided the VAT is charged in addition to the normal selling price or rent, the developer, seller or landlord will not suffer a cost [except cash flow] from the introduction of VAT. However, this may increase the cost of buying or leasing commercial real estate. Provided the buyer or tenant is VAT-registered and able to recover the VAT charged [which will be the case the majority of time], the imposition of VAT should not create an additional cost [except cash flow]," says Nurena Tarafder, senior manager, tax, Deloitte Middle East.

The sale and letting of all commercial property, including retail outlets, is likely to be subject to VAT. Whether this will make buying or leasing commercial property more expensive following the implementation of VAT will depend on the seller's or landlord's decision to absorb the VAT as a cost to their business or pass it on to their buyers and tenants. The latter is likely where the buyer or tenant is in a position to recover the VAT on their purchases.

"Certain businesses such as banks and financial institutions are unlikely to be able to fully recover VAT on their purchases, and therefore if the price of rent or buying property increases as a result of the imposition of VAT, this will be a direct cost to them," clarifies Tarafder.

Commercial properties' valuation and prices are also likely to increase. "Commercial and retail units should be more expensive by five per cent in terms of their rental pricing. Consequently, there may be an impact on their valuation and prices may increase by two to five per cent. This is an assumption. Of course, we will have to see the exact impact," says Kalpesh Sampat, COO of SPF. "A landlord may pass this on to the tenant, whether implicitly in a higher rent, or explicitly by asking the tenant to pay rent plus VAT, on actuals."

In terms of existing property sales contracts and tenancy agreements, the payment clause will have to be reviewed to understand whether the seller/landlord has the ability to charge VAT in addition to the price that has already been agreed.

The first sale of residential property will be subject to a zero rate of VAT. Explaining this, Tarafder says: "The developer treats the sale of new residential accommodation as zero rated for VAT [does not charge VAT]. As a result of treating the sale as zero-rated, the developer is able to recover the VAT incurred on the costs of developing the property. The buyer does not incur VAT as no VAT is charged."

The resales of residential units are likely to be exempt from VAT. This is likely to encourage activity in the secondary market.

"Services and transactions that are exempt from VAT should benefit from a mechanical advantage which is likely to support the residential resale market in this instance. A premium between new home sales and the resale market will naturally be created and will have a relative, negative [although limited] impact on the off-plan market, by comparison to the resale market," says David Godchaux, CEO of Core Savills.

Experts are welcoming the VAT levy as it will generate revenue to plug the GCC's budget deficit and fund infrastructure projects.
"Although the introduction of VAT essentially increases property costs, there are also positive impacts because this can help ease, albeit marginally, the boom-bust cycles here, which can be hugely disruptive," says Jesse Downs, managing director and co-founder of Phidar Advisory.

"Conceptually, I'm in favour of the introduction of VAT because it will presumably fund vital government services, like infrastructure and public safety services, all things that help augment the quality of life and value proposition of this city. The challenge is in the details of the implementation and, of course, the timing," she adds.

- deepthi@khaleejtimes.com

Deepthi Nair

deepthi@khaleejtimes.com