Watch out for indirect VAT costs on property deals

Developers enjoy a zero rate on all residential sales within three years of completion of a project.

With the value added tax (VAT) kicking in on January 1, 2018, end-users in Dubai are confused whether to pre-pone their property purchase decision or to continue paying rents and wait for sales prices to bottom out.

As per the VAT regulations, developers enjoy a zero rate on all residential sales within three years of completion of a project. Any home sale done after those three years will come under the five per cent VAT levy.

However, residents need to watch out for the indirect costs arising from property transactions.

"There will be no direct effect of VAT on unit costs as prices of new residential sales is zero rated and residential leasing is exempted. Nevertheless, indirect costs coming from the ancillary processes of transactions and construction will have an inflationary effect on the final prices over time, that we estimate to be from three per cent to five per cent. Services in the building life cycle such as acquisition services, mortgage charges, construction and property management, maintenance charges, etc., are expected to see a more direct effect from VAT," says David Godchaux, CEO of Core Savills.

Market experts call for caution and remind buyers that there were similar concerns when the Dubai Land Department doubled transfer fees on property transactions from two per cent to four per cent in 2013. Such short-term blips are unlikely to affect buying behaviour.

"Markets adjust to these transaction levies and the reality is that even after VAT, UAE levies on real estate are very competitive when compared to the developed world," says Hussain Alladin, head of IR and research at Global Capital Partners.

With attractive property prices and generous payment plans from developers, Dubai appears to be on course for increasing end-user ownership levels and that trend is likely to continue, regardless of the VAT levy.

Meanwhile, for those sitting on the fence waiting for prices to bottom out, it will be wise to defer your decision no longer.

"Whether Dubai property prices have bottomed out or not depends upon the location and individual development as there are varied drivers affecting sales prices in different communities and districts. Generally, we expect further room for softening, particularly in areas witnessing a spike in new and off-plan launches in the lower market segment as competition by a few developers on low pricing are pulling the area averages down and sometimes dampening recovery of the re-sale market as well," adds Godchaux.

Some experts believe a turnaround is on the horizon, with green shoots appearing in certain communities such as the Palm Jumeirah and Jumeirah Village Circle since the beginning of the year.

"Given the supply and demand dynamics at play, investors should not expect double digit returns this time around, but a slow and steady recovery as fundamentals play themselves out," concludes Alladin.

- deepthi@khaleejtimes.com

Deepthi Nair

deepthi@khaleejtimes.com