5% VAT on first sale of new residential property will not stop flipping, says experts
Sales of off-plan properties in the UAE are expected to see a temporary downturn after authorities confirmed the new value-added tax (VAT) would be applied to the first sale of a residential property.
In a briefing with tax advisors, the UAE Ministry of Finance (MoF) said residential property sales and leases would be exempt from VAT, with the exception of the first sale of new residential property. Sales and leases of commercial properties will be taxed at the standard VAT rate.
The UAE has said it will implement VAT from January 1, 2018.
In Dubai, the country’s most active real estate market, VAT is the latest measure to affect the first sale of a residential property.
During the emirate’s real estate boom leading up to 2008, new projects were sold off-plan within hours of being bought, in a process called ‘flipping’.
The rapid on-sale of properties became rampant, artificially inflating prices, until the property bust in 2009-10. In recent years, the UAE Central Bank has sought to control the problem by allowing first home buyers to borrow up to 75 percent of the property value.
In 2013, the Dubai Land Department doubled its property registration fee to 4 percent of the sale value in another move designed to limit flipping and contain price volatility.
“VAT on the first sale of new residential property will not in itself stop flipping, but it can damper the practice by marginally reducing primary market demand and removing some upward price potential for secondary market buyers,” Phidar Advisory managing director Jesse Downs told Arabian Business.
Chestertons MENA UAE country manager Robin Teh said applying VAT to off-plan sales will push up prices in the short-term, stunting demand.
“From an off-plan perspective, these are traditionally associated with greater risk and therefore increased pricing could temporarily cause the investor to seek alternatives on the secondary market,” Teh said.
“In the mid-term we would expect the demand and supply mechanism to achieve relative balance.”
Core Savills CEO David Godchaux argued taxing new properties would temporarily impact demand while it would be highly unlikely to stop flipping.
“It will have a relative, negative impact on the offplan market, in comparison to the resale market. It is not going to stop investors from flipping as the effect of the VAT tax will be felt across the economy in a mechanism where most costs and prices will self-adjust at a higher level,” he said.
But for the rest of the property market, an exemption from the VAT may not have much impact.
Teh said while it is a positive decision for the UAE real estate market, the increased cost of living due to the tax on most other goods and services could cause a short-term decline in the number of property buyers.
“As the cost of goods increase, disposable income is going to be reduced for a number of tenants which could ultimately have an impact on the decision to buy a property or shrink the budget of residents buying for investment purposes,” Teh said.
Downs said the exemption will not necessarily boost the real estate market but could help to reduce the negative impact of VAT.
“In a market that is in a moderate oversupply, rents should not be impacted by an owner’s cost or expected return, so VAT should not push up rents,” she said, adding rents are determined by factors such as household demand and income levels.
“Now, with stagnant incomes and even some downward pressure on average household income through recent reductions in base salaries, housing allowances and school fees, households will be more price sensitive.”
In the current environment, Downs said VAT is more likely to push down the capital value or sale price.
In the long-term, the VAT, which is expected to be applied to most goods and services, excluding sectors such as healthcare and education, may help boost UAE property prices, with the raised funds to help develop infrastructure that will further improve the country’s position as a global business destination.
Godchaux says he expects the VAT collected to be reinvested into a variety of strategic projects that will ultimately enhance Dubai’s position as a global hub and encourage people to live and work in the country, which in turn will have a positive impact on real estate.
Downs also agreed.
“All these things help augment the quality of life and value proposition of this city,” she said.
“However, the challenge is in the details of the implementation and, of course, the timing.”