Debate: Should Dubai penalise landlords who leave units empty?

With around a fifth of properties left vacant, is it time for the government to follow the example in Saudi Arabia, which plans to tax landowners who sit on undeveloped land in urban areas?
Debate: Should Dubai penalise landlords who leave units empty?
By Staff writer
Thu 23 Apr 2015 09:42 AM

This month it was revealed as much as a fifth of Dubai’s prime properties lie empty for most of the year.

For years, many reports have pointed to towers in JBR or JLT which remain in darkness at night when residential areas should be lit up with tenants and homeowners.

However, the figure is in line with international statistics that show that one in four apartments in major cities across the world are empty. In Dubai, real estate experts believe that between 15 and 20 percent of units in the city are left unoccupied, either because the property is a holiday home or an investment which the owner is holding unto until it is time to flip it.

“There are no recorded statistics for absentee owners, but in my opinion, I would safely say currently in the region of 20 percent of properties, of which buyers mainly come from Europe, Russia, the GCC and to a lesser degree the Indian sub-continent,” Andrew Cleator, luxury sales director, LuxHabitat, told Khaleej Times.

How can Dubai try and curb this problem and should it follow the controversial model adopted in Saudi Arabia? Last month the kingdom's cabinet approve a proposal to tax undeveloped land in urban areas, a policy which could help to end a shortage of affordable homes and spur economic growth.

A lot of urban land in Saudi Arabia is owned by wealthy individuals or companies who prefer holding it as a store of value, or trading it for speculative profits, to the process of developing it.

Is it time for Dubai to follow suit and implement some for of penalty, such as a tax, on absentee landlords and reduce the number of units lying empty across the city, especially at a time when the cost of living is rising as a result of soaring rents in some areas?

We asked some local experts for their take on the issue and what the underlining factors at play are:

Ryan Mahoney, CEO, Better Homes Real Estate

"No we don't need a tax on undeveloped property as that would most likely lead to an oversupply of property across the market. Saudi and Dubai are very different. Dubai is an international real estate market where people from around the world buy, invest in and develop property. While Saudi has a large expat community, they cannot own property and thus cannot develop property, so the property market does not attract international investment and is primarily the domain of a small number of wealthy Saudi businessmen.

"Interestingly, the speculative value of land in parts of Saudi has become so elevated that in some cases the land cannot be developed due to the high cost per plot rendering development financially unfeasible.  Primarily for this reason, in combination with a few other contributing factors, the supply of homes in Saudi is not in step with demand.

"Dubai on the other hand has a vibrant ecosystem that clearly motivates many to develop property rather than just trade the raw land. The ecosystem’s success is the result of a mixture of foreigners permitted to own property, commercial enterprise, the tax status and the overall lifestyle. As a result, Dubai has a huge amount of property under development (visible all around the Emirate), and rather than the market at risk of not keeping pace with demand, there is more likely a risk of oversupply.

"There are areas of the market, such as affordable accommodation, that are still under-supplied but it’s just a matter of time before the economics add up and developers incorporate that particular market. There is no doubt that a significant number of properties are not occupied all year round but that is typical of any international property market and I don't think we need to tax or penalise owners in anyway; in addition, I don’t think we need a tax on land to push supply as the drivers around supply are just fine."

Craig Plumb, head of research at JLL MENA

"There are currently no taxes on real estate in Dubai and this is one of the major attractions of the market for investors.  The government would have to think very carefully about imposing a ‘vacant unit tax’ as this would deter investors from the Dubai market. Taxes on vacant premises have been introduced in other countries (most notably the empty rates in the UK) and they have been found to be very unpopular measures. 

"Another problem in the Dubai context would be that many of the units are occupied as second homes or holiday units by their owners for parts of the year and are left vacant at other periods.   This would make it administratively very difficult to impose an empty unit tax on those units occupied for parts of the year.

"The Saudi tax is in relation to undeveloped land – this is a quite different issue to that in Dubai, where there are not major areas of undeveloped land in prime downtown locations.  Most of the land in Central areas in Dubai has either been developed or is subject to development plans when market conditions are correct.

"Rather than imposing taxes – the Dubai government is seeking to improve the urban form and structure of the city by restricting development in more peripheral areas.  This is the major aim, of the recently released Dubai Urban Master plan – which seeks to create a ‘desert belt’ around the city and focus development within already zoned locations.

"Another major differences between Dubai and Saudi Arabia is the extent of land trading, which is much more prevalent in Saudi.  While there has been some trading in land in Dubai, this is much less of an issue and developers in Dubai earn the majority of their revenue through developing real estate rather than through trading in undeveloped land." 

Mat Green, head of research and consultancy UAE, CBRE Middle East

"There is no real comparison between Dubai’s ‘grey space’ issue and Saudi’s recently approved proposal for taxing vacant land. In Saudi Arabia, there is a significant undersupply of residential property, particularly affordable housing and this is in part driven by the high cost of land that makes development more challenging. The high land cost itself has been driven by a long history of land speculation, where plots have been traded as a commodity and further compounded by land owners that prefer to hold plots for capital growth rather than actually developing them. The situation is such that land is sometimes traded at levels that would in all reality be difficult to derive from actually developing it. Whilst the finer details of the tax are still to be properly understood, the move will surely start to free up much needed development land and in the longer term ease the current pressure on housing through a change in market practice.”

"In Dubai, home owners may choose to leave their units vacant for a number of different reasons. For example they may have purchased the property for capital growth prospects rather than buying to let and wish to keep the property in pristine condition; alternatively they may only utilise the property as a second home / holiday home and hence have minimal time in occupation. Whilst it may skew the demand and supply picture in the emirate, ultimately it is the right of an owner to leave their unit vacant, should they so wish. Adding a tax to combat such practices would only just act as a barrier to further investment and in the long term could be damaging to the appeal of Dubai’s investment market."

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