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Fri 22 May 2015 09:22 AM

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What happens when Dubai's lights go out?

With about one-fifth of Dubai properties voluntarily left vacant amid rising rents, is it time the government followed the example of Saudi Arabia and taxed landowners who sit on undeveloped urban plots?

What happens when Dubai's lights go out?

During the height of the downturn in Dubai, property sales slumped by nearly 60 percent and tenants rejoiced as rents plummeted. The property debates were all about the huge surpluses of stock flooding into the market. One newspaper also infamously sent a reporter (likely a junior one) down to Jumeirah Beach Residence (JBR) to count how many windows on the towers were off in the dark during the peak after-work hours when most residents should be home. It may have been a rather crude way to determine occupancy levels, but it did the trick.

With rents now back soaring and tenants having to compete once again for units, we were surprised to find an interesting report that claims that as much as a fifth of Dubai’s prime properties lie empty for most of the year.

This might sound high but it is actually in line with international statistics, which claim that one in four apartments in major cities across the world lie empty. In Dubai, various 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 the owner is holding onto until it is time to flip, or sell for a profit.

“There are no recorded statistics for absentee owners, but in my opinion, I would safely say it is 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 the Khaleej Times newspaper.

So, should Dubai follow the controversial model adopted in Saudi Arabia last March? The kingdom’s cabinet approved a proposal to tax undeveloped land in urban areas, a policy that 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 that prefer holding it as a store of value, or trading it for speculative profits, rather than the process of developing.

Is it time for Dubai to follow suit and implement some form 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 ask some local experts for their take on the issue and the underlining factors at play.

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 Arabia 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 difference between Dubai and Saudi Arabia is the extent of land trading, which is much more prevalent in Saudi Arabia. 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 Arabia’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 develop 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.”

Kris Markvukaj, Sales and Operations Manager, Aston Pearl Real Estate

“Looking at this from a subjective point of view, it’s easy to see why so many people have different opinions on this particular issue. In our opinion, both sides have valid statements but considering Dubai’s reputation we have our opinions.

“With Dubai’s reputation being a city of wealth, property and lavish lifestyle also comes the association of a tax haven, where many investors come to enjoy their investment and prosper in their careers. With this in mind, it would be a massive challenge for Dubai to welcome and accept this change as it would have big repercussions throughout the property market and the image and identity of Dubai. Property supply would increase hugely and outweigh demand in an unhealthy way.

“The second challenge would be the fact that regulation and implementation are two very different things in Dubai. How would something like this be regulated? How would you differentiate between someone using their property and not? How long would you have to occupy the property for it to be ok and what would be the cut-off limit? These are questions that would have to be looked into beforehand.

“We feel a better regulation would be penalties on owners and landlords that leave properties in a bad condition, which damages the image of Dubai. Holidaymakers and investors should not be penalised for having properties they want to stay in three or four times a year at different periods, especially with the current rental laws in Dubai, which mean that if an owner chooses to rent to a tenant he has to give one year’s notice before he can reclaim the unit and live in his/her own property.

“The success story of Dubai so far has been the fact that it is a free market to a large demographic of people that come from other corners of the world. Imposing this kind of tax on them would once again limit and have a negative impact on the market, making people think twice about investing multiple times.

“At the end of the day, it should be the choice of the owner to do what they want with the property they have spent money on. It is the right of the owner to have their property used in the way they need as they are continually paying service charges, a housing fee and purchase fees. There are already many forms of penalties for when owners are not up to date on their payments from developers.

“So why do we want to limit the investment and expansion of Dubai by making investors look elsewhere, when we can encourage them to keep Dubai growing?”

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