It has been nearly two months since value-added tax (VAT) was introduced in the UAE and various industries are feeling its effects in different ways and varied intensity. While residential property is generally free from VAT, some Dubai real estate developers and brokers are feeling the pressure because other business expenses often incur VAT. To get a better view of the impact on real estate-related businesses in the early days of VAT, we talked to executives in the industry about their insights and how they are coping with the new tax regime.
VAT is making the construction and real estate community more cost-conscious. As a developer, we do not charge the 5 per cent VAT to our customers. However, there is VAT impact on all the outgoings like contractors, sub-contractors, consultant, broker commission and supplier payments. For example, on a Dh100-million construction, we would be paying Dh5 million VAT on contractor bills from January 1. The additional cost makes everyone cost-conscious and going forward I assume the contractors will try to carry out the same volume of work at lower cost by being more efficient. In a way, VAT will make every business more careful and responsible about their expenses.
Atif Rahman, director and partner, Danube Properties
If a contractor passes on VAT-related costs to the developer, it is likely to have an impact on a developer’s selling price. However, with consumers becoming more price sensitive, keeping prices competitive is critical for developers. Hence, a sudden spike in launch prices, however small, could affect demand. As such, residential off-plan sales have been exempted from any VAT, but any future inflation in construction costs could impact sales prices. The first supply of residential property is zero-rated within three years of completion, which allows developers to recover VAT on the construction of residential properties, including elements on architectural design, consulting, contracting and materials used. However, real estate developers should consider the complexities arising from mixed developments involving commercial and residential leasing and the need to assign VAT recovery.
Vijay Doshi, managing director, Vincitore Real Estate Development
No burden on buyers
VAT has an impact on the developer, as it cannot pass on [the tax burden] to the buyer of residential property. Building material suppliers of our residential projects send us invoices with VAT, which we the developer absorb without burdening the buyers. Therefore, the burden stops at the developer level. This will have an impact on profits of the developer. In commercial properties, the developer can pass on VAT to the buyer, but the market is not conducive to increase prices.
Sailesh Jatania, CEO, Gemini Property Developers
Minimal effect on cost
Residential property is free of VAT, so neither the developer nor the buyer is affected by its implementation as developers can be reimbursed for VAT when the first supply is in the market. Therefore, the VAT expense effect comes down to be minimal, which should not bring any difference to the prices. Practically, the implementation of VAT will increase by 1.5-2.5 per cent the general expenses of any business in the UAE, since the companies are not paying VAT on all of its transactions.
Adnan Al Hamly, CEO, GPD Ghreiwati Property Development
Agents incur costs
Most buyers do not want to be paying the VAT costs and expect the agents to absorb the costs, which we agree on a case-to-case basis. Most renters so far have been complying with the VAT as the difference is minimal and hardly makes an impact on the overall value of rentals, but in case of high-end rentals for commercial, we feel the pinch as renters want the cost to be absorbed by the agents.
Riyaz Merchant, CEO, Realty Force Real Estate Brokers
Commissions are negotiated
It has opened up a place for negotiations from the clients in the secondary market. Before VAT, the standard commission was 2 per cent that was never a part of the talks, now some of the clients are opening up the issue and asking us to absorb the VAT in the commission being charged. We hope that there would be a standard practice adopted throughout the market in a few months based on the market conditions. I don’t see anyone not concluding a deal because of the VAT, and the proportion of VAT impact on overall price is not that heavy. People were overall on a wait-and-see mode, but now from the start of this year more enquiries are moving on.
Pawan Batavia, CEO, Synergy Properties
Buyers defer purchase
It is probably too early to say with any degree of accuracy exactly how VAT has affected the cost of selling within the secondary market. I did, however, state last year that the sentiment would be affected by the introduction of this tax. Some buyers will defer the purchase of property, preferring to take a wait-and-see approach before taking the plunge. This potentially has already happened, as sales of off-plan units did slow down in January. If buyers are cautious, fewer sales will take place, putting pressure on an already challenging market. This, in turn, could lead to more softening of prices.
Mario Volpi, sales manager, Engel & Volkers
Marginal rise on expense
Residential sales and lease, not including short-term leases, are free from VAT. However, the 5 per cent VAT is applicable on incidental expenses, such as brokerage fees, trustee agent fee, no-objection certificate charges, district cooling, Dewa fees, etc. This is absorbed by the party responsible for such expense, unless agreed otherwise. For example, a landlord incurs VAT for maintaining a property, but cannot recover the VAT from the tenant, unless the rent is adjusted, which is difficult in today’s market. Landlord thus take a small hit on their returns. The impact of VAT could be very different for landlords who own whole buildings. However, VAT is not a deterrent for residential sales and leasing, as the expense is marginal and is now an acceptable practice.
Rajiv Ghanekar, senior real estate broker, Keller Williams Real Estate Dubai
Nakheel had long been planning for the introduction of VAT by ensuring that all of our businesses were registered in time to comply with the new legislation. We are fully compliant with the new VAT regulations, even in cases where the business needs to absorb the VAT-associated costs. VAT will assist the government to further diversify its revenue streams and ensure that organisations become more transparent. Previously, companies had limited reporting requirements, but with the introduction of VAT, businesses will need to maintain records and report periodically. VAT will encourage greater transparency and accountability in businesses, including the real estate sector, with new auditing processes ensuring that companies comply. This new level of transparency will enhance best practice within the sector, further increase investor confidence and encourage new investors.
Sanjay Manchanda, CEO, Nakheel
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