Dubai skyline
Dubai in particular saw a wave of 'hotel apartment' launches between 2012-15 as developers tried to pull in demand for bigger units, especially from Gulf investors. Image Credit: Gulf News Archive

Dubai: Property owners in the UAE must not let developers change the classification of their near-complete projects just because they have been told it’s the right thing to do. At the very least, investors should be asking their developers why.

The issue has come to light after certain “hotel apartment” projects were recently turned into “residential apartment” by developers, and who then asked buyers to agree to this.

This, according to Firas Al Msaddi, CEO of fam Properties, is selling them short.

By agreeing to the reclassification into residential, buyers are ending up with a 15-20 per cent loss in value.

“This what investors can lose by accepting the downgrade,” said Firas Al Msaddi, CEO of fam Properties. “A fair trade would be for developers to offer investors a compensation of 15-20 per cent of the original purchase price of the hotel apartment.”

A reason for this

Developers have always demanded a higher premium on hotel apartments, and especially in those projects launched in 2013-15 when the market was heading towards a peak. But why are developers now making a switch from hotel apartments to residential apartments?

“This is in effect a downgrade in the project’s profile,” said Al Msaddi. “Investors who are taking possession of hotel apartments now are subject to VAT.”

But these hotel apartment projects were supposed to be handed over in 2015, 2016 and 2017 and were not to be subject to VAT for the first buyer. UAE implemented VAT from January 1, 2018, and commercial properties come under its ambit.

“According to law, investors have the right to claim back the VAT in full from the developer since it is purely the result of the delay in handover,” said Al Msaddi.

This repayment is what developers are now trying to skirt by getting the project reclassified as residential. But for that to happen, developers must get the approval from buyers.

Other reasons too

Also, developers may find they are unable to deliver hotel apartments that are in full compliance with the mandated finishing are per the SPAs (sales and purchase agreements) and brochures issued at the time of launch and sales. Or the finished project is “not in compliance with government standards set by DTCM (Dubai Tourism & Commerce Marketing) for hotel apartments,” Al Msaddi added. “This can be a much bigger problem for developers than simply avoiding having to compensate buyers for VAT.”

What should buyers do?

They have the legal right to claim a full VAT refund from developers in addition to other compensation, if the developer fails to deliver the same type of properties they sold them.

But on the flip side, “Exiting from your property investment today however is not a good idea at all,” Al Msaddi said.

“Cashing out on the resale market comes at a heavy cost, especially for investors who purchased units above market price from developers that were using heavy marketing to drive the sentiments.

“This can be seen when developers offering various sorts of incentives - investors need to be aware that such incentives are already built into the price of the property that are about to purchase.”

 Firas Al Msaddi, CEO of fam Properties
Don't make it easy for developers to reclassify projects, says Firas Al Msaddi of fam Properties. They are the only ones benefiting. Image Credit: Gulf News Archive

VAT is a reality

If developers say that there is no VAT on hotel apartments being turned into residential, they would be in the wrong.

“Three of the lawyers I spoke to have lead me to believe that VAT will still be charged and can be claimed back from the developer if the project was delayed. But we are not seeing any incentives being offered by developers for these additional costs borne by buyers.

“From the scenarios I have seen, some developers are taking advantage of investors, because no incentive will amount to the severe loss that can be caused by the change from “hotel apartment” into a “furnished apartment” on the title deed.

“A majority of developers are offering investors a certain level of payment flexibility without making them subject to unreasonable and unfair requests.”

As long as investors remain aware of why developers want a reclassification, they can be reasonably sure of not being taken for a ride.

Investors should tick these boxes
• Do not accept immediately to all the developer talk about why reclassification into residential is the best option now. “It is definitely not in their interest in any way, shape or form,” said Firas Al Msaddi.

• Another issue is that some buyers who have signed to accept the switch in property type are unable to obtain a signed copy of the waiver agreement from the developer. “This may be because the developer is waiting to receive signed waiver agreements from their full client portfolio - this will indeed take some time,” said Al Msaddi.

• By delaying unless all investors within the same project sign the same waiver agreement, it will be “almost impossible” for the developer to switch a property classification from “hotel apartment” to “furnished residential apartment”. This in turn means that if the investor is looking to sell the property it will have to be sold as a “Hotel Apartment Unit” and it will be subject to VAT.