VAT

Equilibrium now further away for Dubai market

Developers in Dubai will be happy with their 2017 results, with over 70% of all transactions in Dubai in 2017 being in the off-plan space, their efforts have been well rewarded.

In a year where over 69,000 real estate transactions were recorded, with a total value exceeding Dh285 billion, real estate transactions in 2017 eclipsed the 41,776 deals achieved in 2016 which represented a total value of Dh259 billion.

Winning the hearts and minds of real estate investors has never been easy. In recent years, certainly post 2008, buying off-plan would have been viewed with more circumspection as the prospect of buying finished property that would able to yield cash flow in the form of rental income virtually immediately would have been considered a less risky prospect than relying on developer platitudes regarding construction timelines.

In addition, attracting the buyers in the affordable segment has always been challenging as the purchaser tends to be more pragmatic, governed more by fiscal realities than emotion or ego. Developers needed to broaden and deepen their customer understandings and develop greater empathy for a segment that had really been neglected in the past.

So, the foray by developers into the affordable segment was accompanied by an increasingly attractive array of successfully marketed financing offers which were designed to garner an increasing proportion of available investor capital into the off-plan property space. After all, new customers have different needs requiring new strategies and tactics.

While these new tactics may have been treated with suspicion in the past, the industry has matured from the heady days of flipping, speculation, false promises and minimal accountability with the regulatory changes imposed on developers to ensure the rights of investors are protected making offerings in the off-plan space appear less risky in nature.

So, faced with a market nervous about global and regional geo-political and economic events, the imposition of a VAT, the distraction of alternative “new world” investments such as cryptocurrencies, along with burgeoning oversupply in the highly competitive and lower margin per unit affordable segment, developers, requiring greater sales volumes to achieve financial viability, needed to get financially creative to make their affordable offerings even more affordable and accessible for end users and financially more attractive for investors.

Inevitably, the amount of capital shifting from the traditional secondary market to the off-plan market created in a capital allocation imbalance, resulting in declining demand for finished properties. Interestingly, capital allocation was really the issue, as supply was quite healthy in 2017, with mortgages financing over 50% of transactions. It wasn’t that long ago that mortgages made up less than 30% of total transactions, extremely low by global standards.

So, as we enter 2018, we are faced with a familiar situation. The market is, once again, is moving further away from the equilibrium that we are all seeking.

The focus of developers to satisfy the requirements of an emerging affordable segment has been overdone, putting pressure on prices, yields and growth in across the industry.

To suggest a reversal or redirection of capital to the more expansive segments is likely in the short term is mere wishful thinking. The only way to address the issues facing todays market is to ensure that the long awaited and much speculated upon Expo inspired surge in demand transpires or to find other ways to expand the capital pool.

One initiative to do just that is in its final stages of planning. Looking to attract an even greater number of overseas investors, a series of roadshows will be held targeting key overseas markets such as India, China, Russia and the USA with the sole purpose of making investors in these countries to understand the benefits of investing in Dubai.

The schedule for the events is close to completion with events in Amman and Kuwait scheduled for late March to be followed by Cairo in April, Beijing in May, and Moscow in July before visiting London in September, Chicago and Dallas in October and wrapping up the tour in Mumbai does in December.

The importance of initiatives such as these cannot be overstated and The Dubai Land Department, realising the importance of increasing industry demand is pushing hard with this initiative.

Despite UAE investors leading the 2017 nationality rankings of investors in Dubai real estate, Indian investors continue hold second place and remain extremely important to the industry. Saudis came in third place followed by the British, who have dropped down the rankings in recent years due to uncertainty around Brexit and a decline in value of the British Pound. The Chinese are emerging rapidly as active investors in Dubai and still hold the greatest potential for foreign investment.

Foreign investors, almost 23,000 in number made approximately 30,000 transactions worth Dh56 billion in 2017. The local market’s reliance on foreign investment continues and, outside the Gulf region, there are huge opportunities to increase the awareness of what benefits the Dubai market continues to offer, not least of which, is the potential yields of 7-11 percent which are unheard of in much of the developed world.

So, the race continues … to win the hearts and minds of the global investment community.

Understanding value-added tax (VAT)

Understanding value-added tax (VAT)

The UAE will implement VAT at the rate of five percent in January 2018. This is not breaking news but still many people are concerned as to how the VAT will affect them personally. The VAT will affect every individual and every institution in the UAE in some way.

The easy way to understand a Value Added Tax is to consider it to be a “consumption” tax. Put simply, for most goods and services, every time somebody sells a good or service to a customer, regardless of where they are in the supply chain, 5% will be added to the price which is collected by the seller and remitted to the governments tax department.

VAT is not a new phenomenon. It has been implemented in many economies around the world and is considered an efficient and equitable way for governments to collect tax revenue. As oil prices have declined significantly, oil dependent economies require new sources of revenue to continue to invest, innovate, develop infrastructure and provide services that are required for sustainable economic growth. The IMF has predicted that the USE may improve GDP by as much as 1.5% by implementing a 5% VAT. Some countries have applied 20% VAT’s to generate the revenues required by their governments.

For businesses, there are procedural and systems that need to be implemented to ensure that compliance with is achieved in the most resource efficient way possible.  Usually, this requires the implementation of an appropriate accounting solution package. Non-compliance could be expensive, with heavy penalties expected to be imposed for those businesses who do not comply.

Those businesses who are unsure of how the VAT works or will affect them, need to seek expert legal advice as to their obligations under the VAT regulations and engage accounting experts to ensure their systems and procedures are correctly recognising, applying, recording and remitting VAT.

Individuals, meanwhile, will be impacted in their everyday life. For example, Electricity and water services will be subject to VAT, so will most of the food that you buy and the purchase of that new car and any subsequent maintenance that it will require and private education will also attract the VAT.

Fittings and furniture for your new home will also attract VAT, as will services such as housekeeping, dry cleaning or laundering.

There are some goods and services that will be VAT exempt. Items such as fuel for your car, essential healthcare items, public education, air travel and taxis. It is important that, when a VAT is being applied, that the poorer segments of the population are not disadvantaged by taxing the necessities of life.

Technically, the VAT will not apply to your rental expense however landlords will be subject to VAT on items such service charges and maintenance, indirectly driving up the cost of rentals over time.

If you decide to purchase a new home, there will not be VAT applied directly to the purchase but it will be applied to the real estate agents’ fees. Of course, as a purchaser of a new home, your purchase price will certainly cover for the VAT that has already been paid on the charges for materials, labor, marketing and other services etc. that the developer had to incur to bring the project to market.

If you are selling your current house in the secondary market, the sale itself will be exempt from VAT, however, you will need to pay VAT on any Real Estate Agents fees, marketing fees, and maintenance or staging fees that you might incur.

For developers, VAT will affect virtually every supply and construction contract that exists. This will have an inflationary effect on the industry as the additional cost burden of the VAT will be passed on to the consumer. Developers need to ensure that they have the systems to recover the VAT cost and ensure that future planning considers the inflationary effect so that any possible drop in demand due to the rise in prices is comprehended with minimal effect on margins.

VAT is not something to be feared, but it is something to be understood, particularly by the business community. The only cost to business is the administration required and the expense of ensuring compliance while the consumer will only notice the effects at the cash register.