PW Talk: VAT's impact on property prices in Dubai. This week we invited brokers to discuss the first six months of VAT implementation and how it has affected tenants and homeowners
Read the full Gulf News article:
https://gulfnews.com/business/property/half-year-review-vat-in-real-estate-1.2262603
See more at: http://gulfnews.com/videos
Read the full Gulf News article:
https://gulfnews.com/business/property/half-year-review-vat-in-real-estate-1.2262603
See more at: http://gulfnews.com/videos
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NewsTranscript
00:00Welcome to all our viewers. My name is Esha Nag and you are tuning in to PwTalk, a Gulf
00:14News Property Weekly production where we discuss the most topical issues in the real estate
00:20market.
00:21Value Added Tax or VAT has been introduced in the UAE and the rest of the GCC as part
00:27of a program to diversify the regional economy. In the UAE VAT was introduced on January 1st
00:34this year and now six months into its implementation we look at how the real estate industry has
00:40reacted to the new tax scheme. In particular we ask, has VAT had a major impact on real
00:47estate? To help us answer that question I am joined here at Gulf News Studio by John
00:53Stephens, Managing Director of real estate services firm Asteco. Welcome John. Thank
00:58you. And Mario Volpi, Sales and Leasing Manager of Engle & Volkers, also a real estate services
01:04company. Welcome Mario, welcome gentlemen. Thank you.
01:08So let's start with the question everyone is asking, John. What has been the immediate
01:13impact of VAT on real estate? I think the immediate impact on VAT was always
01:21expected to be limited and it has proven to be so. We've had VAT implemented at 5%
01:28here in the UAE. Obviously that's one of the lowest rates in the world. You've got other
01:33countries, Bhutan for example, up to 50% VAT. And what it's applicable on in terms of real
01:39estate is more limited. So don't believe that it's had a noticeable direct effect on most
01:48segments of the real estate market. Okay. Mario, what kind of feedback have you
01:53got in this six months when you've worked on site with other brokers and with your clients?
01:58Well I mean I echo what John was saying. I think the sentiment when it was first announced
02:03that we were going to get VAT was one of not so much shock and horror because it is an
02:10extra cost, but it definitely hasn't turned out to be the problem that perhaps a few people
02:16have thought. And so especially when you're dealing with the residential market, it hasn't
02:21impacted it at all. When you're coming to the commercial market, then clearly there
02:26are extra costs involved which have to be factored in. But for the first six months
02:30honestly I think it's been fairly well received in that respect and it's a tax that is needed
02:36for the government to spend on all the infrastructure projects that obviously is up and coming leading
02:43up to 2020. But Mario, even though residential rents
02:47and sales are not covered by VAT, services like broker consultancy, maintenance, supplier
02:55payments are covered by VAT. And for the most part it will be the seller, the developer
03:00or the landlord who has to bear these expenses. So will there be a certain pressure on landlords
03:05on developers to increase their prices to cover this additional cost? Have you seen
03:09that? I think most people would look at increasing
03:14costs in a rising market to try and obviously offset whatever cost they would have to pay.
03:22But we're not in that type of a marketplace. So even if we are talking residentially, you
03:27will find that the landlord, the seller, if he was looking to offset that cost, if he
03:35would put the prices up, he would then not be in a competitive situation and his property
03:41would then remain vacant or empty or whatever. So we haven't seen that to be very honest
03:47with you. And so right now I believe that these people who have had to pay these have
03:51absorbed these costs. Well going on to commercial real estate, have
03:56you noticed any movement or activity, John, in the commercial real estate leases that
04:02may have been as a result of that? I'd have to echo what Mario said. I think
04:06if we were in a booming market and the landlords were easily able to transfer those costs to
04:12the incoming tenants, they would have. Obviously, we're in a competitive marketplace. Landlords
04:18have basically absorbed the VAT. They've absorbed because the suppliers and the services that
04:24they're using have also incurred VAT. They've absorbed those increasing costs to retain
04:29their tenants. So no, it hasn't had, current market conditions haven't allowed it to show
04:36its face. Mario, for residential and commercial tenants
04:40or for home buyers who use the services of brokers or pay maintenance services, how can
04:46they verify that the agents or businesses they are dealing with are registered to charge
04:51VAT? Okay. So obviously, if you're having to be
04:54charged VAT, you have to have a tax number. It's called a tax registration number, TRN.
05:02So you would have to go to the federal tax office and input the name of the company and
05:08it will show whether that company is liable to actually charge for tax.
05:13The invoice would also reflect the TRN number. It would have the number on there for sure.
05:19So this should be checked. Absolutely. I mean if somebody is being charged
05:22VAT and is not being given a proper invoice with that information on it, my advice would
05:27be to actually question it or not to pay it at all or ask them to show that they are eligible
05:32to charge the tax. Correct. If the invoice doesn't have a TRN
05:37number on it but it's listed as VAT, then you're not obligated to necessarily pay it.
05:42To pay it. Okay. John, you've released, Asteco has released its second quarter market report
05:49and it mentions that property prices remain competitive and favourable to tenants and
05:54home buyers. How long do you think that this kind of tenants market or buyers market is
05:59going to persist? Would VAT have an impact on this tenants market in the medium to long
06:04term? I don't think on the residential sector, not
06:07so much. Part of the clarification that we got very early on when VAT was implemented
06:12was in terms of the owners association. So as an owner, service charges are being charged
06:20VAT at the current moment in time. I'm aware of discussions at a regulatory and community
06:29level amongst those of us in that industry that are looking to see that we get owners
06:33associations not subject to VAT because they are non-profit organisations. So the residential
06:38sector is the maintenance. You as an owner of a property would be paying VAT on your
06:45maintenance and on your operational costs of it. But as a tenant, I don't think it's
06:51necessarily going to directly have much of an effect on you. In terms of supply and in
06:56terms of the tenant market, obviously, you've just released Q2. We're in the summer period.
07:04Our history or our track record shows that peak time for new leases and renewals are
07:09May to November. So realistically, you would be looking towards Q4 2018 to see if there's
07:17a noticeable shift. The new supply that's coming onto the market is obviously putting
07:23it into tenants' favour. As units are handed over, if you're a property owner who has a
07:32mortgage to pay, you're going to want to get a tenant in there as quickly as possible
07:36to cover your mortgage. So I think that the favourable conditions for tenants are going
07:41to last. Whether it's in terms of rent or in terms of choice because there is a lot
07:47more choice coming, it's going to be good for tenants.
07:52So clearly, tenants' market and getting value for money as well.
07:56Correct.
07:58For our viewers, you are here at the PW Talk and we are here with John Stevens of Esteco
08:04and Mario Volpi of Engel & Volkers to talk about the impact on VAT on real estate and
08:11especially for tenants and homeowners. Mario, coming to you, given the consumer-friendly
08:16rates we are seeing in the market, based on your own research, which areas do you recommend
08:21for families who are now moving into Dubai and would like to lease in during the summer
08:26and going into September?
08:27So you're talking about leasing or for buying?
08:29Leasing as well as for buying.
08:31Okay. Well, I mean, apart from the usual hotspots of Dubai, what we're finding at Engel & Volkers
08:39is areas that are up and coming due to infrastructure spending, such as, for example, Al-Fajan is
08:47a bit of a hotspot for families and also individuals because there are also a lot of apartments
08:52there too. So the good thing about that area is that it will have not one, but two metro
08:58stations linking up the expo site. Not until, I think, 2019, I think is when the metro is
09:06going to be live, but you've got Ibn Battuta Mall there and it's not a million miles away
09:11from the marina and for those needing to travel, obviously, to Abu Dhabi, it's quite a good area.
09:17It's got some great family villas and townhouses there and, of course, apartments. Other areas,
09:24again, same for value for money, you're probably looking at Sport City, some parts of Dubai land.
09:32There are some really good individual developers now who are trying to sell their ready property
09:40stock and they're offering some very good deals at the moment. So everywhere tends to act like
09:45a sponge, to be very honest with you. So the choice for the buyer or the tenant right now
09:50is very, very varied. Okay. Okay. John, with VAT adding to the overall real estate construction
09:58costs, do you think this will have an effect on developers' ability to offer attractive payment
10:03schemes? Like last couple of months, we've seen some very great post handover schemes.
10:08So do you think we will see less of those as we go or it's going to, I mean...
10:13No, I think, I mean, for the developments that are already under construction, I think that most
10:18developers were aware that VAT was coming and would have factored that into their construction,
10:24should have factored that into their construction costs. So I don't necessarily think that that's
10:29going to have a direct effect on the offers that you're seeing in terms of the post-completion
10:34payment plans. It's a question of what are the schemes that will come up and will be developed.
10:42Obviously, post-completion payment plans have come in the last few years and we can see on
10:50the horizon there may be much more of the actual formal rent-to-buy type schemes, but all of these
10:58are going to be developers looking at their returns that they're able to generate from the
11:04projects that they're selling. If I may add to that, because that's a very important part at
11:09the moment of our business, we're developing rent-to-own for sure in Al-Fajan, funnily enough,
11:16where perhaps the project wasn't selling as much because people have difficulty to raise the 25%
11:24deposit. And so what is being offered now is the ability to live in a property from a rental point
11:31of view and the money is then put towards that 25%. The minute it hits 25%, the person then
11:36gets a mortgage. Now, this for me is a catalyst and I think you'll find that there'll be many,
11:40many more of these type of projects, type of offerings coming in, irrespective of the VAT,
11:47because now the developer will have to offload stock. And this is stock that had perhaps been
11:53on the market for a while and so it's no longer off-plan, it's ready, which is why you can
11:57obviously rent it. And it isn't just small developers, the bigger boys are also doing it.
12:02Nakheel, for example, is offering five-year post handover payment plans, again in Al-Fajan,
12:07which is why we're heavily involved in this area and we're seeing a lot of activity there.
12:11We had a great Ramadan, for example, which normally it's quiet. It was more the post
12:16handover payment plan, as John was saying. These are the keys. And in fact, Emaar now has jumped
12:21onto the same bandwagon. Yes, we just saw one of them.
12:23Yeah. And so it's a success story. People can actually pay a very small amount of money,
12:315%, and actually 5% or 10%, depending on the development, and can actually move in. And the
12:35rest of the monies can be paid over a five-year period. And for me, as an estate agent, there is
12:41so much pent-up demand wanting to buy, but they haven't been able to raise that sort of 30%,
12:4631% by the time you've factored in 25% deposit plus the 4% and 2% agency fees. So this has
12:53stopped people from buying. But with these plans, people are now starting to buy.
12:58Because it's that 20% versus that 5% where they can pay in 5% and get in.
13:02Exactly. And then they don't have to pay a rent somewhere else. Because often when you're trying
13:06to raise money or save money, you're still paying for school fees, you're still paying for rent,
13:11and it's difficult to save. Well, you'll still have all these outgoings. You see,
13:14this is a very great solution. Great scheme. Okay. But I mean,
13:18after RAT started in, what were homeowners and tenants most confused about? Like,
13:23what were the confusing signals that they were getting or they were coming back with?
13:27I think most people either didn't listen or didn't read carefully. And they just weren't
13:33sure what was VAT-able, if I could put it that way, or who was liable to pay. I mean,
13:38at the beginning, we had people saying, well, we're not going to pay the VAT, you pay it.
13:43But it's a consumer product, and it is the end consumer that has to pay it.
13:48Obviously, it goes in and goes out. So for a lot of companies, it is cash flow.
13:54But most of the confusion really was who has to pay it? And do I have to as well? So there was
14:01that. But now we're saying, look, it's mandatory. It's a federal tax. It's not us or any other
14:07company that is trying to cream a little bit more profits for us. No, we have to pay it,
14:12and it is on the end consumer. So for me, it was the confusion as to who had to pay it and when.
14:19I mean, shortly after, like a few months after VAT, in fact, a couple of weeks back,
14:24we had these new visa reforms that were introduced, John. Do you think that how,
14:29do you think this will boost the residential real estate sector with the 10-year visas,
14:34with students having to stay in and pursue their higher education? Do you think you're
14:39going to see a movement? I think they're all incentives to
14:46investors to invest in the country and for residents to invest in the country. I mean,
14:51you have to think if you're here and you've got kids, you do see people leaving when their kids
14:56get to universities because they're exactly the issue with the visa, that once their kids have
15:01reached the age of 18, how do they remain here? So I think that these initiatives are good and
15:07they will underlie an improvement in sentiment in the marketplace. Obviously, we need to see
15:14more detail on how people will be able to secure the 10-year visas, whether it's going to expand
15:23to a couple of property purchases as well, rather than just the professions. And again,
15:29the incentive further down in the capital, the incentives scheme that they implemented,
15:35I think that the government are taking the right steps to bolster and support the real estate
15:42industry with their own incentives as well. Okay. But John, at this strategic moment with
15:48six months of VAT, new visa reforms coming in, the Expo 2020 a couple of years away,
15:55what would your advice be to people who are planning to put in, invest in buying a property
16:01now? So what, as a consultant, as an expert in this area, what would you advise? There's a number
16:09of different reasons for investing in property, and it's what your reason is. If you're looking at
16:13purely as an investment vehicle, then it's what you're looking for is the returns or the capital
16:18appreciation. So obviously, at the moment in time, there are a number of schemes in town in Dubai
16:24that are offering very high returns to an investor. Capital appreciation at the current moment of time
16:33with the market sentiment, you're looking more in the medium term. Where do you think which
16:37properties are going to be demanded in three, five years, five years' time and are being sold
16:44at a price now where you can easily perceive that there will be a capital growth? The end users,
16:50again, following on what Maria says, is there's a huge pent-up demand from people who want to
16:55buy property here in the UAE that are not able to build up that 30% deposit. So those that can,
17:05there are opportunities to buy homes for your family. And again, as we're seeing in the
17:11marketplace, the prices are falling. It's at what point that maybe the calculation with what you're
17:16paying in rent and what your new mortgage would be means that, yes, look, it's time for me to move.
17:22But then with the schemes that you're looking at with the post-handover completion payment plans,
17:27hopefully the regulatory changes that are required to make a rent-to-own scheme in place,
17:35these are going to facilitate that pent-up demand coming into the marketplace.
17:42I think it's a great time to buy if I can put my tuppence worth in. I mean, timing in business
17:47is everything. And as John says, if it's for investment, then it is business. Do the figures
17:53work. There's no emotions involved. When it's for your home, then there are many more softer
17:59things involved, if I can put it that way. But right now, you could argue that we are,
18:06if we're not at the bottom, we are close to it, in my opinion. And that we may still see a few
18:14months or several months or a quarter or two of perhaps further reductions. But I think we're
18:21there and thereabouts. I mean, you mentioned that we're two years away from Expo 2020. Now,
18:25definitely Dubai will be, you know, the world will be looking at Dubai from a very positive
18:31perspective. So, the future for property, I believe, is that we are at a good time to buy,
18:39if you're looking at just from a price point of view. If you are considering to move, now would
18:44be a good time at least to have a look. Put your feelers out there and see what's out there. And
18:48if what you're looking for is out there, I would not necessarily wait too long. It's very easy to
18:55say, oh, yeah, we should have bought then because we can actually see when that was the bottom of
18:58the market. But I personally think we're fairly close to it. Maybe things might pick up next year.
19:07And that being the case, people will be kicking themselves if they didn't do something perhaps in
19:112018. I think also on that point with what Mario is saying is that there's two segments. There's
19:17the off-plan and there's the completed stock. When we're releasing reports about transactional
19:22values, this is more on what's available in the marketplace, what's completed.
19:27Secondary market.
19:28Secondary market. So, those owners, depending on when they bought, could be, even if the prices
19:34have dropped by 5%, 10%, they've still shown growth. On the off-plan side, again, as Mario's
19:41rightly said, time to buy is we're looking at projects and the feasibility of the construction
19:48of the projects. And due to construction costs, land prices, developers are selling stock not
19:58greatly inflated from cost at the current moment in time. So, when it comes to reducing prices
20:04further on the off-plan on the future projects, you're getting down to they don't really have
20:13that much to go. Further, yes.
20:15Much further to go because that's the cost of their construction. I think you're more likely
20:20to see a slowdown in the new releases and the delivery of these projects. But again,
20:28the delivery element is problematic for developers with the post-completion payment plans
20:33because they don't get any money until they hand them over. So, it's actually in the interest of
20:38developers to hand them over on time and the payment plans kick in.
20:43Okay. That was an insightful discussion about the implications of VAT in real estate and we
20:48would like to thank our guests, John Stevens and Mario Volpe. Join us in other editions of PW Talk
20:54where we discuss the most topical issues in the real estate market. And if you have topics that
21:00you want to be discussed on the show, drop us a line at PropertyWeekly at gulfnews.com