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| 20 September, 2017

UAE developers weigh up the cost of VAT on construction

Dubai Marina night skyline.  Image used for illustrative purpose.

Dubai Marina night skyline. Image used for illustrative purpose.

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Dubai’s developers will have to work out ways to handle the VAT (value-added tax) on contractors during a project development phase. This could even have an impact on how developers end up pricing their property values, an industry source said.

As such, residential off-plan sales have been exempt from any VAT, but any future inflation in construction costs could tell on sales prices.

“It remains to be seen what contractors will do with their VAT charges in preparing for a project,” said Mohammad Shafi, CEO of Prescott, a developer which launch its latest project in Meydan next week. “Already, contractors are sending out letters stating clearly that all prices mentioned are subject to revision in a post-VAT situation.

“This is what creates a certain lack of clarity on what property prices could be eventually.”

Based on developer feedback, project costs typically average around 55-60 per cent of a development, from land acquisition to designing and then on to finally handing over the keys to the property’s owner.

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“Now, if a contractor passes on his VAT related costs on to the developer, I assume that it will end up having a 2.5 per cent impact on a developer’s selling price.”

It may not seem much, but property buyers in Dubai are turning increasingly price-sensitive. Any sudden spike in launch prices — however small — could tell on demand. More so, as there would still a lot of inventory that carry pre-VAT price tags.

Prescott’s Meydan launch will feature a G+4 storey building with 151 apartments. It bought four plots and combined them into one. Its completed projects include a commercial building in Jumeirah Village and International City. And launching shortly will be two at Al Furjan. All of them carry the “Prime” branding.

The combined value of its completed projects totals Dh525 million.

On whether there is too much of new residential supply hitting the market, Shafi said: “It will depend on the level of buyer interest. There’s still lots happening on the investor side, and they are encouraged by the rental yields.

“Rents are still on the higher side and despite recent softening, yields still average 6 per cent against about 8 per cent earlier. That’s what should keep investors busy in Dubai and encouraging developers to launch.”

But apart from its lone commercial property in Jumeirah Village, Shafi does not intend to launch another any time soon. “That’s where the fresh supply and available stock is already sizeable, in locations such as Business bay, Jumeirah Village Circle and JLT,” the CEO said. “The market needs to see a further pick up in demand for strata offices to convince more developers to launch office towers.

“And prices on strata offices are still under a bit of pressure from what they were two years ago.”

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© Gulf News 2017