It has been exactly one year since Value Added Tax (VAT) was introduced in the Sultanate of Oman. The implementation was swift, and the rollout took only six months from the initial announcement in October 2020.

Looking at its impact purely from an economic standpoint, the government has clearly delivered on the key goals it had set out to achieve. There is now an additional source of income to better meet expenditure and tackle government debt which has helped improve the country’s credit rating—S&P Global Ratings upgraded Oman’s credit level to BB- earlier this month in its first upgrade for the country since 2015.

The upgrade is also partially due to the significant increase in oil prices since the start of 2022 as well as a recognition of Oman’s alignment with the steps previously prescribed by the International Monetary Fund (IMF) with regards to fiscal policy.

Beyond government income, the impact on the wider economy of a regressive tax such as VAT is truly fascinating but our scope here is limited to its effects on the real estate market and its participants.

At a basic level, VAT should not have a significant impact on developers as all costs are recoverable, this means that all VAT paid by the developer towards construction, consultancy or other services can be recovered against VAT received from sales. However, this assumes a standard development model where the developer would aim to exit the development as quickly as is feasible. If, however, the developer adopts a static pricing model and holds on to the assets until this price is met, there will likely be a significant lag between VAT being paid and being recovered, which will be an additional cash flow hurdle to overcome.

At another level, given recent market conditions, demand had been limited for many developments even at pre-VAT pricing; naturally, adding 5 per cent to the outlay required would further negatively impact the likely absorption rates.

In 2018, when VAT was implemented in the UAE, we observed that a number of developers chose to fully or partially absorb VAT to maintain sales in a weak market. We are aware that some developers in Oman chose to follow a similar path, which added to their financial strain.

We have therefore witnessed increased demand for best use and feasibility studies, especially prior to land acquisition, as developers needed to ensure that the financial investment they made in the land would allow for a viable and profitable development. We are also noting greater emphasis on phasing as developers seek to bring to market inventory that can match demand.

Beyond completed assets, we understand that serviced land plots will incur VAT if developed up to a certain level. The trigger point that would make an individual plot eligible for VAT is still unclear.

Until this is clarified, we may see some reluctance from developers to bring forward sub-division schemes where a site is developed by way of infrastructure and utilities, as well as some common facilities. Exit prices for such sites will be more sensitive to variations caused by the imposition of VAT.

The situation for residential buyers depends on the type of asset they are acquiring. Brand new as well as off-plan units incur VAT but the acquisition of units on the secondary market does not.

Furthermore, unlike other market participants, residential buyers will not be able to recover their VAT payment. We had already noted some divergence between primary and secondary markets due to greater pricing flexibility in the latter, and the introduction of VAT further increased this divergence. At the same time, we only note this in schemes where the developer did not realign prices to market levels.

As regards to other market participants, we saw minimal impact on commercial occupiers who can recover VAT paid on commercial rents. However, we also noted that some smaller firms, especially ones facing trading issues, struggled with the additional strain on cash flow.

As for retail, the sector had been facing major structural and real estate oversupply issues for several years prior to Covid-19. The full impact of VAT on the sector is difficult to assess given that we have only seen normalisation of commercial activities since earlier this year.

At the current level of 5 per cent, we would not anticipate a major impact on shopping habits but we could begin to see pressure on consumers’ discretionary spending if VAT is increased to higher levels of around 10-15 per cent in the future.

Naturally, this would in turn have a direct impact on retailers and mall operators.

The potential challenges for developers are primarily market related, and would likely have had an impact whether or not VAT was in place. For this reason, we do not believe that VAT has had the negative impact some had anticipated when it was initially announced.

This is partially due to its current low level as well as other supply and demand factors which are having a larger impact on the real estate sector.

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