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| 13 February, 2018

Developers and brokers in UAE absorb VAT costs, for now

But at some point, they are likely to do so since their margins continue to be squeezed

Image used for illustrative purpose.
A property model on display featuring new real estate projects is seen during the Cityscape Global property exhibition in Dubai, September 27, 2011.

Image used for illustrative purpose. A property model on display featuring new real estate projects is seen during the Cityscape Global property exhibition in Dubai, September 27, 2011.

REUTERS/Hany Osman

UAE - Developers in Dubai are not passing on value added tax-related costs to property buyers as yet. This is, in turn, affecting their margins. But at some point, they are likely to do so since their margins continue to be squeezed. Contractors have already started passing on VAT-related costs to developers in the UAE.

For residential properties, the primary market purchase (direct from developer) if the property is off-plan or ready for less than 3 years is not subject to VAT, according to the law.

"Thus, developers cannot pass the VAT on to buyers. VAT is a consumer tax and should the law be amended in future to include the primary market sales, then one could assume that the VAT will be passed on to buyers," says Adrian Popica, general manager, House Hunters Real Estate Brokers.

"Developers in Dubai have so far not passed on the higher VAT-related costs they have been incurring on projects to property buyers. For residential developments, there is no VAT on the property for the first 3 years from completion. So, developers can recover the VAT they are charged on things like design, materials, construction and contracting as they form part of the developer's business costs. In fact, in the few launches that have already been seen in 2018, developers have not noticeably passed on any VAT to the buyer," observes Zaki Ameer, founder, Dream Design Real Estate.

Much also depends on the contracts signed between the developer and the property buyer. The property purchase price is fixed at the time of purchase through a legal agreement and generally contracts have provision for any additional government fees to be levied to the property buyer in which case the developer can pass such additional cost to the buyers. However, there remains ambiguity for properties purchased before December 2017 and which are still under construction on whether VAT can be classed under additional government fees, say market observers.

"In the current market conditions, property buyers will not entertain such an increase in price. I believe such an increase in cost cannot be charged to the customer and we decided to absorb the definite increase in cost. In this scenario, it will be from the developer's margin that such cost will be paid for ongoing projects. I am sure that for all future projects, cost estimates will include a VAT component in order to avoid an impact on the bottom line," reckons Atif Rahman, director and partner at Danube Properties.

Says Shaher Mousli, CEO, Arthur Mackenzy Properties Group: "Our major involvement is within the residential real estate sector, which is exempted from VAT, hence there has been no price shift as far as our real estate offerings are concerned. It will affect our margins but we have a plan in place that will cover this."

Contractors have increased their cost and are charging developers VAT on building materials. "While it does affect our margins, we have been able to accommodate them by making bulk purchases based on our development pipeline," adds Mousli.

"For contracts awarded before VAT and if the works are still ongoing, the VAT will be applicable on the outstanding balance only," clarifies Danube Properties' Rahman.

Meanwhile, a few brokerages in the UAE are absorbing VAT charges to incentivise property buyers and tenants. A property brokerage firm in Dubai recently announced that it is absorbing all VAT-related charges on commissions for transactions on a building in City Walk.

This comes on top of other add-ons brokerages and developers are already deploying, such as waiver of registration fees.

"It is likely that more and more brokers will absorb VAT, especially in the off-plan space as the conditions soften and investors recalibrate to the secondary market," says Hussain Alladin, head of IR and research, Global Capital Partners.

"Today, the incentives include post-handover payment plan, return guarantees, absorption of VAT and transfer fees as well as even buyback agreements. But it's become increasingly clear that these incentives are now becoming exhausted and that developers do not have much leeway to offer further to investors. This is part of the reason why off-plan launches are slowing down. The only incentive that now remains is the inevitable reduction of the price," explains Alladin.

"In the long run, VAT waivers/absorption cannot be sustainable for brokerages. However, for short-term promotions, it can be one of the ways to incentivise buyers. It all depends on the availability, marketing strategy and most importantly the customer's interest in a certain product," concludes Popica.

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