|06 February, 2018

VAT will have 'minimal' impact on real estate in region, JLL says

Firm says VAT will only lead to inflation of 2%, and will have a negligible effect on project returns.

The introduction of value-added tax (VAT) in the United Arab Emirates and Saudi Arabia will have a 'minimal' impact on the region's property market, according to property consultancy JLL.

Speaking in Dubai on Tuesday morning at a JLL event giving predictions for the real estate market for 2018, JLL MENA's chief financial officer Andrew Hatherly, said: "Fundamentally, we do not see VAT as being a market mover, with a significant impact really only on the retail sector as they take a hit on reduced consumer spending.

"They will also have to absorb some of the 5 percent of VAT into their margins to avoid having to pass on too much of their costs to consumers," he said.

Overall, JLL said that the effect of VAT on consumer price inflation was likely to stand at around 2 percent, but given that new residential projects are zero-rated in the UAE, and that developers of projects that attract the standard 5 percent rate can reclaim input costs, the impact on development schemes is likely to be much lower.

"Our initial analysis shows that the returns to investments in typical real estate project developments will be less than a 50 basis point reduction on IRR (i.e. the returns investors earn on developments will drop by just 0.5 percent)," Hatherly said.

"Other sectors and asset classes will see a limited or no impact, but we do see some operational uncertainty during this initial period."

Both Saudi Arabia and the UAE introduced VAT on January 1 this year and are the only two states in the Gulf Cooperation Council to implement the tax so far.

Craig Plumb, JLL Mena's head of research, told journalists on the sidelines of the event, that landlords may not be able to pass on the full costs of VAT to tenants given that commercial property markets remain relatively soft.

"Office rents, retail rents, should all go up by 5 percent, but that's not possible, so the owners are going to have to absorb some of that increase."

He said that some of its clients had attempted to bring forward some real estate deals to complete before the end of last year in a bid to avoid VAT charges, "so January has been a bit of a quieter month because of that".

Retail squeeze

He also said that VAT could be one of several factors that could curtail the development of further retail schemes.

"Because I think there is probably too much retail space being developed right now. It's great if you're a retailer - not so great if you're a centre owner."

JLL's UAE Real Estate Market review published last month stated that there was currently 3.43 million square metres of gross leasable area of retail space on the market, but that this is expected to increase by 30 percent within the next two years to more than 4.5 million square metres by the end of next year.

JLL's assessment contrasts somewhat with Deloitte's predictions for the Dubai real estate market last week, which stated that the introduction of VAT in the UAE "will represent one of the biggest challenges for Dubai’s real estate market" this year as stakeholders have to bed in revised accounting systems, as well as work out the impact on cash flows once VAT is paid on construction materials and professional services.

In a press release announcing its forecasts last Wednesday, Bruce Hamilton, a partner in Deloitte’s Indirect Tax team, said: “The interaction of any new law with existing commercial practice always creates some challenges."

"The introduction of VAT not only forces the real estate sector to relook at their own practices and procedures, but those of businesses in the value chain with whom they interact."

He added that VAT "impacts throughout the business, from procurement to marketing of sales and supplies. How well the real estate market, of whom developers are a crucial sector, come to grips with these changes could impact on the sector in 2018 and for years to come.”

(Reporting by Michael Fahy; Editing by Shane McGinley)

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