| 29 November, 2016

VAT would have a "major" impact on real estate, say industry experts

Experts say commercial properties should have a waiver period to encourage new businesses and start-ups.

29 November 2016
By Yasmine Saleh

The real estate market in Gulf Arab countries would be hit hard if regional governments decide to include the sector in a planned value-added tax (VAT) system due to be introduced in some countries in 2018, real estate and tax specialists said.

The six countries that make up the Gulf Cooperation Council (GCC) agreed in February to introduce a 5 percent VAT, but no details have been issued and it is not clear if new tax will apply to real estate.

“If residential real estate is brought under VAT then that is going to have a major, major impact on that sector and the countries,” tax expert Rakesh Pardasani, a partner at global consultancy firm RSM, told Zawya in an interview in October.

Saleh M. Tabakh, the executive director of Delta Real Estate brokerage, which operates in the GCC, said he believes that any VAT on the real estate sector would be applied on two levels: capital gains and rental income.

“The capital gains will apply to the seller where tax shall be calculated on the gain that the seller makes from the original purchasing price, which will affect mostly secondary markets. The (rental) income tax will cause an increase in rental cost and reduction in yield to landlords, which will affect the market negatively as it will increase the cost of living.”

Tabakh recommended that the purchase of property for personal use should be exempted in order to encourage people to buy rather than rent. He also said that commercial properties should have a waiver period to encourage new businesses and start-ups.

This is especially important at a time when the region is struggling with s slowdown in economic growth, as a result of a sharp drop in oil prices, leading to the widening the government budgets deficits in Gulf Arab states. Saudi Arabia, the world’s top oil exporter, recorded a budget deficit of almost $100 billion last year, while the United Arab Emirates’ stood at $10.2 billion in 2016.

Oversupply issues

Consultancy firm A.T. Kearney said in a report last July that it had expected an oversupply in the GCC real estate market between 2016- 2020 if the slowdown continues, adding that any extra costs such as VAT would pose a further challenge for operators in the market.

“Construction is already a tight margin business and can’t afford to absorb any more,” Wael Allan, CEO of Middle Eastern construction and development company Drake & Scull, said this month at The Big 5 event in Dubai, the biggest construction exhibition in the region.

Allan added he expects consumers to pay the tax bill and said it will “become acceptable” over time.

Real estate is a core sector for growth in many GCC countries, accounting for 158.5 billion dirhams ($43 billion) worth of transactions in Dubai during the first eight months of 2016, according to the Dubai Land Department.

Saudi Arabia, the GCC’s largest economy, is relying on real estate projects to boost its economic growth. The oil-wealthy kingdom is planning an $8.27 billion financial district project, which will include skyscrapers, banks, financial institutions, residential compounds and retail outlets to accommodate for expats and foreign investors.

The kingdom last May also imposed an annual tax on undeveloped urban lands, in a bid to address the housing shortage in the kingdom and help generate new sources of revenue.

But some now fear the introduction of VAT on real estate could trigger an expat-exit and lead to a market crash, similar to the one the UAE saw in 2009, when property prices fell over 50 percent.

“I’m afraid,” concludes Allan, “taxation and death is the two ultimate realities in life”.

Click here to read Zawya's full Special Coverage on the introduction of VAT.

(Additional reporting and editing by Shane McGinley)

© Zawya 2016