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| 22 May, 2018

Drop in house rents softens VAT impact in UAE

Most of the UAE residential market has absorbed VAT's limited inflationary impact in 2018

Residential towers are seen in Jumeirah Beach Residence (JBR) in Dubai.  
Image used for illustrative purpose.

Residential towers are seen in Jumeirah Beach Residence (JBR) in Dubai. Image used for illustrative purpose.

REUTERS/Jumana El Heloueh

Although the levy of a 5 per cent value-added tax (VAT) was expected to affect UAE residents in the form of increased living costs, the reduction in house rents has offset this impact to a great extent.

While global benchmarks suggest that households should allocate no more than 35 per cent of their total monthly income on housing (in the form of either rents or mortgage payments), many families in Dubai currently spend over 40 per cent of their combined income on rents.

"Tenants are definitely experiencing increasing higher living costs. It is, therefore, good news that rents continue to fall [by around 10 per cent over the past 12 months]. This should help address the problem where accommodation costs in Dubai are generally too high," says Craig Plumb, head of research, JLL Mena.

"Although the introduction of 5 per cent VAT at the beginning of the year had an impact on overall costs for residents, this was more or less offset by reduced rents. This is mainly caused by an increased supply, employment challenges and the movement of tenants from one emirate to another seeking the best value for money," observes John Stevens, managing director, Asteco.

Most of the UAE residential market has absorbed VAT's limited inflationary impact in 2018. However, there has been an impact on residents' disposable incomes.

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"Dubai's real estate market is heavily sentiment-driven and the introduction of VAT across Dubai has undoubtedly had a negative effect on this. It is more likely that it is the change in sentiment that may cause tenants to behave more cautiously. However, it is still too early to know with any degree of certainty," suggests Thomas Bolton, Cluttons' director - strategic projects.

Parking charges
There are also rumours on how VAT would affect parking charges in buildings. However, with the market currently being in favour of tenants, landlords are most likely to be absorbing the cost of VAT themselves. Besides, most owners provide at least one parking space within the rent. They may charge tenants for additional spaces - which will be subject to VAT.

"This 'grey area' would be handled at the landlords' discretion until clearly defined. Current building regulations provide for a certain level of allocated parking within a development or building to service tenants. However, many older buildings do not have sufficient parking. Although residential leasing is exempt from VAT, additional costs may in fact be chargeable. Our understanding is that if parking is considered an additional cost to the rent, then VAT is chargeable," reckons Stevens.

Even in instances where parking is chargeable, the rise in costs is minimal. For example, parking charges are generally around Dh2,000 per annum (especially in Old Dubai and Sharjah), which means VAT would add another Dh100 to that amount, estimates Asteco.

Service fees
Also, in case of service charges, they are subject to VAT. However, the cost of VAT is likely to be absorbed by owners rather than being passed on to tenants.

"Service charges are subject to VAT and so are Ejari, agency fees and utility connection fees for residential buildings. The actual residential rent and the security deposit are exempt," informs Edward Macura, partner, Core Savills.

"The Federal Tax Authority categorically states that an owners association is required to register for VAT as long as it exercises any form of control, management and administers the common areas, including dealing with issues such as maintenance, security and community rules enforcement, general well-being of tenants, financial management and engagement with statutory authorities," Stevens points out.

Commercial market
All commercial landlords have been applying and invoicing commercial tenants for VAT. However, this has more of an impact on smaller commercial operators at present.

"The challenge with tier 2 commercial tenants is more about general cash flow and delay of their incoming payments rather than the impact of VAT on their rental. Obviously, the increasing delays in collection of invoiced goods and services will impact the operator's individual cash flow on payment of other operating costs, including quarterly VAT payments to government authorities," says Asteco's Stevens.

Commercial landlords are liable to charge VAT for commercial transactions if their income is over Dh375,000 per year. "Most landlords have already started charging tenants, although in tier 2 locations, landlords are increasingly flexible with headline rents, contribution to fit-outs, rent-free periods, multiple cheque payments and shorter lease terms; easing tenant cash outflows," adds Macura.

"Even for post-dated payments, separate e-VAT invoices are being provided. For new transactions, consolidated tax invoices are issued," comments Dana Williamson, regional director, head of agency and corporate solutions, Mena, JLL.

"We are yet to see examples of landlords offering specifically to absorb the VAT obligation as an incentive to attract tenants to vacant stock. However, we are seeing greater flexibility in agreed rents, with many landlords offering terms 5 to 10 per cent better than earlier in the year," explains Paula Walshe, Cluttons' director - international corporate client services.
 

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