VAT can prompt UAE residential developers to get more generous
This could mean stretched post-handover payment terms will become even more frequent
Come 2018, property buyers can expect UAE developers to turn even more generous with their sales incentives, especially on the post-handover payment plans.
This is so because the upcoming VAT regulations on residential sales offers developers a zero rate on all residential sales within three years of the completion of a project. Any home sale done after those three years will come under the 5 per cent VAT scanner.
Because of that, developers have a definite timeline before them to complete their sales and not have to pay VAT. This being the case, UAE’s property market, especially the one in Dubai, can expect developers to launch off-plan sales even before they start construction on site.
Or they could “bring in more attractive payment plans,” said Faisal Durrani, Head of Research at Cluttons. “In extreme cases, a developer or two is offering payment schemes 10 years after handover. But we could see more of that happening as developers ensure they sell all of their stock at a particular building.”
Interestingly, developers have also been given a VAT-specific reason to finish construction. “They will be able to claim a rebate on the VAT of building materials provided they are able to sell within three years of completion,” said Durrani. “There is an incentive for developers that the schemes they bring to the market can be absorbed. But how people claim rebates need to be worked out.
“Clearly, if they are unable to sell within three years, that project is not a success. Developers in Dubai have been so used to the “build and they will come” mentality. VAT will go some way in making sure the stock developers bring in can be absorbed. That’s a bit of a sea change for developers in Dubai.” According to Sailesh Irani, Director at Sun & Sand Developers, “All VAT payments made by a developer to a building material supplier can be offset. That eventually comes through as a credit in the developer account.”
The surge in off-plan sales was there for the better part of this year, and it’s only over the last four weeks that there has been some drop in such activity. Market sources say that the period before, during and after Cityscape Global in Dubai recorded higher than average off-plan launches, and that developers might be taking a bit of a breather now.
“It could be that developers will need to think about building more affordable projects, to be reasonably sure of completing sales within the stipulated time,” said Durrani. “When we are talking about prime properties, those between Dh1,500-Dh2,000 a square foot, is the segment that is seeing the sharpest correction now.
“Thankfully, the days of speculative developers have gone. These one-off developers were weeded out because of regulatory changes, the doubling of registration fees, implementation of escrow, etc..”
But, according to Cluttons, the super-prime end of the Dubai market is more or less unaffected. The wealthy are still making those multi-million dollar purchases.
But a potential headache looms — “The Chinese are currently the fourth largest buyer demographic in Dubai property outside of GCC nationals. But there are restrictions on how much they can take out of China and spend overseas — right now, it’s set at $100,000 (Dh367.300) per person each year.
“There could be stricter policing by Chinese authorities over whether these levels are being breached. The property markets in Canada, the UK and Dubai could be affected if this policing gets serious.”
Dubai developers need to give serious thought to affordable options
The VAT guidelines are clear — no VAT on residential units at buildings within three years of their completion. But for developers to be extra sure, they need to rethink their offer mix.
Sticking with upscale projects — at Dh1,500-Dh2,000 a square foot — as their preference comes with a risk. There is already a sizeable supply of such properties in the marketplace. More of the same could have difficulty landing buyers.
“The affordable issue is yet to be addressed in full — the Dubai Land Department has been thinking about a quota system,” said Faisal Durrani of Cluttons. “In this, a certain proportion of the project is made affordable — but it’s not clear whether it’s affordable for tenants or buyers.
“They aim to have these in central locations and not the outskirts. It could mean a separate building or the affordable part is done on a lower floor. But it remains to be seen how it’s played out in a market like Dubai. Abu Dhabi has done it, with the Municipality allowing landlords to convert buildings, provided they meet certain criteria like size, location, proximity to bus stops. These are targeted at people earning less than Dh6,000 a month.
“The rents they can charge must only be a third of the tenant’s income. And the landlords are being guaranteed an yield of 30 per cent. A yield of 30 per cent — that’s probably too hard to resist.