VAT’S IMPACT ON DUBAI’S VIBRANT REAL ESTATE ECONOMY

Volatile, vibrant and unpredictable, the Dubai property market has been in a constant state of flux for the last several decades. Real estate market cycles have been unpredictable, accelerating within short timelines, fuelled by government regulations and real-time demand. Over the last two years, increased innovation, transparency and digitisation has resulted in the market finally displaying some maturity. This has directly impacted the Dubai property segment and its investments in a positive way. Given the general buoyancy, initial data suggests that the introduction of VAT has had an almost negligible impact on the country’s real estate segment thus far.

 

Dubai’s real estate market is poised on the cusp of phenomenal growth. The country’s emphasis on attracting FDI, its thrust on providing great value for investors and a versatile bouquet of properties to choose from, has made it a well sought after investment destination. Americans, British and the Asian diaspora have continued to invest heavily in Dubai, and off late Chinese investment has gained momentum. Visa on arrival, current weakness of the dollar against the country’s dirham, a s well as discounts on the Euro and British pound have also contributed to the growth.

 

While interest from expatriates and investors in property has increased, the government’s onus in introducing a stimulating economic package has been more than beneficial. 43% of Dubai’s 2018 budget has been earmarked for infrastructure and transport. Digitisation, increased regulations around buying and selling of properties, stringent procedures and smart city planning – as part of Smart Dubai 2021 – has further added value to foreign and local investment in Dubai’s real estate.

 

The introduction of VAT in January 2018, was one of a slew of measures by the Dubai government to continue with their economic reforms. Applying to all major industries, including transactions of goods and services, this general consumption tax was introduced to generate a new revenue source for the government. Backed by organisations like the IMF, the move has been touted as a way for the Gulf region to move away from its dependency on oil.

 

Despite the short term of its implementation, initial data suggests that VAT has had a minimal impact on the residential real estate sector. Commercial property sales have been levied a 5% VAT however. Since the Dubai Land Department (DLD0 currently collects 4% on each property sale, experts suggest this as the reason for nil tax burden on the residential property segment.

 

The introduction of VAT has several big and small implications for various players in the property market. While buyers of residential properties will be the most benefitted, commercial property buyers, developers and landlords will have to pay additional tax. Developers may or may not pass this additional charge to end-users, and it remains to be seen which direction they go. Leased out offices, retail spaces and rents paid under commercial rental contracts (introduced in 2018) will all be impacted. Real estate agents will also have to register for VAT, regardless of whether the property sold is commercial or residential.

 

Given the early stage of introduction of VAT in a country which hasn’t seen any taxation measures over the last few decades, the longterm implications of such a ground breaking tax rule remain to be seen. However the good news is that investors, renters and leasers of residential property will still get to enjoy their dream homes at varied budgets and price points, tailored to their needs.

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