VAT could impact property market in 2018, increase costs, JLL says

Residential prices dipped in 2017, but Dubai off-plan sales rose to highest level since 2008

The buyer has been waiting 36 months for the delivery of his off-plan unit. Sarah Dea / The National

The introduction of value added tax (VAT) will bring volatility and uncertainty to the UAE’s property sector, which is expected to continue to decline in 2018 amid increased supply in some segments of the market, according to broker JLL Mena.

The five per cent levy, introduced on January 1, does not apply to residential rents and first supply of new homes, but is already adding pressure to an already subdued property market, which suffered declines last year.

“The UAE real estate industry is entering into a transitional phase, with VAT now in effect and key stakeholders seeking to decipher its immediate and longer term impact,” said Craig Plumb, Head of Research at JLL MENA.

“Although VAT does not apply to residential rents and sales of new residential property, other real estate sectors could be negatively impacted by increased costs and cash flow challenges.”

Weak economic growth, jobs cuts, lower housing allowances and increase in supply hit the UAE’s property sector last year as both rents and prices continued to slide in some segments of the market.

In Dubai, apartment prices in the fourth quarter dropped 4.2 per cent year-on-year, while villa prices dipped 2.4 per cent year-on-year, according to JLL. Declines were steeper in Abu Dhabi, with apartment prices plummeting 14 per cent year on year in the fourth quarter and villa prices plunging 12 per cent year-on-year.

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Nevertheless, off-plan residential sales in Dubai rose to their highest level in 2017 since the 2008 financial crisis, with their share of total transactions rising to 60 per cent in 2017 from 10 per cent in 2010 thanks to attractive payment plans by developers. A total of 25,600 off plan properties were bought in 2017, compared with more than 34,800 sales recorded in 2008.

The UAE government introduced VAT this year as part of plans of shoring dwindling government income from oil. The levy is creating complications in some sectors in its early days of implementation, including real estate.

“One of the main complications for the construction sector will be the treatment of goods delivered after 1 January 2018 where prices have already been fixed,” said JLL. “The main concern for contractors will be the impact of VAT on cash flows, which could lead to a downward revision in payment times in construction contracts.”

An expected oversupply in the property market is another concern in 2018. In Dubai, around 570,000 units of new supply could enter the market by 2020, representing an average annual increase of 8 per cent, according to JLL.

“The recent activity in the [Dubai residential] market suggests that confidence has returned to both investors and developers, however it is worth noting that the number of new launches are significantly below their peak levels in 2006/2007 and the volume and the value of sales are also below levels recorded during 2013/2014,” the report said.

“As the market absorbs additional units, it is expected that prices will continue adjusting (downwards) with occupancy levels following a similar trend as supply growth outpaces potential demand.”