VAT clouds UAE’s commercial real estate market in 2018, says JLL

Mezzanine debt likely to play increased role in property financing, residential to see further declines, consultancy adds

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The introduction of VAT in the UAE may impact parts of the real estate market in 2018, in particular the retail and office segments as softer conditions force landlords to absorb extra costs, said property consultancy JLL.

“It can’t be a positive [market influencer] so if anything it’s going to be a negative, but not a big negative,” Craig Plumb, head of research at JLL Mena (Middle East and North Africa), told reporters on Tuesday.

“Because the markets are soft it means the owners can’t pass on the VAT to tenants. Office and retail rents should all go up by 5 per cent but that’s not possible so the owners are going to have to absorb some of that increase.”

However, he added the rate of VAT set by the government was low by international standards and would be “more of a disruption than anything else”.

VAT took effect in the UAE on January 1. Residential buildings are ‘zero-rated’, or largely exempt, from the tax, but the supply of commercial real estate, including offices and retail units, is subject to the country-wide 5 per cent tax.

The UAE property market decelerated over the past two years, with sales and rental prices across many sub-sectors falling throughout 2016 and 2017 and are forecast to keep declining this year.

The UAE has become a tenant’s market, analysts have noted, with landlords increasingly willing to negotiate with occupiers on rents and lease terms instead of being saddled with an empty unit.

Mr Plumb said the retail sector, in which rents have declined and new supply has been introduced to the market, will see the “biggest negative impact” from VAT.

“VAT is going to add about 2 per cent to consumer prices this year, so that’s a negative for retailers,” he said.

“Retail is one sector that is significantly oversupplied, and VAT is one of the things that will slow down future growth of retail. There probably is too much retail space being developed at the moment – which is great if you are a retailer, not so good if you are a [shopping] centre owner.”

Another issue the market faces regarding VAT is cashflow, as businesses have to pay out before they can reclaim it. Mr Plumb said JLL had noticed an uptick in real estate selling and leasing activity in December as people sought to tie up deals before the tax came into effect.

“I think a lot of it was people bringing forward transactions to avoid the VAT, and January has been definitely a quieter month because of that,” he said.


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Overall, JLL’s outlook for 2018 – presented to media and property industry representatives on Tuesday – forecasts a bottoming out of the office and residential markets in Dubai by the end of 2018, after a prolonged period of falling sales and rental prices.

“We are not expecting a major increase [in prices], but we are not expecting a major further decline either,” Mr Plumb said.

Abu Dhabi’s real estate market is typically 12-18 months behind that of Dubai, meaning sales and rental rates are likely to continue to decline, JLL noted.

The hotel and retail markets in both emirates remain further behind in the cycle than office and residential and JLL does not expect those to bottom out until into 2019.

On the investment side, the UAE is becoming increasingly sophisticated and could see use of complicated mezzanine debt vehicles to finance real estate acquisitions above traditional equity-based funding models in 2018, JLL said. Until recently, debt financing for UAE property has been limited to bank loans.

Meanwhile, Expo 2020 Dubai will continue to be the primary driver for a surge in construction activity in 2018 and beyond, while the influx of Chinese tourists to the UAE since visa-on-arrival will go hand-in-hand with increasing Chinese investment into the country through an expanding range of industry sectors.

China State Construction Engineering Corporation is the second largest contractor in the UAE after Arabtec, managing an estimated $2.9 billion of projects, according to JLL.

A separate report from rival property consultancy CBRE on Tuesday said that of-plan sales accounted for more than 65 per cent of the total residential unit transactions in Dubai in 2017, but forecast that competition would rise in 2018 as new projects are launched.

Off-plan properties remain favourable among investors "underlining the speculative nature of the local market,” said Mat Green, head of research & consulting UAE at CBRE Middle East. “Competition is likely to mount in 2018, with a huge number of new units set for delivery and with further project launches expected.”

CBRE also expects the introduction of VAT to bring “increasing pressures” for the off-plan sector and wider market, it said.