VAT to see developers lock horns with buyers, tenants

Some developers may have to hold off on passing the higher costs in a price-sensitive environment

Staff Report
14:54 February 13, 2018

Dubai: Dubai’s developers and landlords are likely to absorb value-added tax (VAT)-related costs on residential property transactions at a time when buyers and tenants are extremely sensitive to sudden increases in their budgets.

While there is no direct VAT on residential property sales or leases, it will come in the form of cost add-ons on utility, maintenance and agency fees, according to a new update from Asteco, the real estate services firm.

“Some of these charges are expected to be initially absorbed by owners/landlords,” the report adds. More so where they have direct influence such as maintenance and service charges.

Summer could be the time when property owners and tenants will start giving serious attention to the VAT component on their facilities service costs. It would also open up some intense negotiations with service providers and developers, market sources say.

As for developers targetting end-users, especially the price-conscious ones, they will have to push projects offering studios at less than Dh500,000 or one-beds for Dh1 million rather than just saying the per square foot price is below the Dh1,000 level.

Across the board, tenants now have the power to dictate terms and get landlords to comply.

“There has been a steady rise in project completions, which has put the bargaining power firmly in the hands of tenants who have taken advantage of the increased choice and competitive rates to relocate to new properties or renegotiate existing contracts,” the report states.

“Proactive landlords looking to secure new leases and/or retain tenants increasingly offered incentives including, but not limited to, rent-free periods of up to two months, increased payment frequency [up to 12 cheques] and all/part of the utilities absorbed.”

Asteco projects 23,000 new apartments to be ready for occupation this year, against the 13,900 units that were completed in 2017.

But actual deliveries could still come up short as has been the case for years now.

“The number of new project launches is likely to ease off as the market finds a new equilibrium.” said John Stevens, managing director of Asteco.

Landlords in Sharjah and the other northern emirates will also need to keep watch on what’s happening in Dubai. If rents decline further in Dubai, they will have no option but change their asking rates accordingly.

“Continuous delivery of supply in Dubai will hinder the recovery of rental rates throughout the [northern] emirates, especially in Sharjah and Ajman,” the report says.