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.