VAT could hit UAE property market in 2018

The UAE property market faces a potential reduction in activity and performance at the start of the year due to uncertainties surrounding a recently introduced 5 per cent value added tax and new supply, according to consultancy JLL.

In an end of year report, the company said the real estate sector continued to adjust to lower growth being the new normal as economic activity slowed from a historic average of 4.1 per cent to 1.7 per cent in 2017.

Despite the weaker market conditions, the last year still saw significant sales activity in the commercial and residential sectors with four major official and assets with a combined value of more than $340m sold last year to institutional investors.

Residential activity was also supported by a surge in off plan sales thanks to attractive prices and payment plans offered by developers.

There were 25,600 off plan sales in Dubai alone last year, the highest level seen since 2008, according to the company.

“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.”

The company said there was an increased level of new units due to enter the Dubai market in 2018 and 2019, which could result in an oversupply situation, while activity remained more constrained in Abu Dhabi.

Dubai

In the Dubai residential market, JLL said there were signs of confidence returning but the number of new launches was significantly below activity levels seen in 2006-2007 and sales volumes were below levels seen in 2013/2014.

Sales and rents declined over the year but slowed in the fourth quarter to an average decline of 1.6 per cent. However, new supply is expected to see prices and occupancy levels continue adjusting downwards.

Read: Revealed: Where Dubai property rents, prices fell the most in 2017

JLL estimates 570,000 units of new supply could enter the market by 2020, an annual average increase of 8 per cent, in comparison to an estimated 3 per cent increase in population by Oxford Economics.

Residential stock in Dubai stood at 491,000 units at the end of 2017, made up of 403,000 apartments and 86,000 villas, following completions inclduing Duja Tower in Trade Centre (679 units) and The Polo Residence in Meydan (598 units).

There are 17,000 apartments scheduled to enter the market in 2018 through completions at projects including New Dubai Gate in JLT, The Pad in Business Bay, Eagle Heights in Sports City and Serenia Residences on Palm Jumeirah. However, actual completions are expected to be around 40 per cent of this total.

In 2017, the office market reached 8.86 million square metres of gross leasable area in the fourth quarter following the completion of projects including One Central (69,087 sqm), Duja Tower (1,551 sqm) and an expansion to the World Trade Centre (70,638 sqm).

The market continued to be hit by consolidation with tenants trying to reduce rental costs and looking at more affordable options but occupancy remained high in Dubai Internet City and Dubai Media City, averaging 95 per cent across all buildings.

Office supply is expected to reach 9.13 million sqm at the end of 2018 and 9.28 million sqm at the end of 2019 with notable completions this year including The Opus in Business Bay (5,200 sqm), Du Biotech Headquarters (34,500 sqm) and the first phase of Motorsport Business Park (6,000 sqm)

Abu Dhabi

In Abu Dhabi, JLL said apartment and villas sales prices declined over the fourth quarter of 2017 while rents remained flat as a wider downturn in the market linked to lower oil prices continued.

Read: Revealed: Where Abu Dhabi property rents, prices fell the most in 2017

The introduction of VAT on January 1 is expected to improve incentives for buyers in terms of post-handover payments plans as sales by developers are zero-rated if they are made within three years after a project is completed.

There were 3,000 residential units completed in the market last year, 88 per cent of which were apartments, including Sigma Towers 1 and 2 on Reem Island, the first phase of Hidd Al Saadiyat and Wave and Al Jazeera Towers on the corniche.

Future supply will come mostly from Saadiyat Island, Reem Island, Yas Island and Raha Beach, which account for 60 per cent of projects under construction and will total 12 per cent of total residential supply by 2020 from 8 per cent today.

Last year, the total gross leasable area in the office market reached 3.5 million sqm. Vacancies in the fourth quarter hit 22 per cent and rents remained largely stable over the year for Grade A and B buildings.

However, new supply entering the market is expected to see rents decline or better terms for parking, grace periods and services negotiated.

The market is expected add 211,000 sqm of gross leasable area in 2018 and 57,000 sqm in 2019 with notable completions to come this year with the ADIB headquarters and Leaf Tower and Omega Tower on Reem Island.