A new tax in the United Arab Emirates could hit commercial real-estate landlords, who may struggle to pass additional costs on to their tenants.
The UAE introduced a five percent Value Added Tax (VAT) – a general consumption tax which applies to the majority of transactions in goods and services – at the start of the year.
While the impact on residential real estate will be “minimal”, the retail and hotel sectors will feel the effects, according to Craig Plumb, JLL’s Head of Research in MENA.
“It’s a negative, but not a big negative,” he said, noting the five percent rate is relatively low compared to international standards.
Given the current soft nature of the UAE’s market, landlords will struggle to pass the VAT cost on to their tenants, Plumb said. “It’s not feasible for office and retail rents to rise by five percent, so owners are going to have to absorb some of that increase.”
The real estate market in the UAE has slowed over the past two years, with further softening expected in sales and rental prices.
The UAE real estate market has been forced to adjust to lower growth as the “new normal” in 2018, said Plumb, with all sectors of the market remaining in the downturn stage of their cycle.
The retail sector will see the biggest negative impact, according to Plumb as the value-added tax is likely to slow future growth by adding around two percent to consumer prices this year.
This will likely curb the development of further retail schemes.
“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 centre owner,” he said.
There is currently around 3.4 million square metres of gross leasable area of retail space in malls in Dubai, which JLL expects to grow by 30 percent within the next two years.
This new supply is facing increasing competition from local online platforms offering competitive pricing and same-day delivery. A number of the Emirate’s retailers have created their own platforms in a bid to stay afloat.
Oversupply is a concern across the market in 2018, according to JLL, with only the office sector currently witnessing large amounts of new supply. However, not all of the proposed new supply is likely to be delivered and the introduction of VAT may add another reason to delay or scale back some proposed projects, says Plumb.
Click to learn more about the real estate market in the Middle East.