Construction Booms and VAT Looms – Who Loses in This Equation?

•      Construction materials prices rose last year, according to a Dubai Chamber report, even as the slowdown in the property sector continues
•      The increase in costs plus the decline in property prices, and the introduction of VAT in 2018, means developers are under pressure to maintain their margins

A report by the Dubai Statistics Centre, DSC, has revealed an increase in the general record number for construction costs during the year 2016 to six cents up from where it was in 2015.

Propertyfinder Group, the real estate portal, analysed the data and considered the implications for residential developers.

The report attributed the rise in costs to an increase in building supplies and a price hike for wholesale building materials, which was up 0.23 percent. Offsetting this, the price for equipment and labour and costs declined 0.19 percent in 2016. Residential building raw material costs also edged up 0.31 percent.

“For developers in this part of the world margins can be healthy,” says Lukman Hajje, Chief Commercial Officer of Propertyfinder Group. “Of course there are challenges to be faced as in any market, but they enjoy lower labour costs, far fewer building restrictions and of course, their profits are largely tax free. The absence of Sunset Clauses means that developers can delay construction and handover to align with sales and favourable market conditions.”

He adds, “All this makes developing property in the UAE a potentially attractive proposition, but focusing on these benefits alone is short sighted.”

While this may be pretty dry material about dry materials, it could have serious implications for regional developers as a new tax looms.

It isn’t news that the UAE is set to levy a five per cent value-added tax (VAT) starting on January 1, 2018. But how will it affect real estate?

Although home renters will escape taxation because residential rentals will be exempt from VAT, landlords may lose out on other expenses they incur with VAT, making rental prices vulnerable to an uptick.

From a developer’s standpoint, VAT will certainly impact the contract price in construction contracts. And since Dubai developers have been ramping up launches of their off-plan projects in the last six months, it’s imperative that they lock down processes so they are prepared to recoup potential losses under the new taxation system.

Hajje points out that while ‘location’ may be one of the top three most important things in real estate, for developers it’s all about brand and reputation.

He cautions that paying attention to the uptick in construction costs and the inclusion of VAT may put a strain on margins, but there are ways to maintain long-term success. “The developers who deliver on time and consistently build and maintain a quality product in the long term enjoy repeat business, attract the best talent and the best margins.”