UAE rental rates to slip further this year, Cluttons says

The property consultant forecasts average rents to drop 5 per cent but VAT will spur growth by the end of next year

Cluttons forecast property prices to drop further this year, but the VAT introduction will help the market rebound. Satish Kumar / The National

The UAE property market will dip further this year as low oil prices pressure economic growth, according to the UK consultancy Cluttons.

However, the introduction of value added tax (VAT) will help the market rebound with greater purchasing power next year, it said.

The London-based property consultant said there were a number of positive indicators for the country’s property market heading into the end of the year.

“We view the government’s plan to introduce a formal tax regime as a tremendously positive step and are confident that it will help cement much-needed alternative revenue streams,” said Faisal Durrani, the research head at Cluttons.

Goods and services will be subject to VAT at a standard rate of 5 per cent from January next year, implemented across the GCC by 2019. The tax will generate a new revenue stream while boosting long-term growth. Sultan Al Mansoori, the UAE Economy Minister, estimates that VAT will add Dh12 billion next year alone in the UAE and Dh20bn in 2019.

This economic expansion as a result of higher spending levels, creating stability and marginal growth in some property segments by the end of next year.

VAT is part of efforts to diversify away from hydrocarbon-based economies in the region,  with Abu Dhabi feeling significant pressure from the low oil price environment as investment in residential areas dropped 0.9 per cent in the first half of the year. The market declined by 6.3 per cent in the 12 months ending in June, with residential values standing at just over Dh1,150 per square foot.

The saving grace for the emirate’s property market has been in the industrial sector, where rents have held steady for the past nine months.

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“Looking ahead, while stability in rents is expected this year, should the economic weakness persist into 2018, headline rents are likely to begin dipping slightly,” Mr Durrani said.

When VAT is enacted, corporations will be liable for the 5 per cent tax based on their annual lease rates. Mr Durrani said that may upset the stability that the Dubai market has enjoyed recently, particularly in more secondary locations.

The emirate is placing hope on the economic boost of Expo 2020 after Dubai’s residential investment dipped by an average of 1.5 per cent  for the 12th consecutive quarter. Rents are expected, on average, to end the year at 7 per cent lower while villas drop 10 per cent. Cluttons said a soft correction appears to be coming to a close.

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The UAE's third-largest emirate, Sharjah, has always played to its proximity to Dubai by offering cheaper rates than the  neighbouring emirate. This has led to a turnaround for villa demand in Sharjah given the rising cost of living. The market is expected to outperform with a growth of up to 4 per cent, but it is not enough to offset the apartment rental rates that are forecast to end the year 10 per cent lower than last year.

“Once the market absorbs the changes caused by the introduction of VAT, we expect to see a resumption in growth,” Mr Durrani said.