Survey finds Gulf investors believe VAT may raise property costs
Additionally, 54% of the surveyed CFA Society members from the UAE, Bahrain, and Kuwait said VAT would impact retail investors more than institutional investors
A survey of the Gulf's finance professionals found that real estate investments would become costlier following the implementation of value-added tax (VAT) in 2018.
Results of the GCC CFA Societies survey, which covered CFA professionals in the UAE, Bahrain, and Kuwait, revealed that 87% of the surveyed respondents said they believe that some – or all – of the additional expenses incurred by real estate firms due to VAT would be passed on to investors.
VAT application is set to be applied on the first sale of properties.
Additionally, 54% of CFA Society members from all three Gulf countries said that retail investors would be more impacted by VAT than institutional investors, with 4% stating that institutional investors would be more affected.
The majority of the surveyed professionals said that "their international business partners are not [...] deterred by the introduction of VAT".
However, 18% of the respondents stated that VAT is "creating a negative reaction" within the international business community.
Commenting on these findings, Amer Khansaheb, the president of CFA Society Emirates, said: "The concerns regarding VAT in the region are largely [to do with] perception rather than policy.
"While it is true that certain areas of the economy will witness marginal higher costs being incurred, this should not deter regional and international investors in a significant way.
"Additionally, with the government revenue this will generate, liquidity levels in the market are expected to improve, which should increase investor confidence and appetite."
Khansaheb said VAT would lead to the creation of a more regulated financial environment that promotes greater transparency.
"Given that taxation at higher rates is a norm around the world, the GCC will continue to be attractive as average tax rates are lower than almost all other major markets," he continued.
According to a report by WAM, Khansaheb said that Saudi Arabia's potential inclusion in the Morgan Stanley Capital International (MSCI) index would be one of the key Gulf developments that would continue to attract international investors.
"With regional financial markets expanding, [...and] investment in commercial infrastructure and economic diversification programmes underway, the GCC will continue to remain a market of opportunity for the investment community," he added.
This September, a Dubai-based accounting expert said the upcoming implementation of VAT could impact construction costs in the country.
Kunal Bilakhia, senior consultant at Dubai-based SM Joshi Chartered Accountants, told Construction Week that the tax would "play a major role" in the property end-user segment as well.
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He continued: "Only residential property and bare land will be exempt from VAT.
"However, [the tax is] more like premium pricing for those who deal in properties. They pay it all the time – this time, it will lead to better governance."
Bilakhia added that businesses with short debtors turnover periods were less likely to feel severely impacted by VAT.
"Whatever you pay in the form of VAT is debit on your cash flows, and whatever you earn as VAT is a credit on your cash flows," he told Construction Week.
"So, if you have a quick collection cycle, your cash flows will more or less remain the same. However, if your firm’s collection cycles are long, then you may feel the pinch of 5% on your cash flows."
However, Bilakhia said it was unlikely that VAT would affect construction salaries.
"I don’t see any effect from VAT on current salaries, and you will still make the same money," he explained.
"Legally, VAT cannot be the reason for reduction in expenses like salary, since you’re bound by the labour contract. It is a different story for bonuses, since a bonus is paid out of distributable profits."