Dubai’s new housing tax may deter investors


By Issac John

The newly-imposed five per cent housing tax that will become mandatory in Dubai for all residential units from January 2011 “is likely to act as a further deterrent” to investment in the emirate’s residential market, property consultancy CB Richard Ellis said on Wednesday.

The calculation of the tax is based on the annual lease amount while for properties being used by investors in freehold areas, it will be based on the average Rera (Real Estate Regulatory Authority)  Rental Index.

“Properties which remain vacant in freehold areas are also subject to the tax, which means investors have to shed extra value on top of service charges. At a time when levels of market activity are already low, this ruling is likely to act as a further deterrent to investment in the residential market,” CB Richard Ellis, or CBRE, warned in its latest Market View.

On the fourth quarter outlook of the sector, the report said the demand and supply imbalance across all property sectors was expected to continue through the remainder of the year resulting in sustained downward movement of lease rates in the short term.

Leases of the residential sector, which dipped 13 per cent on an average in the third quarter, is expected to feel further aggravation during fourth quarter of 2010 and first quarter of 2011, with completed properties awaiting entry into the market from the developments of Business Bay, Dubai Sports City and Jumeirah Village, the report said.

“A significant number of towers in these developments have now been completed for some time but have been held back from the market due to long running infrastructure delays,” the report authored by Matthew Green and Mohammed Faheem said.

“The situation in the office market is actually somewhat worse than the residential market. Of the total expected office space for 2010, around 65 per cent has already entered the market with the remaining 35 per cent scheduled to enter during the fourth quarter,” they said.

“However, looking at the overall pace of construction and the continuation of infrastructure delays faced by these projects, it is expected that a large proportion of this space could actually shift its entry further into next year,” they said in the report.

The entry of office space at the Business Bay development will see the existing Central Business District, or CBD, area expanded further west towards the second interchange. “At this point it is quite clear that ongoing infrastructure issues and a lack of community services within the development, will remain as deterrents for potential occupiers, although this situation should slowly improve in the coming quarters,” the report said.

On a more positive note for Business Bay, the quality of product on offer and the existence of competitive lease rates, make the area a notably better proposition than some of the older and more congested business areas around Dubai Creek.

“The trend of occupiers moving away from old Dubai is one which is expected to continue for the foreseeable future, which can only be positive for the newly developed freehold locations. The expected opening of the Business Bay Metro Station is also likely to add further weight and support to tenants eying Business Bay as their new office location,” the report said.

“Downward pressure on leases continues across virtually all areas of the Emirate. Average rental rates for one, two and three bedroom apartments have dipped by an average 13 per cent on a quarterly basis, while on an annual basis they have declined by 18 per cent. The biggest drop has been for one-bedroom units with a 20 per cent decline,” CBRE report said.

“This can be attributed to the relocation of tenants to bigger unit types as lease rates have fallen away and become more affordable. Among the six non-freehold locations reviewed, the biggest fall in rates occurred in the Al Ghusais area with a 17 per cent drop,” it said.

According to the report, the smallest decline was in the Karama area. A sharp increase in residential supply in Muhaisanah and Al Nahda acted to further mount pressure on lease rates in the neighbouring Al Ghusais area.