Capital gains tax unlikely, say analysts

It is extremely unlikely that the Dubai Government will start imposing a capital gains tax on property dealing, real estate analysts said.

They said the property market was still in its "infancy" and such a step by authorities would adversely affect majority of the investors including speculators.

In July, a Standard Chartered Bank report suggested real estate speculators need to be rooted out of Dubai's housing market by introducing a 50 per cent capital gains tax on properties sold within a period of 12 months from their date of purchase as the best way to discourage short-term flippers.

The capital gains tax is charged on the profit accrued from the sale of a non-inventory asset purchased at a lower price, such as stocks, bonds, precious metals and property. Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations.

Emirates Business sent out a questionnaire to two real estate analysts, three developers and two international buyers to understand their view on how the market would react if such a tax were introduced. Two of the three developers felt introducing a capital gains tax in Dubai would be against the principle of open markets followed in the UAE.

Union Properties' Chief Financial Officer Zaid Ghoul felt if a capital gains tax is imposed in a context that is geared towards cutting speculative activity and controlling the overall market, and is implemented in a way that will not make the Dubai market a less attractive one, then it may succeed in achieving its purpose.

"I have heard that there is a possibility of a tax in specific free zones. In the end I don't think a capital gains tax will be implemented, since it is difficult to attract investment in the sector while increasing taxes," said Robert Mckinnon, Managing Director, Equity Research for Al Mal Capital.

Matthew Hammond, Director, Head of Agency Mena for Jones Lang LaSalle Mena, said: "Due to demand far outweighing supply, we believe that any tax levied on an increase in the value of the asset will be borne by the purchaser which would further increase the inflation effect currently seen in all asset classes of property."

Assem Soliman, Chief Executive, El Tadamon El Arabi Stock Brokerage Company, Egypt, said: "If a capital gains tax was introduced in Dubai he would then switch from being a investor to being a visitor. I will then consider investing in Qatar."


Experts analyse consequences

Emirates Business talks to Matthew Hammond, Director and Head of Agency at Jones Lang LaSalle Mena, and Robert Mckinnon, Managing Director of Equity Research at Al Mal Capital.

Do you believe the government will introduce such a law? Do you have other solutions for Dubai's realty to contain speculation and create sustained property growth?

Mckinnon: I have heard there is a possibility of a tax in specific free zones. In the end I don't think a capital gains tax will be implemented, since it is difficult to attract investment while increasing taxes. The more likely solution to calm the speculative segment of the market would be restrictions on time to re-sell the property or to require a minimum down payment of about 20 per cent for off-plan payment schedules.

Hammond: It is unlikely that the government will set a tax on capital transactions considering the infancy of the realty market in Dubai. If such a law came into affect, it would affect up to 70 per cent of the market, which still consists of speculative investors and this could cause a serious imbalance in demand. Many of the speculative investors are from overseas and therefore relatively transient in terms of where they place their money. If a tax is put on capital gains it will make Dubai uncompetitive to alternative tax-free states. Transparency of information in terms of a greater regulation of the agency market and a limit on the amount of disposal agents per property can be a solution to consider curbing speculation in the market.

How will property prices be affected if the Dubai Government does introduce such a tax? When you say negative, by how much do you predict prices to drop?

Mckinnon: I can't determine the size of any impact to price from a capital gains tax. However, anything that would negatively impact investor returns would negatively impact demand. The point is to formulate a policy that will encourage end user demand, rather than speculative demand.

Hammond: Due to demand far outweighing supply, we believe any tax levied on an increase in the value of the asset will be borne by the purchaser, which would further increase the inflation effect currently being seen in all asset classes of property. As the market evolves and demand and supply become more balanced, the tax will be absorbed and is likely to be shared equally between buyer and seller.

How will buyer sentiment be affected if such a law came into affect?

Mckinnon: No one likes taxes, so I would assume buyer sentiment would decline. Also the existing tax regime – or lack of taxes – in the UAE is a major attraction for people and businesses to the country. A capital gains tax could be interpreted as a change in philosophy for the government, leading some foreign investors/businesses to question the government's commitment to its zero tax regime.

Hammond: If developers take a greater portion of profit out of the development, this is likely to dampen the activity in the secondary market as investors continue to thrive heavily in the realty sector. Certain developers in Abu Dhabi seem to have learnt from Dubai developers and the secondary market. If you compare the initial sales prices of the Palm Jumeirah at around Dh500 per square foot and Raha Beach at Dh2,200 per square foot, it would seem that the developer is trying to take the inflationary benefit often seen on the secondary market.


Developer's take

Emirates Business talks to Zaid Ghoul, CFO of Union Properties; Mehdi Amjad, Chief Executive of Omniyat Properties; and Mohammed Ali, General Manager of ETA Star Properties.

Do you foresee any chances of capital gains tax being imposed in Dubai?

Ghoul: If a capital gains tax is implemented in a context that is geared towards cutting speculative activity and controlling the overall market, and is implemented in a way that will not make the Dubai market a less attractive one, then it may succeed.

Amjad: I think it is against the open market principle of the UAE. There are sophisticated investors in the market, committing their capital for a more long-term interest, and I don't think we should do anything to jeopardise that.

Ali: Imposing a capital gains tax is not the only step to curb speculators in the market.

Do you think this will be a good step in curtailing speculative activities in the market?

Ghoul: We have a lot of faith in the Dubai market. If the government introduces this tax while keeping the overall environment tax-free, this maybe a good idea to help control speculators in Dubai.

Amjad: Generally, you will see a more speculative activity in small projects. But there are justifications to it, like the land prices, which have been escalating. A developer can curtail speculation if he wants to. Although realty prices are growing, we at Omniyat are asking for a more sustainable growth in our projects.

Ali: Investors from all over the world are coming to this market because they like the tax-free property environment. If they impose a tax then this market will no more be attractive.


Buyers speak

Emirates Business talks to Assem Soliman, Chief Executive at El Tadamon El Arabi Stock Brokerage Company, Egypt, and Stephan Schlink, General Manager of HAG Software Solutions, Germany.

What is your total investment in the Dubai realty market? When did you first buy your property here and how many projects have you invested in?

Soliman: I have invested Dh18.4m into Dubai's property market. I bought my first property in July 2005 and have so far bought two residential apartments, two office properties and invested in five land plots.

Schlink: I have invested Dh7m in the UAE. I own three properties in Dubai and one in Ras Al Khaimah. I bought my first property in 2005.

How much have each of your properties appreciated since the time you bought them?

Soliman: My two residential properties have appreciated by 70 per cent but my capital gain so far is higher. While the property is appreciating, my outflow towards it as an investment is not as high, so my capital gain on the property is much higher than 70 per cent. The office properties have appreciated 30 per cent in six months. I bought the office units six months back for Dh1,450 a square foot and they are now going for Dh1,900 a square foot. The land plots have appreciated by 50 per cent in the last year.

Schlink: My three properties in Dubai have appreciated about 60 to 200 per cent in the last two years, while the property in Ras Al Khaimah has appreciated by 80 per cent.

If Dubai did introduce a tax on property gains, would you still invest as much here or would you consider buying in other markets?

Soliman: If a capital gains tax was introduced I would switch from being an investor to being a visitor. I will then consider investing in Qatar.

Schlink: I may keep only one property for my own use and will sell the rest and invest in other markets.

In the current gloabl market situation besides the UAE, where else do you own properties. What are the other attractive markets?

Soliman: I own properties in Paris, London, Qatar, Cairo and Hurgadah on Egypt's north coast. Also, Eastern Europe looks attractive to me.

Schlink: I own properties in Germany, Egypt's Red Sea coast, Qatar and Morocco.