This article appeared originally in Gulf News: link to original article
It is time to tax real estate. Taxing the sector is the most straightforward way to curb its supply. Being once a main driver for economic growth in the UAE, it has now turned into a drag on the economy and its diversification efforts.
The real estate sector has been developed for two main purposes. The first is to turn the various emirates into metropolises, which will allow the country to grow its other sectors and attract residents who will contribute to its economic journey and success. The second is to attract investors.
Investors are being targeted through a range of real estate projects that align with various investing budgets. As for residents, they are targeted through the growth in the number of rental units entering the market every year.
Today though, the market is over-saturated with large-scale development projects and rental units, with real economic growth generated by the real estate sector flattening out in recent years. Expectedly, and given the apparent oversupply in the market, this may as well drop into negative territory in coming years, offsetting any real economic growth from other sectors.
While many would speculate that this is the end of the real estate boom, a more balanced view is that this is rather a market correction.
Such a correction though must not be undermined by allowing a further surge in the supply before a robust evaluation can be undertaken to better understand where the market is today in terms of supply and demand. This must include units that are available for sale as well as units that are available for rent. With the proximity between a few of the emirates, and the convergence of their real estate markets, such a study will need to be conducted at a federal level in addition to studies on a state level.
For a balanced real estate market that will not undermine the UAE’s economic growth, there is no doubt that the real estate committee recently established in Dubai to balance supply and demand is an overdue step in the right direction. Nonetheless, such a step will, sooner rather than latter, need to be taken up a notch from an emirate-level initiative and mandate to a federal-level one.
Parallel to that, the UAE’s government will need to look at options to limit supply in the market as a whole.
One recommended approach would be to introduce a progressive real estate tax. The tax will need to be imposed on real estate developers, on per unit basis, for all units entering the market as a result of their planned projects. The rate must increase as developers pile up unsold and unleased units.
Whether those developers choose to pass the tax on to investors/renters, or not, is a separate matter. However, the presence of numerous developers will probably discourage them from doing so as to not lose market share.
More importantly, the proposed approach will ensure that such a tax does not impact individuals who are building their own houses or purchasing them. It will also mean that the tax will have a smaller impact on developers with better manage supply compared to developers drowning the market with it.
Given the evident excess supply, which has exerted downward pressure on sale prices and rents, the UAE needs to look at the real estate sector from a federal rather than from a state level. Meanwhile, the UAE must seriously consider taxing real estate to control, not cease, its future supply, thus limiting its drag effect on the UAE’s economy. Real estate should no longer be considered a key economic driver. The last thought that I want to leave you with: What should the UAE’s government role be in the real estate market?