Reclassification can hurt property values
Delays on hotel apartment projects will expose buyers to high VAT payouts
Property owners in the UAE must not let developers change the classification of their near-complete projects just because they have been told it’s the right thing to do. At the very least, investors should be asking their developers why.
The issue has come to light after certain “hotel apartment” projects were recently turned into “residential apartment” by developers, and who then asked buyers to agree to this.
This, according to Firas Al Msaddi, CEO of fam Properties, is selling them short.
By agreeing to the reclassification into residential, buyers are ending up with a 15-20 per cent loss in value.
“This what investors can lose by accepting the downgrade,” said Firas Al Msaddi, CEO of fam Properties. “A fair trade would be for developers to offer investors a compensation of 15-20 per cent of the original purchase price of the hotel apartment.”
Developers have always demanded a higher premium on hotel apartments, and especially in those projects launched in 2013-15 when the market was heading towards a peak. But why are developers now making a switch from hotel apartments to residential apartments?
“This is in effect a downgrade in the project’s profile,” said Al Msaddi. “Investors who are taking possession of hotel apartments now are subject to VAT.” But these hotel apartment projects were supposed to be handed over in 2015, 2016 and 2017 and were not to be subject to VAT for the first buyer. UAE implemented VAT from January 1, 2018, and commercial properties come under its ambit. “According to law, investors have the right to claim back the VAT in full from the developer since it is purely the result of the delay in handover,” said Al Msaddi.
This repayment is what developers are now trying to skirt by getting the project reclassified as residential. But for that to happen, developers must get the approval from buyers.
Also, developers may find they are unable to deliver hotel apartments that are in full compliance with the mandated finishing are per the SPAs (sales and purchase agreements) and brochures issued at the time of launch and sales.