Many property investors in Dubai will be recalculating their profit margins and costs with the introduction of a raft of the new regulations and charges to the Dubai property market. After initially leaving the market to its own devices within a loose framework it looks as though the rulers of Dubai are looking to formalise the property market and bring it under more standard controls while also increasing the tax drop for the authorities.
The latest development in the Dubai property market has become known as Law 13 and revolves around the registration of property, whether fully developed or off plan, with the country’s Land Department.
The new law was actually introduced back in August although it is only now that many developers are receiving their demands from the authorities for payments of 1% from the buyer of the property and 1% from the seller/ developer of the property.
The move has shocked many property investors and developers who had been banking of the fact that Dubai has always been known for its lack of taxes and the encouragement of overseas property investors to plough money into the country. So what consequences will the 2% charge have on the property sector?
There are many factors to consider which include :-
Charge each time a property is sold
The 2% charge, while split 1% to the seller and 1% to the buyer, is applicable each time a property or development is sold and re-registered with the land department. In affect this means that any developer looking to make a quick profit will now have to take into account an extra 2% of charges which is sure to hit the bottom line.
Scope for more charges
While Law 13 is the latest property law to hit the market there are fears that this is the start of a whole new campaign to try and kill the short term investors who have in some areas taken over the Dubai property market. The government has been more than willing to encourage overseas investment but of late some overseas property developers have been banking huge profits with nothing being returned to the state.
Penalties for late registration
Just in case any property developers thought that they could delay the payment to the Land Department the rulers of Dubai have introduced a number of fines for those late or trying to avoid payment. There is speculation that property developers in the region could well try to pass these fines on to investors under different guises.
Less scope for short term profit
Many investors in the Dubai market have been known to enter with the intention of taking a short term profit on a development which is in demand. This added charge will not only reduce the profit available for some of these short term traders but it will also reduce the number of buyers – many of who will be looking to drive harder bargains to try and offset their 1% charge against the sale price. There were concerns within Dubai that the more speculative edge of the property market was making some overseas and local investors very nervous – something which did not go unnoticed by the rulers.
So what next for the Dubai property market?
While Law 13 is in the news at the moment the authorities also brought in what is known as Law 14 which relates to mortgages and securing proof of land titles on a property. This was an area which had proved to be very difficult with no formal land registry, but when tied in with Law 13 it starts to put the whole property sector on a firmer footing.
As well as bringing in the above two laws the authorities have also acted to substantially reduce the amount of time it had being taking to resolve land disputes. The introduction of a formal Land Court with the power to not only mediate but rule on disagreements is something which should really have been in place some time ago, but the pace at which the Dubai property market developed took many people by surprise.
Even though it would be difficult to describe Dubai as your standard property market there are a lot of similarities with other new property markets. When the market started to attract overseas interest there were many moves by the authorities to make investing in the country as tax efficient and easy as possible. However, when the market literally took off and overseas money began to overload the system there was a need to pull on the brakes.
While it would be wrong to say that the Dubai property market has not been the subject of regulation since day one, there were many legal finer points missing. These finer points are now being addressed, such as the Land Court, and the injection of confidence this has given to those dealing in the market is there for all to see.
Conclusion
There were many investors looking at Dubai as a free ride on what has become one of the hottest property markets in the world. The seemingly endless flow of money in the region had meant that demand was still strong even after the credit crunch started to hit the likes of the US and Europe. However, many have been surprised by the speed at which the authorities are starting to introduce more formal property market regulations and procedures.
There was no way that the Dubai property market could continue unchecked as demand was rising in the short term with developers unable to fulfil this demand. Those with a longer term outlook spotted that the point at which demand would fall below supply was not a million miles away (2010 seems to be the consensus figure) and some caution has started to creep into the market.
The introduction of the Land Department charge will take some of the sting out of the market and hopefully lead to something of a pull back in demand. The market is still in good shape although we seem to be moving from a developing property market to a developed market place with a number of regulations and additional costs which are common place around the world.