Standard Chartered Bank, of Britain, has suggested introducing a capital gains tax on profits from buying and selling properties before they are finished to curb excessive short-term speculation in the Dubai market. In a study released yesterday, the British bank also recommended that developers demand bigger down-payments to curb speculative trading that may be distorting prices.
It is unclear if any of these measures is being considered by the Government, although the authorities have expressed concern over the causes of inflation, which is largely fuelled by rising property prices. The bank research shows fundamentals in Dubai's property market are positive even as there are signs of the market "overheating" due to the brisk business done in reselling properties that are still in the development stage, also known as "off-plan".
Demand in Dubai's property market is outstripping supply and rental yields are high. According to Colliers International, property prices in freehold areas in Dubai rose by 42 per cent during the first three months of this year. "The target is to control speculation. You are not destroying fundamentals," said Mary Nicola, an economist at Standard Chartered Bank. "You are targeting speculators' behaviour. You are not taxing someone willing to buy a home and live in it."
The study found that buyers tended to buy off-plan properties directly from developers with the intention to flip them before their instalments were due, after paying only 10 per cent of the value. Properties are resold with a considerable premium several times before their actual completion. Buyers of off-plan properties can multiply their initial investment several times in a few months because prices are rising so fast.
"Usually a completed home is expected to appreciate. It is one of the few assets that actually appreciates, in comparison with buying a car, for instance," the study said. With the price of completed properties slightly higher than those that are off-plan, buyers who seek quick returns tend to enter the off-plan market. The challenge facing authorities was how to best slow down short-term speculators, without affecting long-term investors, the study said.
A capital gains tax on properties could discourage short-term speculative transactions, but to be a proper deterrent, the study suggested the tax needed to be high - more than 50 per cent - and should only apply to properties that were bought and sold within a period of 12 months. In addition to capital gains tax, authorities should consider regulating the payment plans that developers offer to buyers, the study said.
Initial deposits, for example, could be raised to 20 per cent of the purchase price, from five to 10 per cent. The study said potential buyers should also be required to show proof that they were able to finance the remaining 80 per cent, either through existing funds or an approved mortgage agreement. Goyas Gökkent, the head of research at the National Bank of Abu Dhabi, thought the report's recommendations were too restrictive. "I would not recommend a tax, because it seems to me that authorities have an interest in keeping the market active. It could spoil the move," said Mr Gökkent. "It would be contrary to the open strategy that they have, since this is a tax-free country."
He said the matter could be addressed in other ways, including changing the rules of financing for property purchases. "There are different and less intrusive ways of approaching this kind of thing," he said. @Email:ngillet@thenational.ae