View from the Middle East and Africa: GCC real estate sector awaits effect of VAT

While usually claiming pole position in many sectors in the Middle East and Africa (MEA) region, Gulf Co-operation Council (GCC) countries have recently been challenged by low oil prices and radical political and economic changes. The introduction of 5% VAT in Saudi Arabia and the United Arab Emirates on January 1, 2018 is highly likely to have an impact on the purchasing power of local investors and on the investment decisions of international investors.

Although the real estate sector has been exempt from VAT (only commercial rents are included), the overall insecurity in the private sector is expected to lead to more conservative attitudes in overall spending and investment climates in both countries, as well as other GCC countries that intend to introduce a VAT regime soon.

Another crucial aspect in the MEA region is the devaluation of local currencies, and local inflation. In this context, the two countries with fast-growing populations, Egypt and Iran, show interesting similarities as local investors use the real estate market as a ‘safe haven’ to protect their wealth. According to JLL’s 2017 Year in Review report, the prices for new projects in Cairo jumped by more than 50%.

The Iranian market has not reached such hype but the devaluation of the rial in recent months, devastating natural disasters such as the earthquake in Kermanshah and falling interest rates in a shaky banking sector are already having a reviving impact on the real estate sector. In both countries, this trend is likely to continue, fuelled by further economic growth in 2018.

Meanwhile, another rapidly growing phenomenon to watch out for is the hype over Bitcoin and other cryptocurrencies. While many in Africa have a practical approach of using cryptocurrencies to bypass local foreign currency restrictions, others are gambling with their savings – or even with borrowed money. Given the high volatility of this newly evolved market, most African governments are warning citizens of the risks they are taking. The consequences of a market crash might have enormous consequences far beyond the local and regional real estate markets.

Mazdak Rafaty is managing partner of Ludwar International Consultancy and SME adviser to the joint Emirati-German Chamber of Commerce. E-mail: m.rafaty@lic-consulting.com