Converting Hotel Apartments to Residential

 

Property investors in the UAE should be on guard to ensure what they bought is what the developer actually delivers. In particular, they should not get confused by buying a ‘hotel apartment’ and then having to take delivery of a plain-vanilla ‘residential apartment’. If they do, they could end up with a 15-20 percent 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 compensation of 15-20 percent of the original purchase price of the hotel apartment.”

A reason for this

Al Msaddi insists that developers have always demanded a higher premium on hotel apartments, and especially in those projects launched in 2014-15, when the market was at its peak. 

But why are developers now making a switch from hotel apartments to residential apartments? “This is in effect a downgrade in the project profile,” said Al Msaddi.

“Investors who take handover of hotel apartments have recently been made subject to VAT. 

But hotel apartment projects that were supposed to be handed over in 2015, 2016 and 2017 were not supposed to be subject to VAT by the first initial buyer.

“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.”

This is what developers will try and skirt by getting the project reclassified as residential. But for that to happen, developers must get approval from buyers.

Other reasons too

Also, developers may find they are unable to deliver hotel apartments that are in compliance with the mandated finishing on their SPAs and brochures or are “not in compliance with the government standards by DTCM for hotel apartments,” the CEO added. “This can be a much bigger problem for developers than simply avoiding VAT.”

What should buyers do?

They have the legal right to claim a full refund in addition to compensations if the developer fails to deliver the same type of properties they sold them.
But on the flip side, “Exiting from your property investment today however is not a good idea at all,” the CEO said. “Cashing out on the resale market comes at a heavy cost, especially for investors who purchased units above market price from developers that were using heavy marketing to drive the sentiments.

“This can be seen when developers offer luxury cars as incentives - investors need to be aware that such incentives are already built into the price of the property that is about to purchase.”

VAT is a reality

If developers say that there is no VAT on hotel apartments being turned into residential, they would be in the wrong.

“Three of the lawyers I spoke to have led me to believe that VAT will still be charged and can be claimed back from the developer if the project was delayed. But we are not seeing any incentives being offered by developers for these additional costs borne by buyers.

“From the scenarios I have seen, some developers are taking advantage of investors, because no incentive will amount to the severe loss that can be caused by the change from “hotel apartment” into a “furnished apartment” on the title deed.”

Mr. Firas, could you expand on this?

“In addition, I think the majority of developers are offering investors a certain level of payment flexibility without making them subject to such unreasonable and unfair requests.”

BOX

“Many buyers have approached me for advice and I have immediately advised them not to accept as it is not in their interest in any way shape or form. Another issue which I am hearing about in the market is that some buyers who have signed to accept the switch in property type are unable to obtain a signed copy of the “hotel apartment” waiver agreement from the developer. This may be because the developer is waiting to receive signed waiver agreements from their full client portfolio and this will indeed take some time.

Simply delaying unless all investors within the same project sign the same waiver agreement, it will be almost impossible for the developer to switch a property classification from “Hotel Apartment” to “Furnished Apartment”. This in turn means that if the investor is looking to sell the property it will have to be sold as a “Hotel Apartment Unit” and it will be subject to VAT.



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