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Reclassification of Property in UAE – What Buyers Need to Do to Cover Losses?

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Property owners of near-complete projects in the UAE are facing a new issue in the form of reclassification. Recently, the developers of a hotel apartments project reclassified it into residential apartments project. They also convinced the buyers to agree to this change citing it as the need of the hour. Although investing in residential apartments in UAE is a profitable venture, buyers should only get what they have paid for. Changing the classification of the project can end up in loss in value for buyers. For example, in the case of a hotel apartments project turning into a residential apartments project, buyers or investors can lose up to 15 to 20% loss in the overall value.

CEO of Fam Properties, Firas Al Msaddi, also believes that a real estate investment that is reclassified in the later stages is a loss for investors. It is a downgrade of their investment, which they are agreeing to. Hence, they should be compensated for their loss.

Another reason why real estate experts believe that investors are at a loss with this reclassification phenomenon is that developers demand a premium on hotel apartments. Investors have paid for a higher premium particularly for the projects that were launched in 2013-15 as the sector during that time was showing immense growth. However, their decision to reclassify the project in today’s time doesn’t come across as an ethical move as investors have to pay VAT as well at the time of possession.

Since it is because of the delay in handover the investors are subjected to VAT, they have full right to claim back the complete amount paid from the developers. It is to be noted that VAT was implemented by the UAE government from January 1, 2018. So, if you have purchased a property before that and the delay in handover caused it to be delivered late, a refund can be claimed for VAT.

Some developers claim that if a hotel apartment project is turned into a residential project, VAT won’t be applicable. However, this isn’t the case. Top real estate experts and legal consultants in the UAE confirm that VAT will have to be borne by the buyer. Therefore, developers need to offer additional incentives to make up for the loss to investors. If they don’t do so, they are taking undue advantage of investors as they are at the risk of suffering from major losses.

Another major reason why developers opt for reclassification is their inability to meet the criteria of Sales & Purchase Agreements (SPAs). It is mandatory for them to deliver projects featuring hotel apartments that completely comply with the mandated finishing and brochures they issued when advertising and launch of the project. If they are unable to comply with the standards set by Dubai Tourism & Commerce Marketing, they may have to reclassify the project.

Firas Al Msaddi believes that the reclassification of a property is not in the best interests of investors. Therefore, they must not accept this proposal from the developers without asking for all the necessary details.

A project has usually numerous investors. All of them are required to sign the waiver agreement that allows the developer to reclassify the property. If they don’t, it becomes nearly impossible for the developer to change the nature of the property and reclassify it. This implies that the property will have to be sold as a hotel apartment on which VAT is applicable.

Buyers’ Rights

In the event if you buy property in UAE, which is later reclassified, you can exercise the following rights:

  •         As stated above, buyers can claim a full refund for VAT they are subjected to.
  •         They can also ask for compensation if they suffer a loss in the property’s value.
  •         They can ask for incentives. However, most of these incentives are already included in the price they have already paid for the property. Hence, if the developer is offering you incentives, don’t just agree to their offers without dwelling into the details.
  •         The buyer can prohibit the developers from this reclassification. The law only allows them to reclassify a project after they have obtained approval from investors/buyers.

The crux here is that buyers and investors need to completely investigate the matter when the developer proposes to reclassify a property. Settling for a minor incentive won’t help much as they will still face huge losses if they have paid a premium amount to buy hotel apartments.

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