Property owners in the UAE who are nearing completion of projects are facing a new problem in the form of reclassification. A hotel apartment project was recently reclassified as a residential apartment building by its developers. They also persuaded the customers to accept the adjustment by arguing that it was urgent. Investing in residential apartments in the UAE can be lucrative, but buyers should only get what they pay for. Changing the project’s classification can result in a loss of value for buyers. If a hotel apartment project becomes a residential apartment project, for example, buyers or investors may lose money. For example, converting a hotel apartment building to a private apartment project can result in a 15 to 20% reduction in overall value for buyers or investors.
Firas Al Msaddi, CEO of Fam Properties, likewise believes that reclassifying a real estate investment at a later point is a loss for investors. It’s a downgrade of their investment, and they’re okay with it. As a result, they must be paid for their losses.
Another reason real estate experts feel investors are confused by the reclassification phenomena is that developers charge a premium for hotel units. Investors have paid a bigger premium for projects launched between 2013 and 2015, as the sector was hot at the time. However, their decision to reclassify the project in today’s world does not appear to be ethical, as investors must pay VAT at the time of possession as well.
Because the investors are subject to VAT as a result of the delay in handover, they have the right to seek back the entire amount paid to the developers. It should be mentioned that the UAE government adopted VAT on January 1, 2018. So, if you bought a house before that, and the delay in handover led it to be delivered late, you can get a VAT refund.
Some developers say that converting a hotel apartment building to a residential project eliminates the need for VAT. However, this isn’t the case. VAT will have to be paid by the buyer, according to top real estate experts and legal specialists in the UAE. As a result, developers must provide additional incentives to compensate for the loss of investment. If they do not do so, they are taking advantage of investors by putting them at danger of significant losses.
Another key reason for reclassification is the inability of developers to meet the requirements of Sales and Purchase Agreements (SPAs). It is required of them to deliver projects with hotel flats that fully conform with the required finishes and brochures issued during the project’s advertising and launch. They may have to reclassify the project if they are unable to meet Dubai Tourism & Commerce Marketing’s guidelines.
The reclassification of a property, according to Firas Al Msaddi, is not in the best interests of investors. As a result, they must not accept the developers’ plan without first obtaining all relevant information.
Typically, a project will have a large number of investors. They must all sign the waiver agreement, which permits the developer to reclassify the land. If they don’t, the developer’s ability to change the nature of the property and reclassify it becomes practically difficult. This means the property will have to be sold as a hotel flat, which will be subject to VAT.
Rights of Buyers:
- If you purchase property in the UAE that is later classed, you have the following rights:
- As previously mentioned, purchasers are entitled to a full refund of the VAT they have paid.
- They might also seek compensation if the value of their home decreases.
- They have the option of requesting rewards. However, the majority of these benefits are already factored into the price they paid for the house. As a result, if the developer gives you incentives, don’t just accept them without looking into the fine print.
- The buyer has the option to prevent the developers from reclassifying the property. They can only reclassify a project after obtaining investor/buyer consent, according to the legislation.
The bottom line is that when a developer tries to reclassify a property, purchasers and investors must thoroughly study the situation. Even if they accept a little inducement, they will still suffer significant losses if they pay a premium for hotel apartments.