The introduction of value added tax (VAT) will bring volatility and uncertainty to the UAE’s property sector, which is expected to continue to decline in 2018 amid increased supply in some segments of the market, according to broker JLL Mena.

The five per cent levy, introduced on January 1, does not apply to residential rents and first supply of new homes, but is already adding pressure to an already subdued property market, which suffered declines last year.

“The UAE real estate industry is entering into a transitional phase, with VAT now in effect and key stakeholders seeking to decipher its immediate and longer term impact,” said Craig Plumb, Head of Research at JLL MENA.

“Although VAT does not apply to residential rents and sales of new residential property, other real estate sectors could be negatively impacted by increased costs and cash flow challenges.”

Weak economic growth, jobs cuts, lower housing allowances and increase in supply hit the UAE’s property sector last year as both rents and prices continued to slide in some segments of the market.

In Dubai, apartment prices in the fourth quarter dropped 4.2 per cent year-on-year, while villa prices dipped 2.4 per cent year-on-year, according to JLL. Declines were steeper in Abu Dhabi, with apartment prices plummeting 14 per cent year on year in the fourth quarter and villa prices plunging 12 per cent year-on-year.