How to choose the right commercial property in Abu Dhabi

Abu Dhabi is an attractive global hub that promotes economic diversification, empowers global talent and supports the emirate's sustainable development. The city has witnessed a surge of investors lately due the fact that free zones started introducing attractive pricing schemes for new start-up businesses to boost economic growth. For instance, on 22 August 2021, Masdar City launched three business license packages, with the least costly option set at AED 1,000 (USD 273) only. Thus, it is quite profitable to invest in commercial property in Abu Dhabi, while the business environment is getting back on its feet. The process of renting or buying this kind of real estate may seem a little bit tricky regarding the legislative system of the emirate, however we will walk you through all aspects of commercial property in Abu Dhabi, so you will be able to make the right choice.

Before you even consider renting or purchasing a commercial property, you or your business are required to obtain a trade license in Abu Dhabi. The Department of Economic Development is the statutory body that regulates and controls the licensing procedures in this emirate. There are commercial, industrial and professional trade licenses provided by the DED. It is strongly recommended to obtain a mainland trade license for a small business owner as it gives the possibility to generate clients from anywhere in the UAE and internationally, as opposed to free zone business licenses. Moreover, no capital is required in order to receive a mainland license. Meanwhile, large international companies are advised to get a free zone license due to the long-term benefits and services it offers (such as tax-free imports/exports and tax incentives of 15 to 50-year tax holidays).

The UAE has a VAT tax of only 5% and has been in effect since 2018. There are specific categories of goods and services exempt from this tax, however both leases and sales of commercial property are subject to VAT. Of course, a landlord of a commercial property will issue a tax invoice when billing the annual rent. And one has to remember that the same principle is applied to the sale of real estate, as the seller is obliged to issue a tax invoice for the purchase price. It is not only companies that have the liability to register for VAT, individuals have to follow this regulation as well.

It is worth noting that a buyer and a seller have to be registered for VAT. If the annual rental exceeds the mandatory tax registration threshold of AED 375,000 (USD 102,090) per annum, a seller is obliged to pay the fee. The same applies to the buyer and the purchase price is subject to 5% tax.

Property sale agreements concluded after 1 January 2018 have to contain specific VAT provisions and demarcate the responsibility for VAT payment, usually by the purchaser. In the case that this provision is not made for 5% tax in the sale and purchase agreement, the purchase price is considered to be inclusive of VAT, according to the UAE VAT law.

Furthermore, according to the VAT law, if the commercial property is sold with an occupying and ongoing tenant, this sale will be subject to 0% tax provided that both a seller and a buyer are registered for tax and the exemption is applied in accordance with and subject to the relevant rules regarding this exemption.

The FTA published the guidance in 2018 that explains how the VAT law should be applied regarding real estate transactions. This law was updated in April 2020. We will review public clarifications on the implications of a change in the permitted use of the building, labour accommodation and bare land.

The UAE FTA (Federal Tax Authority) published value-added tax guidance on the implications of a change in the permitted use of a building on 27 April 2020. The new regulation states that when a buyer of property changes its permitted use from commercial to residential (or vice versa) after the purchase, the FTA treatment of this transaction remains the same. Nevertheless, any future leases or sales will have liability for VAT based on the changed use.

For instance, if a building is acquired as a service hotel apartment building (it is considered non-residential and subject to VAT tax) and subsequently the purchaser changes the permitted use to residential use only and sells the building to a third party, this sale will be exempt from the VAT tax. Meanwhile, the treatment of the preceding sale still remains unchanged.

If an employer provides accommodation to its employees free of charge, as a rule, the employer may recover the VAT incurred on costs regarding the housing in line with its VAT recovery rate. At the same time, the refund is subject to the condition such as a legal requirement or a contractual obligation that the accommodation is necessary for the employee to do their job. For example, housing that provides extra services (e.g. hotel apartments) may not be considered necessary housing and any VAT paid on the property may not be refunded.

The fact that the FTA paid special attention to this point shows that it may have come across businesses applying the rules incorrectly through the latest audits. Thus, companies should ensure that the approach they have taken is appropriate, otherwise it is recommended to submit a voluntary disclosure in order to correct their VAT records.

As a practical example, in Abu Dhabi, companies with 50 or more workers, where the wage of each worker is less than AED 2,000 per month must provide accommodation to its workers. Thus, if an employer obtains housing for these employees from an external vendor which has identified the provision of this accommodation as commercial due to the supply of additional services, any VAT regarding this housing should be fully recoverable for the employer.

The supply by means of a sale or lease of bare land is exempt for UAE VAT purposes. In order for the land to be a bare plot, it must not be covered by civil engineering works and partially/fully completed buildings. The updated guidance states that the construction of fencing or moveable structures to allow construction to start on permanent structures generally will not cause the bare land to become subject to VAT.

Moreover, no VAT is required on the lease of bare land to a tenant that begins development on this type of plot if the lease was paid in full before the start of any development. If the lease payment is made on a periodic basis, the tenant must inform the landlord of any development on the land and, if necessary, VAT should be charged at the standard rate for the remainder of the lease.

The FTA also explained the specifics of the lease of bare land by a landlord with the tenant converting to developed land during the course of the lease. In this situation, if a tax point is triggered before the land is converted to the developed plot – for instance, rent for the first quarter is paid in advance before the development – there will be no change to the initial treatment of the lease as an exempt lease of bare land. If a tax point is triggered and is converted into a developed plot – for example, rent for the second quarter is paid after development – this rent should be treated subject to VAT 5%, since it has become the lease of developed land.

Before 2019, foreign investors in Abu Dhabi were granted leasehold arrangements with a maximum 99-year period. However, this rule was amended through a royal decree, as foreign investors are eligible for freehold ownership of the property in the designated investment zones. These are as follows:

• Yas Island
  
• Saadiyat Island
  
• Reem Island
  
• Maryah Island
  
• Lulu Island
  
• Al Raha Beach
  
• Masdar City
  
• Sayh Al Sedairah
  
• Al Reef
  
• Masdar City
  
• Al Falah
  
• Fahed Island
  
• Hidd Al Saadiyat
  
• Al Jurf
  
• Jubail Island
  
• Nurai Island
  
• Al Shamkha.
  

In freehold titles, the investor has complete control over the property unit and the land. Owners can make changes to the structure and renovate it as they see fit, as well as sell or lease the property at their own discretion. Moreover, the freehold contract is applicable in perpetuity and when the owner passes away, the property can be inherited.

Besides freehold, the Abu Dhabi Government allows expats to own and trade in commercial properties through:

1. Usufruct. This form gives its owner the right to use property of another and exploit it, provided it remains in its original condition. It is restricted to a maximum term of 99 years in Abu Dhabi.
   
   
2. Musataha. It is a property right that gives the owner the right to build and use the building during the term of the Musataha. The duration of this agreement is restricted to a 50-year renewable term.
   
   

Note: Non-UAE nationals may only hold the above-mentioned interests within one of the designated investment areas for the specific periods of time which apply.

Abu Dhabi does not provide a clear distinction between a usufruct and a lease. At the same time, according to the law, long-term leases (with a term of 25 years or more) are property rights, however, there are no specific features defined of the leases with shorter terms. Nevertheless, the municipal authorities have deemed any lease to a foreigner of four years or more as usufructuary, making them ineligible to rent outside the designated investment area. Generally, long-term leases may be granted as security for project finance, while short-term leases are considered to be mere personal contractual rights.

All leases in Abu Dhabi have to be registered whether they are short or long-term. Otherwise, the lease will be considered not enforceable except for the personal obligations between the lessor and lessee. In Abu Dhabi, leases of four years or less have to be registered under the system of Tawtheeq. When the unit is being leased on terms of more than four years, it has to be registered under the Tamleeq system. The lessor is responsible for registering the commercial property and covering the associated fees.

Under the Abu Dhabi tenancy law, there is no specific minimum or maximum length for a period of tenancy, however, as a rule, leases of three to five years are being offered for commercial properties and longer for industrial real estate. The terms of a lease will remain in force until the set date, and then it can be renewed if both parties are willing to extend. Three months' notice for renewals or a termination is required for commercial leases.

When it comes to commercial property, most are available as shell or core, which means that the units are provided with no fixtures of finishing. Quite often there are bathroom and pantry facilities installed in common areas of the building. Currently there is an increased offer of fully-equipped commercial real estate as the market is getting more competitive. If you rent a shell/core unit, you have to take into account additional expenses for furnishing.

The lessees have a limited right to improve or alter commercial property in most cases. In fact, changes are not allowed without the consent of the landlord, unless the property will not be damaged. If the tenant breaks this agreement, the lessor has a right to demand that the lessee restore the property and also pay any reasonable compensation. If the tenant makes improvements to the commercial property, they have to be abandoned at the end of the term, unless the parties previously agreed otherwise in the contract. Within the Abu Dhabi Global Market free zone, landlords and tenants are free to contract as they wish.

The market of commercial property in Abu Dhabi is bustling with various options including offices, ships, warehouses and commercial plots. For instance, the areas such as Mussafah and Al Reem Island are in high demand among investors willing to acquire office spaces. The popular towers are Addax Park Tower, Tamouh Tower and Oceanscape, where the prices range from AED 380K-AED 3.5M (USD 11K-USD 953K).

Mussafah is also known for having a wide selection of generously sized warehouses with an area of 27,000-35,000 sq. ft. This location provides easy access to airports and ports, multiple entry points and an excellent road network.

As one of the most sought-after destinations in Abu Dhabi, Al Raha Beach is an outstanding choice when it comes to purchasing shops and supermarkets. In particular, Al Raha Lofts and Khor Al Raha have proven to be rather popular among buyers and lessees. The starting price for a retail unit ranges from AED 880K-AED 1.3M (USD 240K-USD 354K).

Speaking of commercial plots, Reem Island, Zayed City and Al Shamkha are top choices among investors as well. In fact, Al Shamkha features an array of projects that are in line with the Abu Dhabi Economic Vision 2030.