Global Arab Network | Will Lebanon introduce a capital gains tax on real estate transactions?

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Will Lebanon introduce a capital gains tax on real estate transactions?

Global Arab Network - - Sarah Khan

Thursday, 01 December 2011 22:17

http://www.english.globalarabnetwork.com/images/stories/2010/MAY/lebanon_construction.jpg

Global Arab Network - There are concerns that proposals made by the Lebanese government to introduce a capital gains tax on real estate transactions will further chill an already cooling property market. However, despite the marked fall in sales this year, finance ministry officials insist the plan is essential to help close the deficit in the state budget, Global Arab Network reports according to OBG.

In early October, Finance Minister Mohammad Safadi made public some of the key elements of the 2012 draft budget, which aims to increase state income by raising a number of taxes, such as the standard value-added tax (VAT) and by imposing a 3% tax on real estate transactions.

The minister has sought to play down suggestions that the new taxes would put additional pressure on the economy, which the International Monetary Fund (IMF) forecasts will expand by a moderate 1.5% this year, well down on the 7.5% growth in GDP in 2010

“In the new draft budget,” Safadi explained, “we have tried to create a balance between the taxes imposed and the additional social security benefits offered to citizens.”

However, while Safadi said the new taxes will not have a major impact on the real estate sector – to the extent that he has even floated the idea of a 15% tax on profits earned from property sales – property investors are less positive about the immediate outlook for the industry.

Property sales have already experienced a steep downturn this year, with activity in the real estate sector well down compared to 2010. According to data issued by the Directorate of Real Estate, property transactions for the first six months of the year are 18.6% behind the pace set for the same period last year, with just 37,386 deals being secured.

The fall in sales to foreigners was even more pronounced, with transactions down by 32.5%, while the overall value of sales also retreated, plummeting by 18.3% to $3.85bn for the first half of 2011, the directorate’s report stated.

While this spells bad news for estate agents and sellers, there were some positives for those in the property market. The easing in demand, for example, took the heat out of the price spiral, with the average value per property edging up by 0.4% over the first six months of 2011.

The cooling of sales is also affecting the construction sector, with the number of building permits issued in the first eight months of 2011 down by 7.3% on last year. The rate of decrease is gathering momentum; in August, there was a 29% fall in the total of construction permits compared to the same month last year.

This reduction in the flow through the supply pipeline may help push up prices again in the medium-term, though with a fair stock of completed or still being built properties yet to find a buyer, it may be some time before contractors or private owners start to see better returns on their investments.

The combined slowdown in the real estate and construction sectors is in marked contrast to their performance in more recent times. According to the Central Bank, real estate prices have increased by an average of five times since 2006, while the construction industry has grown almost 30% in the last three years.

The government’s plan to impose a tax on real estate transactions has been on the table for some time, and has drawn its share of fire over the past few months. Nassib Ghobril, the chief economist at Byblos Bank, believes that while the government needs to increase revenue, the timing of the new real estate levy is far from ideal, and could harm the sector.

In an interview with local media in late September, Ghobril said, “In principle, if you make profits on a transaction you should pay a tax, but the real estate sector is already in a slowdown phase and the tax would not help restore growth.”

It is not just local analysts who believe the new tax on property transactions could further dampen the market. In early October, financial services firm JP Morgan warned that while the proposed increases in VAT will help reduce the budgetary deficit and broaden the national tax base, new revenue raising measures such as the tariff on real estate sales would weaken consumer demand.

Parliament has yet to vote on the draft budget and the proposed real estate sales tax measure, though the budget as a whole may get a rough ride, with the plan to increase VAT from 10 to 12% in particular having been criticised. With neither the 2010 or the 2011 budgets having been passed in parliament, it remains to be seen if next year’s version, complete with its real estate tax, will be ratified. (OBG)

Global Arab Network

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Last Updated on Thursday, 01 December 2011 22:19

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