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The effects of VAT on the Real Estate Industry

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Submitted By Andray Volney of Paradise Properties

October 1st 2012 is a pivotal day in the economic and social landscape of Saint Lucia. The implementation of VAT will affect every aspect of life on the island including transactions involving where people live and work. How will this new tax affect the price of property? Will the long term impact be an increase or reduction in property sales? VAT will have a significant effect on the real estate market but the impact on residential and commercial real estate will differ.

The good news? There is no VAT on residential real estate. Consumers will therefore not face increased rental prices. Nor will the price of land and houses for sale go up. However, VAT will indirectly impact the residential real estate sector. The primary way in which it will do so is by the taxation of services. Bankers’, lawyers’ and agents’ fees will all be subject to VAT. This means that purchasers of real estate will face increased transaction costs. Therefore, while the cost of property will not increase, the cost of acquiring it will. This dilemma is not exclusive to the real estate industry. VAT will affect all service based transactions in St. Lucia.

The extent to which VAT impacts the residential real estate sector will depend on how consumers’ purchasing power is affected by the tax. If VAT causes a significant increase in the country’s cost of living, people will have less disposable income to devote to large investments such as buying property. However, this will be offset to some extent by the government’s construction stimulus package. Land sales will be boosted in the short term as people hurry to take advantage of the decreased cost of building new homes. In fact, the construction stimulus package may be a lifeline for the entire economy.

The economic benefits of one construction project filter through all strata of society, from real estate developers to architects, engineers, manufacturers and laborers. While the residential real estate sector may be spared the wrath of VAT, the same is not so for commercial real estate. All commercial real estate rentals and sales will be taxed at a rate of 15 percent. This will have a detrimental effect on commercial real estate transactions and by extension, the business sector. Investors wanting to open new businesses will face increased real estate costs amid an already tumultuous economic environment. The effects of this must not be underestimated, as real estate is one of the largest capital expenses for any new business. Higher costs mean fewer new businesses, a lower survival rate and fewer jobs created by the local private sector.

The overall impact of VAT on Saint Lucia’s real estate industry is therefore mixed. Residential sales may not be severely impacted in the long term. Land sales may even be boosted in the short term by the construction stimulus package. VAT will however, cause an increase in the cost of commercial real estate. This will have a downward effect on commercial property rentals and sales. The consequences of this for the business sector will be severe.

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