Bartering Property - A Recession-proof, cashless alternative to reduce Dubai investors' bad debts
With the world reeling under global recession, money plays a crucial role and the root of the money is production, the root of which is property, and property as we have seen, is the root of economics. As markets continue to be denuded, consumers are hard-pressed for cash and resources to make ends meet. In such a scenario, the age-old concept of commodity barters or exchanges assumes significance. A real estate bartering system implements barters between pluralities of parties, each having one or more classes of items available for barter.
How is property exchange or bartering relevant to the UAE? The answer is simple. Spiraling costs and tightening cash flows could very well put a strain on investors. The bartering business is really recession-proof in a slow economy, and the barter system helps clients find new customers and move inventory, the cashless alternative boosts customer bases, reduces bad debts, turns surpluses into profits, eliminates the idle time of employees and reduces cash outlays. By opting for exchanges, owners are assured of assets matching their requirements and demands. Moreover, through barters they can move assets to different locations, thereby spreading and reducing risk.
Property exchanges work on the premise: "I will buy your house, only if you will buy mine." They work in the case of those property owners who would like to move on and are on the lookout for properties in fresh surroundings, yet do not want to laden with additional expenses. A property exchange can be regarded as two separate transactions taking place simultaneously, where party A buys a house from party B, while party B buys the house from party B. The transactions take place on the same date via simultaneously closing. Both parties pay off any existing loans and obtain any new financing on the home they are buying. Rather than a seller-buyer transaction, it is a buyer-buyer deal.
In the US and the UK, barters are highly popular in areas where foreclosures are high; even then, swappers have to contend with paying taxes, in some cases higher than what they were paying for their earlier property. However in the UAE, barters are extremely cost-effective as there are currently no capital gain taxes. The only costs entailed are the transfer and registration fees remitted to Real Estate Regulatory Authority (RERA) if applicable to Dubai or the Land Department in case of other emirates. Property exchanges are totally ‘shariah' compliant because they are completely devoid of third party involvement.
However, all said and done, exchanges are not without complications. For instance there is the problem of mortgage disparity. If the property of party A that was worth AED 5 million a year ago and which has now depreciated in value by say, 40% comes up as a potential match for another property worth AED 7 million with no equity, how do you deal with it? RERA and other real estate monitors might have to issue clarifications on the situation. Furthermore, everything hinges on the co-operation between the swappers.
But property barters may, in the long run revive the UAE real estate sector by encouraging people to consider buying and selling property again; especially if the government defines well-trenched policies that require established businesses augmenting their sales with barter transactions to report those deals. The key to breaking the current market inertness is clearly more transparency from the government. In the US, the state agency Internal Revenue Service (IRS) has a site containing useful information on bartering. If the UAE government embarks on a similar drive, then we may be in for a quite a long innings as far as property swaps/ exchanges are concerned.
