Transaction cost is an important element in real estate investing as high transaction costs can take a significant chunk out of any capital appreciation that an investor expects. In Oman, there is renewed focus on transaction costs, as the government has recently hiked the registration fees, payable to the Ministry of Housing, from three per cent to five per cent.
Transaction costs include, registration fees, stamp duties, legal fees and agent’s commission. To keep it simple, in this article, we have excluded capital gains taxes although these can reduce returns significantly from property investments. Many buyers are under the mistaken impression that transaction costs are about the same in all countries. This is not true. Transaction costs in real estate investing vary widely from country to country with the lows of about 3 per cent in some Baltic countries to a markedly high 25 per cent in Russia.
Transaction costs in real estate are much higher than in other asset classes. In bonds and equities, the transaction costs are usually less than 1 per cent. In some cases they are completely negligible. Investors must keep this in mind before buying in to real estate.
As it is, the real estate market is very illiquid compared to equity, bullion and bond markets. Whereas you can sell equities, bonds or bullion in a few seconds it can take months to sell a real estate property. The high transaction costs make the market even less liquid. This automatically means that speculation is a lot less in real estate compared to other asset classes (although it is there) and investors are usually long term investors. In Dubai, the government has dampened speculation further by imposing an additional 4 per cent on second sales of off-plan properties. This is to discourage speculators from creating booms
and busts which damage the economy.
A brief comparison of transaction costs in major countries, some GCC countries and Oman is presented below:
It shows that transaction costs in Oman are moderate overall and in line with those in the GCC countries.
In Oman, there is no registration fee on off-plan transactions, irrespective of how many times the property changes hands before final registration. In addition, in integrated tourism complexes (ITC), the government has completely exempted registration fee from properties bought directly from developers. This makes it very attractive for first buyers of ITC properties. This will help diversify the economy by attracting foreign capital as expatriates are allowed to buy properties in ITC projects.
There are instances of under reporting of transaction values in Oman in order to lessen the registration fee payable to Ministry of Housing. The government would do well to insist on valuations of properties by approved independent, reputed professional property valuation firms before accepting any transaction at the Ministry of Housing.
Overall, we have some catching up to do with our neighbours.