Uncharted Quarters

Saudi Arabia’s new land tax laws are designed to free up sites for affordable housing projects. Experts say the measures are only part of the answer.

Dream ticket: For many Saudis, the prospect of owning their own home remains elusive.
Dream ticket: For many Saudis, the prospect of owning their own home remains elusive.

It is now just over ten days after news broke that the Saudi government was to levy fees against undeveloped urban land, but we’re still no clearer on just how the directives will be implemented or to what degree the real estate market in the Kingdom will be affected.

Despite a sudden drop in real estate stocks and a boost to construction share prices, the news lacked the resonance one may expect from a law that is designed, at its core, to free up urban parcels of land for developers to build on.

The motives for the move to tax unused land are no great secret. The Kingdom is in desperate need for affordable housing, and it needs private developers to step in and create those homes for Saudi nationals.

Saudi Arabia’s new monarch, King Salman, has also sought to move quickly on this issue through the introduction of the new land tax and through the removal of former housing minister Shuwaish Al Duwahi last month.

To achieve its initial aim of building around 500,000 homes across the country, the Kingdom needs land in areas that are both desirable for buyers and which doesn’t drive the cost of development beyond the reach of the ordinary Saudi wage earner.

Of course, affordability is a subjective matter. According to figures calculated by Al Rajhi Capital and published in the Oxford Business Group’s Saudi Arabia 2014 report, a home buyer would need a monthly salary of SR6,200 ($1653) in Riyadh and SR9,200 ($2453) in Jeddah to make a mortgage on a basic apartment ‘affordable’. With public sector jobs starting at between SR3,000-5,000 ($800-$1333) – and even less for private sector employment (something the government is pushing to address under its Saudisation programme), plus the requirement in most cases for a 30% deposit, affordability is a real issue for the Kingdom.

It’s not helped by the rising cost of land in urban areas, either. Mohammed Al Abdani, director-general of the Real Estate Development Fund (REDF), told the OBG: “The price of land remains a big issue. Land can be 60% of the total cost of developing a unit.” Century 21, also quoted in the report, states that residential land prices in Riyadh had reached as much as SR3500 ($933) per square metre in 2013 and that commercial land along the King Fahad Road in central Riyadh had hit a staggering SR22,000 ($5865) per square metre.

That has placed the emphasis on low-volume, high-return developments on land which is being built on – and driven down the incentive to develop affordable housing projects.

Levying fees on undeveloped land sounds like a shrewd way of forcing landowners to do something with their chunks of real estate, but the lack of follow-up detail means most are currently in the dark about how it will affect them.

Dar Al Arkan’s chairman Yousef Al-Shelash is confident the land tax won’t affect his company unduly, despite the company’s considerable ‘land bank’, which it valued at SAR14.5bn ($3.9bn) at the close of 2014. Most of that (60%) is in Jeddah – the balance is in Makkah (21%), Riyadh (12%) and Madinah and the Eastern Province (7%).

Shelash said he was confident the government’s tax plans would only affect white or undeveloped land, and since Dar Al Arkan is already working with local authorities on masterplans and zoning approvals for many of its land parcels, any proposed tax plans wouldn’t affect the company adversely.

He told newswire Reuters that he also didn’t expect the land tax to prompt a sharp decrease in the price of land in the Kingdom either, and that the government had been discussing the move for almost a year.

“The impact has been largely discounted in the market already,” he said.

In a statement issued following the announcement, analysts Jones Lang LaSalle said that while the company welcomed the new government policy initiatives, it remained guarded in its views as to how effective it would be in meeting its goals.

Jamil Ghaznawi, head of JLL Saudi Arabia, said: “The next stage in the process will be the release of more detailed regulations on how the tax will be set and administered. Only at that stage will we have a clearer idea of how the real estate market is likely to respond.”

So far, the government has not followed up with details over the mechanics of the tax system, its scheduled introduction or any details of the kinds of levies faced and how they would be imposed. Ghaznawi said there was clearly work left to be done.

“Given this is the first real estate tax to be proposed, there is currently no administrative body with responsibility for setting or collecting taxes. We would therefore assume that the vacant land tax would be administered through the different Municipalities or The Department of Zakat and Income Tax.”

Ghaznawi said: “It is reasonable to assume that the proposed tax will result in more sites being released for development, the effect of this on land values and ultimately on residential sale and rental prices is, however, much less clear.

“What is clear is that this is only one issue that needs to be addressed in the fight to increase the supply of affordable housing in Saudi Arabia. The proposed vacant land tax is not a panacea or complete answer and we would expect other measures to be announced in the coming months as the government continues to address the need for more affordable housing.”

The government has, since the early 1970s, helped Saudis into their own homes with interest-free loans via the REDF. The initiative has been tremendously successful, helping 1m Saudis into their own homes – but the REDF has a current waiting list of around 2.7m applicants. Major revisions to Saudi mortgage laws are expected to help, including a move by the REDF to offer interest free loans on the required 30% deposit. That essentially means that the REDF could offer 100% mortgages to Saudi residents, with 30% of it interest-free.

Shelash says that easing red tape for developers would also help. The government freed up rules governing off-plan sales by private developers in 2011 – Dubai’s Damac Properties was one of the first international companies to be granted a license to do so – but requirements for developers are time-consuming.

“The purpose of this new law is to facilitate faster housing development, and we are hoping that on top of the new mortgage law, there would be additional measures to facilitate the off-plan selling,” he said.

“This would prompt us to be in a position to change our strategy to massively increase our production of housing units.”

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