Dubai: The Saudi authorities’ move to “tax” investors holding undeveloped land is unlikely to be followed by their counterparts in the other Gulf countries, according to an industry source. It was last month that the kingdom decided to impose a 2.5 per cent of the land’s value as annual tax.
“The ‘white land’ tax should remain a uniquely Saudi affair, given the vast scale of undeveloped land that are with private investors there,” said Craig Plumb, Head of Research at JLL Mena, the consultancy. “In a way, the tax is to incentivise investors/developers to start projects on their land banks and ease some of the demand building up for new residential stock.
“It’s completely different to the market conditions prevailing in a market like Dubai.” (Master-developers in Dubai have the powers vested with them to charge sub-developers fines if they do not proceed with launching their projects on-site within a certain timeline. But these are left to the discretion of the master-developer whether they want to enforce this.)
Until now, land owners in Saudi Arabia had no reason to start building. Land values in Riyadh and Jeddah are exceptionally high and it was left to the owners to decide how they wanted to monetise it.
Detailed regulations
The market is still undecided on what the immediate implications of the tax will be. ‘As the law was passed without the publication of any detailed regulations, its effect on the residential market is difficult to quantify,’ says a new JLL report. ‘As developers wait for further regulations to be announced, no major new residential developments were announced in Jeddah or Riyadh over the second-half of 2015.
‘However, the long-term impact should be positive, as the income generated by the government will be used to fund new housing projects in the kingdom.’
New housing is a dire need across the kingdom’s cities. According to JLL estimates, the number of residential transactions in Saudi Arabia was down 5 per cent in the year to November. ‘There has been a notable shift away from sales towards rentals, leading to a sharp increase in average apartment rents,’ said the report. ‘These increased 13 per cent in Jeddah and 9 per cent in Riyadh’ between January to November 2015.
A major factor was the Saudi Arabian Monetary Agency’s decision to limit the loan-to-value on mortgages to 70 per cent from 100 per cent earlier. ‘Although the regulations were passed to prevent a residential bubble scenario, the effect has been counterproductive to the kingdom’s severe housing shortage,’ the report adds. ‘The steady rise in the value of homes in Saudi over the last several years has made a 30 per cent down payment unaffordable.
New development activity
“Middle-income households who constitute the majority of residents have been priced out from the market. Although there has been some speculation that the 30 per cent mortgage law will be decreased to 15 per cent in the near future, no confirmation has been announced yet.”
Saudi authorities are pushing the envelope in trying to kick-start new development activity. Apart from the land tax, the last quarter also saw the announcement transforming government-owned Saudi Real Estate Development Fund into a bank. ‘This will allow the REDF to expand its operations and offer mortgages for existing homes in addition to providing mortgages for the development of new homes,’ the report says. (REDF provides loans of up to 500,000 (Dh489,557) to individuals, but paid directly to developers in a lump sum to facilitate the development of homes.
In another move, the minimum apartment size to qualify for a loan from the REDF was reduced from 240 square metres to 175 square metres.
‘Although this is a positive move by the REDF, this could see demand for units of 175 square metre and above increase, adding upward pressure on apartment prices,’ JLL report adds. ‘To avoid this scenario, regulations are expected to be put in place to prevent landlords from exploiting the REDF initiative.
“The REDF has also announced that it will provide loans for the development of infrastructure on raw lands. The conditions and regulations of the loans are still under review.”
