By Rob L. Wagner
26 June 2016
Jeddah – Saudi Arabia has introduced a 2.5% tax on undeveloped property in an effort to jump-start residential construction but the key to its success will be how quickly the Ministry of Housing can issue building permits and guarantee that water and utilities are available for developments.
Large tracts, particularly in Riyadh, remain undeveloped as many people buy land as investment instead of building on it. As a result of this speculation, as much as 30% of land in urban areas is vacant and the city, as well as Jeddah and the Eastern province, are experiencing a severe housing shortage.
The Ministry of Housing hopes that imposing a tax will encourage landowners to build homes. The kingdom suffers from an estimated housing shortfall of 1.5 million units. The ministry is betting that by encouraging residential housing development, the percentage of Saudis owning their own homes will increase from about 47% to 51%. In 2015, the average cost of a home was about ten times the gross salary of a typical Saudi wage earner.
Jamil Ghaznawi, head of the Riyadh office of Jones Lang Lasalle, which specialises in commercial real estate, said the success of prodding landowners to develop their land rests with how effective the Housing Ministry runs its permit-processing programme.
Ghaznawi said landowners worry about lack of services, such as water and utilities, and delays in issuing permits if they develop their property. The ministry has promised to smooth the paperwork.
“The Ministry of Housing has created a new gateway or platform to expedite the permits and make it easier for development,” Ghaznawi said.
Property owners could, however, choose to shoulder the cost of the tax and hold onto their undeveloped land, he said.
“The tax could be a cost justifying holding the land but the fundamental structure of holding land in urban areas has changed. It’s not necessarily a means of storing wealth like it once was but should be held for development. The upper hand today in urban areas is to develop the land,” Ghaznawi said.
By implementing the plan, the Saudi government hopes to see the property sector’s annual growth rate increase from 4% to 7% over four years. The government also hopes to spread land ownership and encourage competition.
Housing Minister Majid al-Huqail said in a statement that vacant land in urban centres has been “monopolised by investors in the real estate sector”, becoming an acute problem. The tax is expected to “stimulate the creation of appropriate housing at appropriate prices for all citizens”, he said.
The programme is expected to be applied in five stages with plots 500,000 sq. metres or more to be taxed first and plots of 10,000 sq. metres by the last stage. The Housing Ministry is further encouraging residential development by striking partnerships with foreign residential and commercial developers.
Not all property owners may be hit with the tax, Ghaznawi said.
“We have to be very clear the tax is meant to be an incentive to land owners,” he said. “Once they close the gap and supply and demand are met, the government may hold the tax on other owners when the shortage is no longer a problem.”
The cabinet also approved a measure to allow foreign investors to own up to 100% of retail businesses, up from the previous permissible ownership of 75%. There is a caveat: Foreign companies must invest a minimum of $53 million in the first five years of ownership to be eligible to obtain a licence giving 100% ownership.
Ehsan Ahrari, an independent foreign affairs consultant and chief executive officer of Strategic Paradigms in Alexandria, Virginia, said attracting private investors, at least from the United States, to assume 100% ownership in retail and wholesale operations may be difficult.
Deputy Crown Prince Mohammed bin Salman bin Abdulaziz recently visited the United States and lobbied officials, including US President Barack Obama.
“But how much of that will filter into lucrative business deals? I cannot say that I am very hopeful,” he said. “The fear of (the Islamic State) ISIS is so pervasive in official circles and the business community here.
“That feeling, at least in my judgment, trumps Americans’ notorious love for money.”
The announcement of the new tax follows the launch of Prince Mohammed’s Vision 2030 plan to wean the kingdom off oil revenue and encourage other types of investment. Saudi Arabia has a $98 billion budget deficit for the 2016 fiscal year.
Taxes, long an anathema to the Saudi government, which offers subsidies to its citizens, are expected to spur the economy. The government is also expected to implement a “sin tax” on soft drinks and cigarettes and privatise some government entities, including hospitals.
The cabinet said in a statement: “The decision is in line with Vision 2030 to ease restrictions on ownership and foreign investment in the retail sector to attract regional and international brands and contribute to the creation of job opportunities for citizens in this sector.”