March 25 (Bloomberg) -- Saudi Arabia’s King Abdullah is paying the price for his own generosity as past land giveaways undermine his plans to build half a million homes and open up the country’s mortgage market.
State gifts of urban land complete with roads, water and power have left the government with almost no space of its own to develop within Saudi Arabia’s cities, according to Adnan Ghosheh, an adviser to the country’s Housing Ministry. That will hold back building plans as the government chooses between buying back city plots that have been inflated by years of speculation or paying a premium to build in the desert.
“Around 50 percent of land within some cities is vacant, while the government is being forced to look to the edges of the desert to build,” Ghosheh said. “It isn’t economical or sustainable to develop outside urban boundaries.”
The 89-year-old monarch earmarked 250 billion riyals ($67 billion) to build homes across the kingdom two years ago as the Arab Spring political unrest put pressure on the country’s leadership to address a growing housing shortage. The government of the world’s largest crude-oil exporter also moved to boost private home ownership by expanding mortgages, a change that could increase residential lending to about $32 billion annually, Capitas Group International Ltd. estimated.
The lack of affordable land for development will add time and costs to both public and private efforts to build more homes in a country where about 60 percent of the population lives in rented accommodation and fewer than 4 percent of homes are bought with mortgages.
Home-loan growth will affect local banks such as Banque Saudi Fransi, 31 percent owned by Credit Agricole SA, and Saudi British Bank, in which HSBC Holdings Plc has a 40 percent stake. Saudi Hollandi Bank is 40 percent owned by ABN Amro Holding NV.
Land commonly accounts for 50 percent of the cost of building a home in Saudi Arabia, compared with a third in Europe, said Kristian Syson, director of broker Cluttons LLP in the Middle East. The expense deters private developers from constructing homes for middle-income buyers, he said.
Saudi authorities are concerned about the lack of available land and plan to address it as part of a draft national housing strategy, said Mohammed Alzumaie, spokesman for the Saudi Housing Ministry. Undeveloped plots within cities, known as “white land,” account for as much as 40 percent of the property in Riyadh and prices are “over-inflated” he said.
Neither the market nor the government has the means to pressure landowners to lower their prices or sell. Land holdings aren’t subject to tax or annual fees and much of the property once given away has been accumulated by wealthy families with little need to raise cash, Syson said.
Two government welfare programs gave citizens land plots by royal decree and through municipal grants. The Ministry of Municipal and Rural Affairs has distributed around 2.2 million plots to widows and males over 18, regardless of income or economic status, according to broker CBRE Group Inc. There is no data available on how much land the monarchy gave away.
“I visited all 13 provinces in Saudi Arabia and mayor after mayor told me that the lack of government-owned land is the main reason for the housing shortage,” said Ghosheh, who worked for the past two years on the national housing strategy.
He advised authorities to consider imposing a tax or a fee on undeveloped land to encourage owners to sell or develop the plots. Though the kingdom doesn’t have any income or property tax, it could levy a “betterment fee” that charges landowners for government-provided infrastructure that helped drive up the value of their land, Ghosheh said.
Alzumaie, the housing ministry spokesman, said the strategy will include ways to put pressure on owners of empty land to sell or take part in its development. It will also include measures to combat land speculation and accumulation and incentives such as help in financing development, partnerships with builders and simplified planning regulations, he said.
“The state definitely would prefer to use the incentives at first,” he said. “If these don’t work, there might be more direct policies to combat this problem.”
Saudi Arabia needs to build 85,000 homes a year to keep up with a population of 28.4 million that’s growing at 2.5 percent annually, Mike Williams, CBRE’s head of MMEA research, wrote in a March 17 report. Analysts estimate the country’s existing shortage at 500,000 homes. While Saudi Arabia is about the same size as Mexico, the vast majority of space outside cities is desert that would require extensive infrastructure to make it habitable.
Even with the limits on land, there are signs that the mortgage law changes are lifting home buying in the kingdom. Real estate financing jumped 83 percent to a record 48 billion riyals in the fourth quarter from a year earlier, according to data compiled by the central bank.
Saudi authorities approved the first nine projects that will be built under the King’s housing initiative, designer Parsons group said on March 3.
The Tadawul All Share Real Estate Development Industries Index climbed 1.5 percent to close at the highest since May 12. The measure includes eight Saudi developers. Taiba Holding Co. led gains with a 6.6 percent increase to 28.9 riyals, while Jabal Omar Development Co. rose 2 percent to 25.3 dirhams.
Culture plays a part in stifling the Saudi land market. Plots in cities are considered a status symbol, with a few wealthy and influential owners keeping it empty for decades for use by their sons and grandsons. The absence of property taxes makes this easy and divorces land prices from their development value, Cluttons’ Syson said.
Wealthy Saudis “continue to favor land as a long-term investment vehicle, vastly inflating residential land prices and consequently excluding low-cost housing from vast areas of the Kingdom,” Williams wrote. The lack of regulation governing land trading and a lack of interest in the “actual economic or residual value of the land” makes things worse, he said.
Land prices in most Saudi cities jumped 50 percent and in many cases doubled over the last few years on “pure speculation,” making the property too expensive to develop profitably, Syson said. Land transactions aren’t regulated and are often shrouded in secrecy, making it almost impossible to establish price trends, he said.
The approval of the mortgage law will increase demand and without a similar rise in housing supply will result in higher prices, said James Reeve, an economist at Riyadh-based Samba Financial Group.
‘Out of Whack’
“There is not much borrowing by middle and low income Saudis because expectations are still out of whack with reality,” he said. “Most Saudis want to live in villas but to achieve that, they will need to borrow at least 10 times their salary and no bank is going to lend on that basis.”
Expanding development into the desert would be a costly strategy, according to Mohammad Alwazir, senior economist at The National Commercial Bank, the country’s largest by assets.
It would require the government to build roads, bridges, electricity, water, cooling and telecommunication infrastructure and also mean the state have to spend billions of riyals constructing schools, hospitals and shopping centers in areas as far as 80 kilometers (49 miles) from city centers, said Ghosheh. The government, which set the budget for each home to be built at 500,000 riyals ($133,300) would have to more than double that amount if it’s to build the infrastructure.
Imposing a fee for undeveloped land would probably run into opposition among both land owning families and other Saudis concerned that it would set a precedent for taxation.
“The Saudi government has contemplated in the past imposing tax against undeveloped plots,” Cluttons’ Syson said. “It fell by the wayside because of a huge uproar as it’s often wealthy and influential people that own most of the land.”
While controversial, a tax could be justified under the principal of Zakat, Islam’s third pillar, said NCB’s Alwazir. Zakat requires owners to give out 2.5 percent on the accumulated wealth every year.
“A government can’t pick and choose which people or asset classes to tax,” said Fahad Al Said, chief executive officer of Saudi Real Estate Co., one of the country’s oldest developers. “Either everyone pays taxes on wealth or everyone doesn’t. So far all none of the Gulf economies are tax based.”
Divided responsibilities may also hinder homebuilding plans. While the Ministry of Housing is responsible for the king’s plan to build 500,000 homes, land administration falls under the Ministry of Municipal and Rural Affairs. Closer cooperation between the two is necessary to achieve a coherent plan to increase supply and encourage landowners to sell or develop it, Ghosheh said.
The enactment of clear and strong regulations would help ease the land shortage by clearing issues related to old title deeds, he said. It’s very common in Saudi Arabia that land would be left for decades as disagreements over old deeds and lingering disputes prevents owners from selling.
The appropriation of land by the state for a fair value should be available, though only as a last-resort solution, Ghosheh said.
“The issue becomes: what is a fair price?” Syson said. “The government had to pay vast sums of money for land in Mecca and with Saudi’s land market being so opaque, true value is hard to determine.”
To contact the reporter on this story: Zainab Fattah in Dubai on email@example.com