Saudi Arabia’s new monarch isn’t afraid of riling the rich and powerful to get his subjects into homes they can afford.
One of King Salman’s first policy decisions after taking power in January was to approve a tax on millions of acres of so-called white land: development plots in cities that lie empty for years because the owners have no incentive to build on them. The move breaks the kingdom’s taboo on property taxation and puts pressure on landowners and developers who until now have been content to own and trade empty land like a commodity.
“It’s a bold decision that will ruffle some feathers,” Ramzi Darwish, a consultant with Cluttons LLC, said in an interview in Dubai. “The majority of landowners are royals and powerful trading families and this will push them to either develop the plots or sell.”
The tax aims to change a real estate market where city land, complete with with roads, water and streetlights, sits empty while the country endures a shortage of 2 million homes. It will help revive a plan made by King Abdullah, who died in January, to build a half million homes for lower-income Saudis.
Though the levy won’t go into effect until officials iron out details including the size of the tax, the March 23 decision to impose it is already affecting real estate shares. The Tadawul All Share Real Estate Development Industries Index has slumped 11 percent since the tax was announced, signaling that investors expect developers to face pressure to build on the land they own.
For Dar Al Arkan Real Estate Development Co., the kingdom’s largest listed developer by assets, land sales contributed 2.9 billion riyals ($666 million) of its 3.05 billion riyals of revenue last year. Home sales generated 8 million riyals, less than 0.3 percent of the total.
While Dar Al Arkan has been growing its development pipeline, “the main source of revenue is the sale of land plots,” according to Cairo-based Harshjit Oza, an analyst at Naeem Brokerage. The developer has around 30 million square meters (323 million square feet) of land, he said. The shares fell as much as 9 percent the day after the tax was announced.
Saudi Real Estate Co., another developer, didn’t report any revenue last year from selling properties that it built. Out of the company’s 341.2 million riyals in sales, 77.1 million riyals came from selling land and the rest was generated by rentals and property management.
Dar Al Arkan slumped 1.4 percent today, bringing the loss since the tax was announced to 16 percent. Saudi Real Estate fell 0.8 percent today and 24 percent since March 23.
Getting the tax rate right will be key to the plan’s success, said Darwish from Cluttons.
“It will be set at a reasonable rate that doesn’t hurt landowners too much, but at the same time pressures them enough to build to avoid losses,” he said. The tax may be around 5 percent of the market value for plots inside the cities and less for those outside it, he added.
Saudi Arabia’s housing shortage has worsened as development and property financing failed to keep up with a growing population. In 2011, King Abdullah earmarked 250 billion riyals to build homes across the kingdom.
The homebuilding initiative stalled because the government had given away so much city land in the past that it was left with little of its own to develop.
In some Saudi cities, white land makes up as much as 65 percent of space served by state infrastructure, according to Darwish. About 40 percent of the land in the capital, Riyadh, sits vacant, the Saudi Housing Ministry estimated in 2013.
Saudi Arabia is a highly urbanized nation. The capital Riyadh contains more than 5 million of the country’s 30 million people, according to the latest figures released by the official Central Department of Statistics and Information. The port city of Jeddah has 3.4 million, while the holy city of Mecca has 1.6 million people.
“The king was very clear on this being a very urgent matter,” said Jamil Ghaznawi, head of Saudi Arabia for broker Jones Lang LaSalle Inc. However, structures need to be set up including a land registry and administration and land owners need to be identified, he said.
The tax should help bring down land prices, which have been inflated by speculation in a country where even ordinary citizens put their savings into land in the absence of a developed treasury market, said Mohammed Alsuwayed, a Riyadh-based financial analyst and partner at SPT Investors LLC, a market-analytics company.
“The only way that they could make homes affordable and solve the housing problem is if they change the way people save for the future,” he said. “They have to provide them with alternatives like sukuk or treasury bonds.”
Still, the tax “will impact the way land is held as an asset class and how banks value and collateralize white lands,” John Sfakianakis, the Riyadh-based director of the Middle East region at London-based investment manager Ashmore Group Plc., said by e-mail.
It will push more owners to form partnerships with developers to avoid paying the tax and that “will fundamentally change the real estate market and why people own land,” Ghaznawi said.
The cost of land in Saudi Arabia accounts for as much as 60 percent of the overall cost of a property compared with global average of around 25 percent, according to Mazen Al-Sudairi, the head of sell-side research at Alistithmar Capital, a unit of The Saudi Investment Bank.
The Saudi residential market has been subdued since November, when the central bank in an effort to deflate prices required mortgage down payments of 30 percent for borrowers, according to Paul Loiacono, managing director of financial platforms at Capitas Group International Ltd. That led to a slump in mortgage applications and few transactions as buyers anticipated further declines, he said.
A fall in land values will take time and some in Saudi Arabia are forecasting a drop of as much as 50 percent once the regulations are introduced, Loiacono said.
Others are skeptical. Taxes may not “shake the market” if they are similar to fees levied by municipalities for providing state services without being based on land values, Alsuwayed said. Municipal taxes often come out to less than 1 percent of land value and that isn’t enough to dent the market, he said.
“Imposing fees on an asset will reduce its attractiveness,” said Fahad Al Turki, chief economist and head of research at Jadwa Investment. “We will see more land coming into the market, which eventually will lead to a decline in prices.”