Perhaps the most significant regulatory enactment for the Kingdom’s construction and real estate players in years, the white land tax is expected to have a wide-ranging impact on the market. Instituted to encourage sales of land to more active developers, the government began issuing its first bills for taxable land in late March 2017.
The tax – an annual levy of 2.5% of the value of undeveloped land in plots larger than 10,000 sq metres – is initially being applied to areas designated for residential development under urban master plans. However, Mohammed Almudaiheem, supervisor of the tax at the Ministry of Housing (MoH), told local press in June 2017 that the levy would be extended to commercial zones as well. Owners of plots categorised as white land must pay the tax or develop the land within 12 months. Once the invoice is issued, the landowner is liable for the lax even if they sell the land before it falls due. Those who fail to pay the tax are fined.
Phased Rollout
The second phase of the rollout will not start before 2020, Almudaiheem said, which is expected to apply to single landowners of developed land over 10,000 sq metres in master planned developments. Real estate company JLL expects that “developed” will be defined as plots where horizontal infrastructure such as roads, power and drainage systems have been built, but no vertical construction has taken place. Such areas have become more commonplace in Saudi Arabian cities in recent years, as the pace of construction has not kept up with the government’s infrastructure programme.
No timeframe has been given for the third phase of the tax rollout, which will extend the levy to smaller plots of at least 5000 sq metres, nor the fourth phase, which will apply to single landowners with plots exceeding a total of 10,000 sq metres in one city, whether or not the plots are contiguous.
Implementation
The levy was first piloted in Riyadh and extended to Jeddah and the Eastern Province during the second quarter of 2017. The introduction of the tax came after nearly a year and a half of anticipation and speculation about its effects, following its approval by the Cabinet in November 2015. While the tax is not universally popular, analysts and industry players tend to agree that its introduction will help bring clarity to the market after a period in which some investors held off due to uncertainty about its scope. The MoH did not want to rush the introduction of the scheme, as it needed time to compile an accurate database of the land to which the tax applies and calculate its value based on size, location, designated use and availability of services.
Hosam Khairalla, general manager of real estate consultancy Flag Realty, told OBG that land prices fell by 10-20% in the 18 month-period prior to mid-2017, as both investors and local purchasers held off buying property until the effects of the tax were better known, and as some landowners looked to sell before or after the tax was applied. This created an opportunity for buyers of medium- and small-sized plots around the cities where the tax was first applied due to the decrease in land prices.
Impact
JLL expects the tax to present landowners with two options, either initiate development plans to avoid the tax burden, or sell off the land to another developer more willing and able to shoulder the tax or raise capital to develop the land. As a result, land prices should drop further, easing a major cost pressure on developers. Land values have grown strongly in recent years, accounting for as much as 30-50% of development cost in mid-2016. Lower land prices should feed through to lower development costs, thus making development more commercially viable. Overall, JLL says that the white land tax represents a power shift in the sector from landowners to developers.
Rationale
The primary aim of the tax is to stimulate development, particularly of residential property to address the shortage of homes for the lower- and middle-income segments of society. The Kingdom has an affordable housing shortage of an estimated 1.5m units, an issue that will only grow more acute in a country where 26% of citizens were below the age of 15 in 2016 and the population growth rate is 2.2% per year, according to the World Bank. Indeed, the lack of affordable housing supply has regularly been cited as a major challenge for Saudi Arabia over the past decade, but while the state has made moves to step up its efforts in this housing segment, the private sector has tended to participate in a more limited fashion, as rising land costs have meant that developing affordable housing is often viewed as unprofitable.
As with many policies being implemented at present, the white land tax is partly designed to support the goals of Saudi Vision 2030, the Kingdom’s long-term economic transformation plan introduced in April 2016. In this case, bringing more affordable housing to the market is expected to help the government achieve its aim of increasing the proportion of Saudis who own their homes by five percentage points by 2020 from a baseline of 47% in 2016. The MoH also hopes that the tax will promote competition and address monopolistic practices in the industry by lowering cost barriers to entry for developers and disincentivising the holding of land by wealthy owners. Ahead of the tax’s approval in November 2015, Majed Al Huqail, the minister of housing, told the Saudi Press Agency that housing supply in city centres is “monopolised by investors in the real estate sector”. In a 2016 report on the white land tax, professional services company EY said that the levy would “help develop a more active real estate market” with an increase in “overall real estate transactions by value and number”.
Holding land has traditionally been a common way to store wealth in Saudi Arabia, and some developers earn more money by trading land than building on it. Multiple trades can lead to inflated land values and widens the rift between the cost of the land and its development value, an issue that has become more prominent in recent years as the economy has slowed but land prices continued to rise.
EY said that the white land tax is likely to help narrow the gap between land banking and land development in what has effectively become a two-tiered land market in the Kingdom, with plots traded for a considerably higher price than feasible development would yield. “The aim is to release more land onto the market, reducing land prices and the cost of development,” Ahmed Almihdar, senior research analyst at JLL, told OBG. “It’s positive for the market and we should start to see benefits in the coming two to three years.”
Budget Effects
The new tax should also help to ease pressure on the public budget, though the government has made it clear that raising cash was not the primary reason for its implementation. In 2013 the MoH estimated that empty plots accounted for approximately 40% of Riyadh’s land area, while the government was investing billions of riyals in developing infrastructure and affordable housing on the outskirts of the capital and other cities.
Further development of city centres allows the government to make use of existing infrastructure, while lower land prices will reduce the cost of public housing development. Local media has suggested that the government could save $13bn annually through the tax, with EY reporting that the collected revenues would be invested in housing projects, as well as related utilities and public services.
Changing Market
In a survey published in its 2016 report, EY found that 65% of real estate professionals questioned – including developers, investors and government officials – expected the white land tax to improve the environment for housing development in the Kingdom. Some 70% expected changes in project delivery strategy after the implementation of the tax, 80% expected a fall in land values and 65% expected an increase in land transactions. However, the majority (65-70%) of respondents also expected to see higher labour costs and building material prices due to rising demand from developers.
The report highlighted some other potential downsides, including the inefficient use of land and resources as developers move too quickly to develop plots rather than pay the tax, while some landowners could potentially raise the sale price of land to offset the cost of the tax. The company also warned that developers could attempt to evade the tax by doing the bare minimum of development without actually completing and selling new real estate assets.
Despite these caveats, it is widely expected that the white land tax will be positive for the sector on the whole, adding new dynamism, opening the market to further developers and helping meet the goal of increasing the supply of affordable homes. With the first phase already rolled out in 2017, uncertainty surrounding the measure is likely to be alleviated and developers should be able to take advantage of a considerable drop in the cost of new projects within the municipal limits of Saudi Arabia’s thriving cities.
