Saudi Arabia, the world’s largest oil exporter and the biggest nation in the GCC region, has been under great pressure because of the 2-year long oil-price slump that severely hit the economy. This crisis has not only debilitated the country’s revenues and reserves, but has also shook its massive construction and real estate industry. However, construction and real estate sectors can expect a favourable change in the near future as the government of Saudi Arabia has announced a series of revival plans, including a 2.5% white land tax.
What is the new white land tax all about? Why has it been introduced?
The Saudi government approved a 2.5% white land tax that will be imposed on owners who hold over 5,000 sq m of unused land. With this new law, the government aims to bring down land rates and provide housing facilities to the middle-income group. It is seen that wealthy Saudis buy lands to increase their assets and keep them undeveloped for years. They later charge a high selling price to the contractors/builders who are willing to buy these plots. It is noted that the land cost alone makes up 50% of the total project cost. This makes it difficult to erect affordable housing facilities in the Kingdom. The country faces a severe shortage of residential space because of the rising population of middle-class Saudis. After the Kingdom introduced the initial mortgage law that lets customers apply for 100% loan-to-value (LTV), the demand for homes by middle-class people has increased. However, because of high land rates, real-estate transactions reduced by 7.7%, dropping to USD 22bn in the first quarter of 2016. Also, in Riyadh, 30% to 40% of plot remains undeveloped.
Benefits of the new white land tax:
- The 2.5% land tax is likely to mint yearly savings of USD 13bn for the government.
- It will help overcome the problem of affordable housing shortage.
- It will attract more number of foreign investors, builders, architects, contractors, etc.
- It will help in urbanisation of Saudi towns.
- Middle-income people would not have to depend on rented homes.
“The 2.5% white land tax is a boon for construction and real-estate industries as well as the middle-income Saudi Arabians.”
The tax policy will work in tandem with other campaigns and policies of the government including the Eskan and Vision 2030. For the middle-income nationals, the government is planning to construct about 5,00,000 homes. Currently, there are nearly 187 affordable housing projects, under the Ministry of Housing’s supervision (around 2,33,651 units). Saudi Arabia’s home ownership is expected to rise by 5% points by the year 2020. To draw these plans into reality, the Kingdom has inked MoUs with China, France, and Britain. An MoU has also been signed with Saudi-South Korean consortium for erection of 1,00,000 houses in Riyadh in a decade.