Following the recent implementation of value-added tax (VAT), investors are wary of the effect this will have on the Saudi real estate market. In an attempt to boost revenue and diversify non-oil income, the Kingdom of Saudi Arabia introduced a 5% tax on most goods and services. Taking effect on January 1, 2018, the VAT in Saudi Arabia and the UAE is applied to the supply of goods and services and to imports into the country. This includes the sale of properties, food, clothes, electronics, and gasoline, as well as phone, water and electricity bills, and hotel reservations. However, some services such as residential rent and public healthcare and schooling will be exempt.
Up until 2017, residents of the Kingdom of Saudi Arabia have been living a tax-free life. With the introduction of the VAT in Saudi Arabia, many local and foreign investors have expressed their fears regarding the effect this will have on the real estate market. Moreover, first-time home buyers are concerned about the increase in prices. Furthermore, residents are concerned about the impact VAT in Saudi Arabia will have on their lives overall. The tax raises living costs as it applies to almost all goods and services. This will decrease the purchasing power of individuals and possibly put them on tighter budgets.
However, it is important to note that value-added tax is applied all over the world and is used as a means to increase revenue. Accordingly, Saudi Arabia plans to spend $261 billion this fiscal year, the largest budget in its history. While the country is relying on VAT to boost non-oil revenue, some investors are cautious about the real estate market after the introduction of VAT in Saudi Arabia.
What is VAT
Implemented in over 160 countries worldwide, VAT is an indirect tax imposed on goods and services with some exceptions. The consumption tax varies widely from one country to another. While the GCC has imposed a 5% tax, other countries such as Norway tax some goods and services at 15%. The value-added tax is the difference between the base price and the final product price. The value-added tax is levied at each stage of production and distribution. From being sold from its source up until it reaches the final consumer who is burdened with the tax.
Real Estate VAT in Saudi Arabia
The recently introduced VAT in Saudi Arabia is applied to any real estate transaction in the Kingdom. The 5% rate is implemented on the sale of a house, apartment, or other residential real estates, the sale of any commercial real estate, transfer of ownership of bare or undeveloped land, and the sale of partly completed construction works. The tax excludes selling to relatives to the fourth degree and residential rentals. Moreover, the government of Saudi Arabia will cover the 5% VAT on first homes with values up to 850 thousand riyals.
The Saudi Real Estate Market
Some realtors have predicted that the VAT will cause a decrease in the prices of sales and rentals. According to some, the tax will limit the rise in rental prices and therefore contribute to the improvement and diversification of services. Since residential rental is exempt from tax, landlords may be tempted to lower rental prices in order to create a profit.
On the other hand, real estate sales will, in fact, see an increase in price. Considering that a 5% tax will be added to the sale, investors will have to cover that increase themselves. Expert realtors are predicting that sellers will simply add the tax to the value of the property rather than cover the cost themselves. This means that investment in Saudi Arabia will become more costly.
Furthermore, the VAT will be applied to more than just the sales transaction. Real estate developers will be paying more for raw materials and construction, which will also raise the final price of properties. Once again, this will increase the size of the investment for those hoping to invest in Saudi Arabia's vibrant real estate market. Accordingly, realtors feel the Saudi real estate market could see a fall in sales transactions. They believe that investors, as well as individuals, may not be as enthusiastic towards purchasing properties. For many individuals, the prices of residential properties may become out of reach. However, this will encourage people to opt for rent rather than property purchase. While this may boost the rental mark, it may leave a dent in sales transactions.
Investing in the Saudi Real Estate Market
Still, in comparison to international real estate markets, where the standard VAT is significantly higher, the Saudi market continues to offer prime investments. Even with the introduction of the VAT, residential and commercial properties, as well as vacant plots, provide investors a chance to enter a strong and growing market. Since the VAT has already been applied in the UAE, with the remaining GCC states expected to follow soon, the same can be said across the region. Though investors will be in need of larger sums of money to finance their projects, they are expected to yield higher returns.
The Kingdom of Saudi Arabia continues to provide solid investment opportunities in various sectors. Investors in the GCC, and in Saudi Arabia specifically, are attracted to the endless potential that the region holds. Year after year, projects across the different sectors work to boost revenue and create countless jobs. Furthermore, the entire region is expected to witness larger and more diversified projects in the future.