Although the economy of the Kingdom of Saudi Arabia has maintained its stability for a long time, things have changed quickly in the recent years. Due to its dependence on oil industries, KSA’s economy was impacted the most by the downfall of the petroleum prices; an impact that led KSA to issue many policies and take many measures to counter that negative impact, including the White Land Tax law.
The Butterfly Effect
Before we elaborate the new law any further, let’s stop and take a look back at how the negative impact of the downfall of petroleum prices resonated across the different sectors and markets of the Kingdom of Saudi Arabia, including the real estate market primarily.
As the oil prices decreased, so did the revenues of the kingdom’s government. As a result of that, the kingdom was forced to reduce its expenditures to cope with the new changes, not to mention to how the oil investments in Saudi Arabia and the employment rates in the petroleum sector were eventually affected.
All these factors led the Saudi Arabian citizens to rationalize their expenditures and, therefore, their purchasing power and their will to invest generally and in real estate specifically. To understand more about this issue, you can find here detailed article about the outlook of the Saudi Arabian real estate sector in 2018.
The Idle Lands Problem
The real estate market crisis in Saudi Arabia is a bit complicated, yet it makes sense when you look at the whole picture.
On one hand, we have the oversupply of the expensive residential units (especially villas) that was met by the reduced demand affected by the weakened expenditure; on the other hand, the demand rose in the low- and middle-income segments of the market with no equivalent supply.
This imbalance has further fueled the crisis and its implication on the economic growth of KSA. The complicated part of the crisis, however, was not the contradiction between the existence of over-supply and over-demand in two different sections of the same market, but it was in the fact that the low supply of low- and middle-income segment products happened despite the abundance of residential lands – or, to be more precise, the white lands.
The white lands, also known as the idle lands, by definition, are the lands that are listed or categorized as residential lands and yet remain unutilized as no construction works have been taking place on it. This can be attributed to multiple reasons that could be mischievous sometimes including land flip (i.e. the practice of purchasing a piece of undeveloped land at a low price and then sell it undeveloped at a higher price as a way of making profit).
The White Land Tax as a solution
In a step towards eliminating this imbalance, and as another step towards achieving the recently announced Saudi Vision 2030 – a long term plan that aims at reducing the Kingdom of Saudi Arabia’s dependence on the oil industries through developing the non-petroleum sectors and developing the public services, the Saudi Arabian government imposed what is known as white land tax.
It is worth mentioning here that the Saudi Arabian citizens have enjoyed a tax-free life for decades before the emergence of the recent oil crisis. However, the white land tax was not the only tax to be imposed recently on the kingdom’s nationals.
At the beginning of the current year, KSA levied a 5% Value-added Tax (VAT) on most of its products and services with a few exceptions that include leased properties and properties that are sold to the relatives (up to the fourth degree). You can find more details here about the VAT and its expected consequences on the Saudi Arabian real estate market.
The white land tax has been levied on March 2017 after getting approved first by the Consultative Assembly of Saudi Arabia. The law requires the owners of undeveloped lands that were allocated for residential or commercial usage to pay a 2.5% tax if they did not begin developing it within 12 months.
The policy aims at resolving the gap between the supply and demand forces in the real estate markets of Jeddah, Al Riyadh, Mecca and the Eastern Province. The tax has three purposes: to increase the supplied pieces of residential land, reduce the land prices to a fair value, and encouraging fair competition and combatting monopoly.
The tax will be applied on four phases: the first phase includes all the lands that spans 10,000 square meters or more of land within the ranges pre identified by the Saudi Arabian Housing Ministry; the second phase will include the multiple developed lands that are owned by the same owner within the same block that span more than 10,000 square meters; the third phase aims at the developed lands that have areas that exceed 5000 square meters and finally, the fourth phase the developed lands owned by the same owner within the same city which have accumulated area that exceeds 10,000 square meters.
Concerns on the white land tax
Despite the expected positive outcomes of the new levied tax, some developers and real estate experts have expressed logical concerns.
For instance, there are some worries that some owners and developers might resort to minimization (i.e. to build the smallest passable structure possible) just to escape their eligibility to pay the tax. This might lead KSA to have developed lands that are not fully utilized.
Another concern is that monitoring and managing this legislation might be a hassle for the ministry of housing who has its hands full already with multiple other priorities, programs and projects. As a result, some experts called for the creation of a new committee to investigate and handle the tax violations.
The Anticipated effect of the white land tax
Currently, there are more than 1100 undeveloped lands in Jeddah, Mecca, Riyadh and the Eastern Province that span a total area that exceeds 400,000 square meters.
The white land tax aims at encouraging the development of these lands to contribute to the market supply and help meet the rising market demand. Because of that, it is hoped that it will help revive the real estate market of Kingdom of Saudi Arabia, which comes in line with the steps the kingdom is taking towards achieving its 2030 vision.
And while the crisis is expected to last on the short term, the multiple legislations and taxes levied by the government are expected to stop it in its tracks, reverse the wheels and revitalize the Saudi Arabian economy.