IDLE LANDS, IDLE ECONOMY

Saudi Arabia 2018-19 | REAL ESTATE, HOUSING & MORTGAGE | FOCUS: WHITE LAND TAX

Is the Kingdom's white land tax the catalyst the real estate and construction sector needs as the economy bounces back from oil price doldrums?

Though the region has long been known for its limited taxes—a privilege enjoyed because of their oil-export-based economies, Saudi Arabia has been exploring new options for raising revenue. One method is the region-wide 5% value-added tax, which will be implemented across the GCC.

Another tax is the white land tax, or idle land tax, that Saudi Arabia is hoping will spark development of unused land, boosting construction activity and realigning real estate supply and demand.
Rolled out in March 2017, the white land tax is a 2.5% tax aimed at residential and commercial landowners who do not begin development within 12 months. In April 2018, Weetas, a Bahrain-based, leading real estate company, estimated that there were approximately 1,100 undeveloped lands across Jeddah, Riyadh, Mecca, and the Eastern Province. According to a press release from the Ministry of Housing, white lands total over 411sqkm across these four areas.

In the capital, the ministry is estimating USD1.25 billion in annual revenue from the tax.
The Ministry of Housing has implemented an Idle Lands Program with three main objectives: to increase supply to balance supply and demand, to provide affordable residential options, and to guarantee fair competition to control monopolization. While not a direct manipulation of property prices or market dynamics, the idle lands tax is trying to incentivize more balanced land development and raise revenue. The program utilizes geographic information systems (GIS) in its land assessment processes. For its innovative and successful use of technology, the ministry was recognized at the annual GISWORX conference in the UAE in May 2018.

The Ministry of Housing even has its own Department of GIS, and the director, Abdul Aziz bin Abdullah Al-Qahtani, emphasized his department's efforts to achieve the highest level of accuracy as well as advanced integration between various electronic systems across ministries. He was part of the delegation in the UAE to accept the “Excellence in GIS Implementation" award. For landowners who fail to develop their white lands, the ministry has e-payment systems in place so people can pay via online channels, further indicating a clear objective of digitalization within the ministry. However, many do not want to pay, and revenue estimates may be overstated, as many property owners sold or gave away their white lands before the tax came into effect. And there are concerns that landowners could very minimally develop the land just enough to legally escape the tax while land utilization would remain inefficient.

Among other complications are potential increases in land prices to try and shift the tax burden as well as doubts about the ministry's capacity to enforce and monitor the tax. Many are concerned that the Ministry of Housing is stretched too thin with its several other programs and fear the Idle Lands Program will not be implemented efficiently. A lack of transparency shrouding the Housing Ministry raises even more concerns.
Nevertheless, overall expected impacts from the tax are fairly positive as outlined in an EY survey. Of survey participants, 65% anticipate “an incremental increase in housing development over the next two to three years." Furthermore, Bloomberg figures put land sales and development at around 30% of owners in this first year of the tax scheme, meaning 70% of landowners are expected to pay the tax.

Boosting land development is part of the Kingdom's bigger goal of making more citizens and residents homeowners by 2030. The government expects to add nearly a half million units by 2020 and 1.2 million units by 2030. Increasing ministry revenue will help the ministry offer more incentives to developers and home buyers to elevate home ownership and build a stable real estate sector.