Saudi Real Estate Shares Tumble On Decision To Tax Undeveloped Land

Saudi Arabian real estate shares tumbled on Tuesday after the cabinet approved a proposal to tax undeveloped land in urban areas – a policy that could shake up investment incentives in the kingdom and help to resolve a housing shortage.

Much urban land in the kingdom is owned by wealthy individuals or companies who prefer holding it as a store of value, or trading it for speculative profits, to the process of developing it. Some analysts have estimated 40 or even 50 per cent of space inside big cities such as Riyadh, Jeddah and Dammam is undeveloped.

The cabinet’s decision, announced on Monday night and the first big economic policy initiative since King Salman took the throne in January, aims to change that pattern by pushing more land out into the market, where it can be developed.

The tax is politically sensitive because it may hurt the interests of influential people. But a lack of affordable housing has become a major social problem in the kingdom, and the tax could make more land available for home building.

“Saudis always say, ‘the land does not eat or drink,’ but now it will eat and drink, so owners will eventually have two choices: sell or develop the land,” said Turki Fadaak, head of research and advisory services at Al Bilad Investment in Riyadh.

The cabinet gave no details of the likely size of the tax, how it would be implemented, or a timetable for introducing it. An economic council will make proposals to the Shura Council, a top advisory body.

But some investors fear a greater supply of land will force down its price, hurting the balance sheets of real estate development companies which own large land banks.

Shares in major property developer Dar Al Arkan sank 6.5 percent on Tuesday morning, while Emaar Economic City dropped 6.60 percent.

While there is no official data on land prices, advertisements on popular Gulf classifieds website Dubizzle suggest Riyadh residential land prices are roughly on a par with Dubai, where the property market has just undergone a major inflationary cycle.

For instance, a 375 square metre land plot in the Saudi capital, just enough to build a house, is offered for 1.5 million riyals ($400,000).

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After social discontent prompted uprisings elsewhere in the Arab world in 2011, the government announced a plan to build 500,000 homes over several years, earmarking some $67 billion of state funds for the plan. But progress has been slow, partly because of the difficulty of obtaining land.

Shares in the construction and building supplies sector climbed on Tuesday on expectations that the land tax would stimulate more activity.

Major builder Abdullah Abdul Mohsin al-Khodari and Sons gained 1.9 per cent, Saudi Cement Co added 3.3 per cent, and Red Sea Housing Services, a maker of modular buildings, rose 2.1 per cent. The overall Saudi stock market index climbed 0.4 per cent.

Mazen al-Sudairi, head of research at al-Istithmar Capital in Riyadh, said rising prices and limited availability of land had dampened many areas of Saudi business activity, so the tax could have a broad, positive effect on the economy.

“The decision opens growth opportunities even to other sectors. Retailers, which mainly depend on leases, can now buy land and expand. Cement firms will grow with rising demand, and even banks will prosper as they will lend to those firms.”

Sudairi said the stock market was also pleased by the signal that King Salman was moving quickly to address economic problems and push through long-delayed reforms.

“Despite the drop in the real estate stocks, the market itself is up – people are optimistic about the economic reforms and the seriousness of current management in executing reforms,” he said.

“This year for Saudis will not be the year of the oil price drop or anything else. It will mainly be the year of economic reforms.”