Saudi construction sector set to gain from 'white lands' tax

Large land plots in Saudi Arabia are expected to shift from the hands of passive investors to those working in development and construction, as the 2.5 percent tax on unutilized urban lands helps boost the kingdom’s housing sector, which still faces a shortage of 1.5 million affordable homes.

In the capital city of Riyadh, about 40 percent of land is comprised of empty plots that investors have been holding on to in expectation of sharp increases in value, according to housing ministry estimates.

Companies operating in the real estate, housing, and construction sectors are expected to gain from the new tax as some investors “will sell rather than pay the tax, resulting in a possible decline in overall open land prices,” Muhammad Faisal Potrik, head of research at Riyad Capital told Argaam.

“At the same time, buyers will now want to buy lands with the intention to utilize them rather than for capital gain,” Potrik added. “This can in turn increase the demand for building materials if construction improves.”

The areas that will be taxed, which are also referred to as “white lands,” are defined as plots that are connected to infrastructure— such as roads, power and water— but are not being developed or used for construction. 

Another impact of the tax would be to potentially lower land costs.

“We believe that land prices overall will fall as more land enters the market… this is the ultimate point of the fee, rather than to raise revenue for the government,” HSBC analysts wrote in an investment note.

Analysts at Jones Lang LaSalle Saudi Arabia also expect that increased competition will add downward pressure on land values, making them affordable as more plots are released into the market.

Withheld lands in major cities had previously curbed supplies in the market, thus pushing prices upwards, Jamil Ghaznawi, head of JLL in Saudi Arabia told Argaam. This made it unprofitable to develop affordable housing units. It also forced developers to build further towards city boundaries in areas with limited infrastructure and basic services.

In the absence of clear demand-supply data on land in Riyadh and the rest of the kingdom, it is difficult to estimate the amount of land that is vacant or even how much of that will come into the market as a result of the new tax.

It is clear, however, that the purpose of the tax, which is to release more land for affordable housing, will likely be met.

For now, the ministry intends to help stimulate the creation of affordable housing for all citizens, particularly in city centers, which were monopolized before by investors in the real estate sector, said Majid Al-Huqail, Saudi housing minister.

Write to Brinda Darasha at brinda.d@argaamplus.com