Saudi residential property sales to rise ahead of VAT, say analysts

Demand for residential properties could rise in Saudi Arabia in the last months of 2017, ahead of the implementation of the value-added tax (VAT) in the country next year, analysts told Argaam.

The Kingdom is preparing to levy 5 percent VAT on all goods and services from January 2018. While the government has kept rental of residential real estate outside VAT’s purview, residential sales and commercial property will be taxed.

Additionally, the construction sector falls under VAT, which could result in higher cost of residential property once the levy is implemented.

“There is likely to be a small inflationary impact for new residential properties sold to private individuals (who will not be entitled to a credit for VAT paid) after the introduction of VAT in January 2018,” said Matthew Parkes, from the International Gulf VAT Desk at Deloitte.

“We may see an increase in demand for residential purchases in the last few months of 2017, before VAT applies,” he added.

Parkes expects that the Kingdom’s construction sector will be subject to the main VAT principles that apply to most sectors. 

The government could, however, bring in special rules to ensure VAT is collected – and refunded on costs – throughout a construction contract. “(This) will align VAT more closely to the invoicing and payment profile of sector businesses,” Parkes said.

In terms of fresh investments, while VAT is designed to have a neutral effect on commercial investments, the property sector in the Gulf region will likely get a boost as additional levels of transparency in transactions could motivate more international entities to invest.

“I anticipate a new tier of players — international corporate players, real estate funds and REITs — to enter the region with VAT being introduced,” Firas Al Msaddi, CEO of fäm Properties, told Argaam in an earlier interview.

“More (people will be) comfortable to enter Dubai market, when there is a higher level of transparency,” he added.

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com