A planned tax on undeveloped urban land may transform Saudi Arabia's real estate market, boosting construction and making homes more affordable, but potential loopholes could dilute the impact and make the effect on the market hard to predict.
Real estate stocks tumbled and construction stocks rose last week after the cabinet backed introducing the tax, which could help the government meet promises to build 500,000 new homes and ease a housing shortage. By pushing more land out into the market, the tax could bring down prices, hurting developers who are sitting on big land banks.
"It should release land for development - people who earlier held onto a plot will now likely look at building income-generating housing on it," said Fayyaz Ahmad, director of property consultants JLL's Riyadh operations.
"It should benefit construction, but there are a lot of unanswered questions that will determine the true impact."
One area of uncertainty is the minimum size of land to be taxed, and whether the tax will apply only to completely undeveloped land or also to plots with some infrastructure already built.
Smaller land parcels are typically "serviced" - connected to utilities such as power and water - while larger parcels defined as "raw" lack such amenities. Raw plots tend to trade in sizes above 50,000 square metres, while serviced parcels are usually less than 1,000 square metres, said Ahmad.
"Some big parcels of say 1 million square metres are sub-divided into many lots and then these get sold and re-sold, passing through many hands," he added.
The dominance of land trading in the property market can be seen in the fact that of 20,460 real estate deals completed between December and mid-March in Riyadh and Jeddah, the two main cities, 71 percent were land sales, JLL said. Sales of villas accounted for only 20 percent and apartments, 9 percent.
If the tax is not applied to smaller parcels, owners may be able to avoid the levy simply by sub-dividing their holdings, or by building minimal infrastructure on them.
The cabinet has given 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; given the money at stake, there may be considerable lobbying to water down the tax.
Other questions include whether the tax will be levied at a flat rate or on a sliding scale, and whether holders will be given a lengthy grace period - perhaps one to three years - before paying tax.
The answers to these questions will help to determine whether holders transfer ownership to relatives, business contacts or shell companies to avoid the tax.
"How effective the government will be in closing these loopholes will be a big factor in determining whether the law is effective," said Ahmad.
"It's too early to say how the law - if introduced - will affect land prices. Sellers may be able to incorporate the tax owed into the selling price."
The idea of the law was raised about six months ago, Ahmad noted, so some property developers have probably already been making contingency plans.
The stock market's property sector index has dropped 8.3 percent since last week's cabinet decision because of a belief that the value of real estate developers' land banks will shrink. It has underperformed the main Saudi equities benchmark, which dropped 3.9 percent because of the conflict in Yemen; the construction sector index is now down 3.5 percent.
The Saudi building sector was worth 152.4 billion riyals ($41 billion) in 2014, providing 5.4 percent of gross domestic product, HSBC estimates.
"It may help spur economic activity in the construction sector, which is a significant driver for Saudi's non-oil economy," said Razan Nasser, HSBC's economist for the Middle East.
That would be especially welcome at a time when weak oil prices are dampening the energy sector. The tax could also be a significant step in diversifying Saudi Arabia's revenues beyond oil, which traditionally has provided about 90 percent of budget income.
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