Saudi Arabia‘s clampdown on land hoarding is prompting citizens to buy plots and build their own homes, analysts say, leaving developers struggling to sell higher-priced luxury residential projects.
The most up-to-date figures from the country’s General Authority for Statistics show that in April, the number of building permits issued rose 28 percent (7,350) compared to the same month a year earlier (5,740).
This increase is in spite of a slowdown in home sales. Residential transactions fell by half in the first quarter, according to real estate agency Knight Frank Mena, with the total value of sales dropping 57 percent to SAR22 billion ($5.7 billion).
Last year the government raised the white land tax to a maximum of 10 percent, aimed at landholders sitting on undeveloped plots.
The tax applies to vacant parcels above 5,000 square metres in designated zones, on a sliding scale from 2.5 percent in outlying districts to 10 percent in the highest-priority development areas. The levy has risen in stages since 2015, when it was introduced.
The tax has driven down land prices in Saudi Arabia more broadly, including plots under 5,000 square metres.
Faisal Durrani, head of research at Knight Frank Mena, said the tax was “obviously designed to encourage landholders to build” – sometimes too well. “In some extreme cases in Riyadh, we’ve seen land prices declining by 20 to 30 percent,” he said.
Durrani said Saudi families who had “previously committed to buying real estate off plan from third-party developers” are now withdrawing and buying land instead.
He pointed to the pull of building your own home: “Culturally it’s quite significant.”
Durrani added that he remained “concerned about an oversupply of luxury housing in the market”.
Developers, he explained, “had to go down the route of luxury housing” to make land economics work, which “created gaps between what people are willing to spend, and what developers are planning to deliver”.
In May that foreigners were not buying up Saudi homes, as authorities had hoped, due to the war in the region. Many of the homes pitched to foreigners are luxury developments in the giga-projects.
Jonathan Barnes, head of deal advisory at Knight Frank KSA, said the current wave of land sales is unfolding in the white land tax’s first full cycle since the revised framework took hold.
Once a white land tax penalty invoice is issued, selling a plot, transferring ownership or using it as collateral for a loan becomes more complicated, prompting many owners to sell their plots before the tax is applied.
Barnes called it “a paradox” as a tax designed to activate potential sellers may make the plots less attractive to buyers and lenders because the tax liability makes the transaction more complicated.
Knight Frank’s own forecasts suggest Saudi Arabia needs 830,000 new homes by 2034 to keep pace with population growth.
