In November 2015, Saudi Arabia’s cabinet said it will finally impose a long-discussed tax of 2.5 per cent a year on undeveloped urban land designated for residential or commercial use.

The Housing Ministry says the policy targets unused, privately owned land – or white land – across the country that can be better used to solve the kingdom’s housing problem.

The government has looked for measures it can take to encourage housing developments in the country. This has included a decision in September last year by Jeddah Municipality to release 3 million square metres of land that had been cleared of illegal occupants in the south of the city.

The land tax will be imposed as a percentage of the land’s value, in line with earlier recommendations from the kingdom’s advisory Shura Council. The money will be held in the central bank and used to fund housing projects and other public services, according to the Saudi Press Agency.

According to government statistics, there are 750,000 families eligible for public housing.

Housing commitment

The late King Abdullah bin Abdulaziz al-Saud issued a decree that committed the government to building 500,000 low-cost homes in 2011, and set up a new housing ministry. The $67bn plan aimed to help Saudi Arabia’s poorer citizens, who have suffered from rising rental prices in cities such as Riyadh and Jeddah.

That programme has seen only limited progress, with four ministers in as many years, suggesting problems with the state-backed programme. Reports of excess bureaucratic processes partly explain the slow progress

The authorities have, however, continued their commitment to housing and set a target of 3 million units being built by 2025 to manage the shortage in urban areas. To meet that ambition, over the next nine years, the kingdom will need to deliver 330,000 units annually.

Early in 2015, King Salman bin Abdulaziz al-Saud made an additional SR20bn ($5.3bn) available under royal decree, as part of a plan to boost the real estate market and bring down prices by 20 per cent.

The decree will ensure the provision of infrastructure facilities for housing, providing electricity and water facilities. The SR20bn bonus will also enable citizens to build housing units in vacant plots gifted by the government.

According to the decree, SR14bn will be used to provide electricity connections to new units and SR6bn for water connections.

Reduced spending

The government is expected to limit spending this year, with cuts across several major sectors, such as transport and infrastructure.

But the kingdom will find that despite the financial pressures brought about by the low oil price, it cannot ignore the needs of a growing population. Increasingly, they will demand more from the authorities as fuel and food subsidies are slowly lifted to increase government revenues.

In its 2016 budget, the kingdom has estimated it will spend SR840bn, a reduction of SR135bn on actual spending last year.

Within that reduced budget, the government will need to better manage its spending to deal with the housing and related infrastructure work required to improve access to affordable housing in major cities.

“Spending on the capital side in 2014/15 combined was more than SR700bn. The government this time around will try to finalise these [incomplete] projects,” says Fahad Alturki, chief economist and head of research at the local Jadwa Investment.

“In 2016, we will see continuous growth on the part government revenues and attempts to diversify income be it through fees or VAT or fees on empty land, as we saw last month [December].

”Energy subsidy reforms, which will be applied gradually, will serve as an important alternative income. The reforms will be applied over five years to protect the kingdoms economic activity, which is a welcomed move.”

Private-sector encouragement

Fuelled by the need for more affordable homes across the kingdom’s urban areas, and in a bid to raise home ownership from today’s 36 per cent of the population, Saudi Arabia’s real estate market is set for changes, with analysts predicting a spike in small development launches in the coming years.

However, falling sales prices and speculation surrounding the new white land tax has increased uncertainty and resulted in few new project launches in recent months, according to a report by US real estate firm JLL.

In an attempt to combat this slowdown in new projects, the government is expected to encourage the private sector to develop smaller, low-cost and more affordable real estate units.

The Saudi Arabian Real Estate Development Fund has also reduced the minimum area for apartments eligible for purchase through their financing programs to 175 square metres, inclusive of common areas.

It is hoped these efforts will stimulate further demand for smaller projects.