Property deal tax to curb speculations, revive sector: analysts

Saudi Arabia’s decision to exempt all sales of real estate supplies from a 15% value-added tax (VAT) and impose a 5% real estate transaction tax will curb speculations and stimulate real estate supply, analysts surveyed by Argaam said.

Property deals are likely to double, reviving the sector after the recession witnessed following the application of a 15% VAT.

Omar Al-Othaim, Head of Alternative Investments at Mulkia Investment, said the recent decision will reflect positively on the sector, as property sales will directly take place between developers and end consumers, suppressing speculations and potential price hikes.

The number of property transactions and trading volume are expected to decline in the short term with a significant impact on speculations. The 5% property deal tax is non-refundable, as is the case with VAT, Al-Othaim explained, expecting the effect to show fully next year.

“The existing assets of REITs will not be directly affected. The Kingdom’s decision will impact those funds on two levels; first, REITs will incur higher costs for expansions, as they will have to pay an additional, non-refundable 5% cost,” he added.

“Second, the majority of assets owned by REITs are commercial properties with a zero-property deal tax. However, the rentals of these properties include a 15% VAT – a significant unchanged ratio,” he noted.

Moreover, as long as the decision was well studied and no further revision of VAT is likely soon in the real estate sector, the market might deem that decision negative and unexpected.

Elsewhere, Abdel Hamid Al-Amri, a member of the Saudi Economic Association (SEA), said the new decision will help activist investors and consumers in the real estate market through tax reduction, to which the market can adapt offsetting pressures in the previous months.

“The real estate market saw a decline in the number of transactions amid the lockdown, which fell to a 10-year low of over 60%. As the precautionary measures were eased, the market saw VAT tripling to 15% - a matter that led it to head into recession again.”

Speaking of the new tax impact on the real estate industry, Al-Amri expected a two-fold increase in the number of property deals and a recovery in the market starting from October until the year-end. In Q4 2020, the market will brace for implementing the second phase of the white land levy in Riyadh, Jeddah and Dammam, effective next year.

On the other hand, analyst Anas Al-Rajhi said the new decision will help limit the number of land speculations and stimulate real estate supply.

The real estate market is forecast to revive following the recession witnessed after the application of 15% VAT.

“The decision will have a positive impact on real estate developers and Saudi-listed REITs. In addition, sectors, such as banks and cement will be bolstered by growing demand from developers and incentives for retail and corporate finance,” Al-Rajhi added.