The Ministry of Municipal Rural Affairs (MOMRA) issued an update in February 2020 with regards to the regulations related to the disposal and utilisation of municipal real estate. This largely relates to MOMRA’s land bank which is offered for investment. CBRE believes that this will have a positive impact on the real estate market and will support the attraction of local investors.
We understand that the updated regulations will help in achieving several objectives. At the onset, it will reduce dependence on government subsidies allocated to municipalities through the optimal use of municipal real estate, attracting quality investments in Saudi cities; expanding the concept of municipal investment to advance the investment sector, increase its effectiveness, and keep pace with the new investment mechanisms and tools as well as raise the efficiency of implementing investment projects and programs.
The implementation of the new regulations will likely have a positive economic impact on KSA, through supporting the attraction of private sector investors who could potentially partner with local municipalities engaging in real estate related to the municipalities’ land banks. This in turn will enable the government to focus a component of its funding on other projects in line with the objectives of the Vision 2030 and consequently, support real estate development more broadly. The latter will positively impact employment levels through the creation of additional job opportunities.
The new set of regulations further allows for short-term leasing . This will lead to increased revenue for MOMRA and will flourish the entertainment sector through inviting more events in the short-term. CBRE believes that short-term leasing will support the increase of entertainment events, such as “Saudi Seasons,” which have highlighted requirements for short-term space related to restaurant and attraction pop-ups as part of wider events and festivals.
The decision to increase the grace period for land lease will also support the attraction of more local investors, particularly those whose development and operating models are built on securing competitive land leases for new projects. One such example is the Al Nawras project in Jeddah, where the land is owned by the Jeddah municipality, whilst the developer is Abdulrahman Faqeeh.
We understand that the new regulation will lead to the revision of the grace period to 10% of the contract period (in preparation for construction), and furthermore lead to the increase of the contract period for land lease from 25 years to 50 years, supporting feasibility for investors and enhancing the attractiveness of large-scale projects in the Kingdom. Furthermore, the new regulation has decreased the bank guarantee for a land lease from 100% of a year’s rent to 25%.
A Royal Decree in Q4 2020 exempts all real estate transactions from 15% VAT and replaced it with a Real Estate Transaction Tax (RETT) of 5% of the property value. This reduction is expected to support buyers and increase liquidity, encouraging investors to deploy capital in the real estate sector.
Additionally, the government has increased the exemption threshold limit related to first home buyers to SAR 1,000,000 (previously at SAR 850,000). First home buyers are exempt from paying the tax if their unit is valued at less than SAR 1 million and are only required to pay the difference on ticket prices above that amount. This is expected to strengthen residential transaction levels across the Kingdom and support the Vision 2030 objective of increasing the percentage of household ownership amongst Saudi nationals to 70% by 2030.
The amendments to the MOMRA regulations are expected to accelerate growth, fostering investment and partnership opportunities across the Kingdom, which is pivotal from a business and economic standpoint, supporting the advancement of company placement and operations.
For more information on the Saudi Arabia real estate sector, contact Gabriella.
