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02 March 2024

GCC should tax property to halt speculation: NCB

Report calls for end to myopic speculation in the market. (PATRICK CASTILLO)

By Nadim Kawach

Gulf oil producers need to introduce taxes on local property to halt speculation as part of a post-crisis strategy designed to ensure sustainable growth in the real estate sector, said a Saudi investment company yesterday.

The six Gulf Co-operation Council (GCC) countries, which had experienced unprecedented boom in the real estate sector before the global fiscal distress, also should improve transparency and enact mortgage laws, which are vital for long-term growth in the real estate market, said NCB Capital, an offshoot of National Commercial Bank, Saudi Arabia's largest bank by assets.

"While the property market correction in the GCC appears to have reversed for now, there is little cause for complacency. A great deal more needs to be done from a regulatory viewpoint to make the sector more open and transparent," NCB Capital said in a study about the GCC real estate sector.

"These should include measures to curb speculation. One major reason that GCC real estate markets have so acutely felt the impact of the global slowdown is because of the relative importance of speculative investments."

The report, echoing the practices of many Western markets before the aberrations of the 2000s, said the region must discourage what it described as "myopic" speculation with potentially systemic implications.

"Along with greater transparency, taxation can serve as a key instrument in discouraging short holding periods. Possibilities in this regard include levies on transactions and capital gain taxes on properties sold sooner than a specified minimum period. The Real Estate Regulatory Authority in Dubai has taken an important step in this regard by mandating the registration of off-plan transactions.

"Short-term speculation with off-plan properties was one of the key drivers of the boom in Dubai," it said.

NCB Capital said GCC nations, which have put on hold large projects in real estate and other sectors because of the global credit squeeze, score the lowest in real estate transparency compared to other markets.

In the global transparency index 2008 compiled by Jones Lang Lasalle, Dubai comes first among the GCC markets with rank of 32 followed by Bahrain at 47.

"Important overdue steps include property price information and norms with respect to building, bankruptcy, rental, and mortgage standards," it said.

"An efficient mortgage system is also an essential prerequisite for the sustainable long-term development of any real estate market. It brings in serious long-term investors by making properties more affordable."

The report said the GCC markets have historically relied mainly on cash purchases as well as government real estate funds targeting mainly lower-income buyers.

Potential legal challenges remain in the area of foreclosures, although precedents are now emerging even in this area, it added.

In Saudi Arabia, the pending mortgage law will likely act as a major demand driver for residential units in the Kingdom, said NCB Capital.

"Not only will the institution boost the availability of low cost mortgages with long tenors but it also promises to drive the development of the kingdom's debt capital markets through securitisation.

In the likely near-term absence of government bond issuance, the housing finance securities have the potential to emerge as a broader quasi-sovereign benchmark for the Saudi market."

Other measures proposed by NCB Capital include the adoption of proper construction and maintenance standards as a key for sustained growth. It said homes and commercial properties should be built to last and constantly maintained so as to protect the value of the investment and to create the basis for a thriving secondary market.

"This in turn will improve geographic and social mobility. Property depreciation remains one of the main challenges facing the regional markets and has in many cases given buildings an internationally and unnecessarily short life-span in addition to fostering divergent dynamics between land and property prices."

Turning to prospects for the GCC real estate sector, NCB Capital expected a period of stabilisation in the near to medium term.

But the report added it saw a "high probability of increased geographic differentiation" within the region in the short term, partly in reflection of divergence in the overall economic performance. "Moreover, the markets remain highly fragmented with different cities and even individual market segments subject to at least partly distinct factors."


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