Real Estate Sector in Saudi Arabia
When the Saudi government developed their national transformation plan, one of its primary goals was to create an environment that would encourage the growth of the real estate industry in Saudi Arabia.
Vision 2030 outlined various ways this could be achieved, one of which was their goal to build 300,000 new housing units over the next five years. Over 106,000 new housing units have already been constructed, with a further 101,000 currently under construction. This investment has injected much-needed diversity into the current housing stock, creating a surge of new jobs in construction and related industries such as architecture.
The sector has also benefited from an increase in foreign investment over the past few years, as Saudi Arabia works to improve its standing on global indexes related to business competitiveness. This has created opportunities for investors from all over the world as well as domestic businesses and entrepreneurs.
But like any booming industry, the real estate sector in Saudi Arabia requires a robust financial regulatory framework to ensure that growth is sustainable and healthy. In this article, we will outline the key financial aspects of the Saudi real estate industry, including IFRS standards and tax liabilities, as well as its current performance and outlook for the future.
Financial Rules & Regulations of Saudi's Real Estate Industry
The Saudi real estate industry is subject to several financial regulations that are designed to promote growth while maintaining stability. One important aspect of these regulations is the adoption of International Financial Reporting Standards (IFRS), which govern the accounting practices of companies in Saudi Arabia.
All real estate companies operating in Saudi Arabia must adhere to the International Financial Reporting Standards (IFRSs) or IFRS for SMEs, as endorsed in the Kingdom of Saudi Arabia by Saudi Organization for Chartered and Professional Accountants (SOCPA), which are designed to ensure that financial statements are comparable across different businesses and industries. These standards cover a wide range of areas, including income recognition, financial instruments, leases, pensions, and taxes.
IAS 40 Investment Property
This standard lays out the requirements for real estate companies to account for their investments in property. For example, real estate developers must classify properties as either held-for-investment (for capital appreciation or rental, or both), held-to-dispose (not in the ordinary course of business), or development property. This classification determines how the company will account for the asset on its statement of financial position, as well as any income or losses that it generates. Real estate companies have a policy option to keep their properties either at cost or fair value. If cost model is chosen for properties, companies are still required to disclose their fair values at reporting date. For fair value model, any changes in fair values are recorded in statement of profit or loss.
IAS 2 Inventories
This standard lays out the requirements for businesses to account for their inventories of real estate, whether they are actively building new developments or holding existing properties for sale, in the ordinary course of business. Inventory properties are measured at lower of cost or net realizable value and any adverse changes in value are recorded in statement of profit or loss. Inventories may include raw materials, work in progress, finished goods, and land.
Another key component of the financial regulations governing the Saudi real estate industry is mandatory audits by independent auditors. This ensures that real estate companies are accurately reporting their financial results and helps investors to make informed decisions when assessing the risks and opportunities in the sector.
Real estate developers in Saudi Arabia must also comply with tax regulations, which are designed to prevent businesses from engaging in illicit practices such as money laundering and tax evasion. In 2020, Saudi Arabia introduced a Real Estate Transaction Tax (RETT), which applies to all land and property sales and transfers unless clearly exempted. The current RETT rate stands at 5% and replaces the previous VAT rates which had been applied to real estate transactions.
What is the Current State of the Industry?
Saudi's real estate industry felt the effects of the global pandemic, with residential transaction volumes falling by 19.9% in Q2 2022. However, it's not all bad news for the sector. As residential sales prices have taken a hit across the GCC since 2019, Riyadh has bucked the trend with either growing or stable prices. In 2021, the total value of real estate transactions was worth over USD 4.7 billion and the sector is predicted to grow at a CAGR of 9.74% until 2027.
With new investment in infrastructure, such as the high-speed railway system and increased development of public transport systems, Saudi Arabia's real estate industry is set to become the center of growth in the Middle East. Whether you're an investor, developer or home buyer, Saudi's real estate sector offers plenty of exciting opportunities for those looking to expand their horizons in this financially rewarding industry.