Real Estate Developers Considerations When Entering Saudi Arabia

As the real estate market in Saudi Arabia continues to attract the attention of regional and global real estate developers, we outline several key considerations developers should bear in mind when entering the market for the first time:

1. Entering the Market:

   • A foreign investment license, issued by the Ministry of Investment Saudi Arabia, will be required in most circumstances.
   • The Ministry of Investment allows 100% foreign ownership of real estate companies, provided the project has a value exceeding SAR 30 million and is completed within 5 years.
   • Less restrictive requirements apply to developers wholly owned by GCC nationals.
   • Developers must register with WAFI to develop and sell real estate off-plan. This also applies to developers wishing to pre-lease space under development. Separate marketing and sales licenses are required on a project-by-project basis for off-plan sales or leases.

2. Equity Structures:

   • Joint ventures, structured as LLCs or JSCs, are common vehicles for developers partnering in real estate projects.
   • Typical joint venture participants include the landowner, equity provider, institutional investor, and sometimes the contractor or professional team, who may contribute services partly in kind for shares in the project company.
   • Real estate funds are popular alternatives, especially for projects requiring limited recourse financing. Sponsored by a fund manager overseeing the project, developers often serve dual roles as both unit holders and service providers.

1. Land Registration:

   • Historically, the office of the notary public was responsible for the registration of title deeds and transfer of title in each city in Saudi Arabia.
   • Steps are well underway to move towards a centralized land registry under the Real Estate General Authority, with implementation already occurring in some areas of Riyadh, Jeddah, and elsewhere.
   • It is now possible to register the transfer of real estate at an office of the notary public outside the city where the real estate is located.
   • Registration and transfer of title to real estate can also take place before a private notary duly licensed by the Ministry of Justice. In some areas of Saudi Arabia, subject to certain limitations, registration and transfer of title can take place entirely online without the need to attend the office of the notary public.
   • Online searches are now available, although it remains important to conduct a final title check at the office of the notary public before transacting.

2. Financing:

   • Banks in Saudi Arabia adopt a careful and measured approach to lending in the real estate sector.
   • Debt facilities are often over-collateralized, and limited recourse financing is more of an exception than the norm.
   • Loan-to-Value (LTV) ratios can be as low as 50% for development financing.
   • Not all banks will consider land as equity for development financing; instead, land is treated as collateral. Banks typically require cash equity from the borrower to be utilized first before drawing down debt.

3. Tax:

   • Saudi Arabia imposes both corporate tax and withholding tax on foreign investors.
   • A system of Zakat, based on Islamic law, applies to Saudi Arabian shareholders.
   • Tax advice is crucial when structuring the corporate vehicle for entering Saudi Arabia and the project vehicle for developing a real estate asset.