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contribution to GDP from 5% to 10%; 2) reduce the average time required to approve and license new residential real estate; 3) reduce the housing unit cost from 10x to 5x of the gross individual annual income; and, 4) increase the real estate financing to non-oil GDP ratio from 8% to 15%. e The Saudi Commission for Tourism and National Heritage is looking to increase and develop hospitality facilities and tourism services. The ministry targets by 2020 to increase the number of hotel rooms/apartments by 39% to 621.6k. Positive government ambitions but... The rise of real estate finance to non-oil GDP from 8% to 15% implies an incremental funding of US$32bn which could finance c212k additional units by 2020 or c53k additional units p.a. This compares to an estimated annual demand of 181k units which come on the top of the existing cl.2mn shortage of housing. ..needs to be combined with land tax and sukuk issuance initiatives Based on the target Key Performance Indicators (KPIs) set for the Ministry of Housing, we estimate the initiative to be supportive but not sufficient to cater to the natural annual demand which is 3.5 times more elevated than the implied additional supply funded by the programme. We understand this initiative has to be combined with the land tax initiative and the potential sukuk issuance from the Ministry of Housing which could add further liquidity to the REDF to finance more units. Land tax - gradual revenue source Land tax among flagship measures adopted by the Saudi government We expand more below on our understanding of the land tax initiative which was recently approved by the Cabinet to tackle the housing shortage and raise government revenues. Saudi Arabia’s Cabinet announced in November 2015 that it will gradually levy a 2.5% tax on undeveloped land plots owned by persons or private entities in urban areas, after the country’s Shura council approved a proposal to impose taxes on the so- called white lands. The draft law was amended to include gradual taxes in accordance with a specific timetable to force landlords to sell land, thus increasing land supply. The regulations adopted in mid-June define undeveloped land as all vacant land dedicated to residential use or commercial residential use within the urban boundary limits. Fees will be applied to in a gradual series of stages; first, to owners of undeveloped land with areas exceeding 10,000 square metres; second, to single owners of developed land of more than 10,000 square metres in one master development plan; third, to single owners of developed land of more than 5,000 square metres in one master development plan; and, last, to single owners of land of more than 10,000 square metres in one city. The Ministry of Housing will determine the land locations where the tax will apply. The extension of the tax in later phases to developed land, from undeveloped ones at first, will broaden the tax base and minimize tax evasion. Tax proceeds will be deposited in SAMA The taxes and fines collected by the Ministry of Housing shall be deposited in the central bank, the Saudi Arabian Monetary Agency, and will be used to develop the country’s infrastructure for new housing projects, according to the state-owned news agency. Law could be effective this month, but gradual implementation likely Under the new system, the housing ministry has been in charge of issuing executive procedures and rules for the new legislation within 180 days. The law will be effective 180 days after publication in the official gazette. The housing ministry is finalizing necessary amendments to the decree by end-June 2016 and aim for implementation by 17 January 2017 (including a 1-3 year grace period). OS Merrill Lynch GEMs Paper #26 | 30 June 2016 65 HOUSE_OVERSIGHT_016175