For many years China was regarded as a sleeping giant in terms of its potential impact on the world's economy. Few would deny that the giant is now well and truly awake.
The Kingdom of Saudi Arabia (KSA) is another country which is already exerting enormous influence on global finances, largely as a result of its massive reserves of oil.
KSA may not be perceived as having the glamour of some of its fellow GCC members, but its accumulated and increasing wealth, large population, huge land mass, abundant natural reserves and appetite for growth make it a country which is becoming an increasingly visible player on the world investment stage.
Many organisations are actively doing feasibility studies, launching initiatives and expanding operations in KSA in order to take advantage of the bullish climate of investment opportunity and optimism.
As a result the incentives for foreign investment offered by KSA through its foreign investment laws have become more significant.
In terms of real estate, the right to ownership in KSA is affected only by the nationality of the person or, in the case of a company, its place of incorporation and the nationality of its shareholders. This position is not affected by considerations such as a company's management and control structure and the location of its main office.
As one would expect, different rules apply to GCC members.
Key laws Real estate ownership in KSA for companies and individuals which are GCC nationals as well as foreigners is predominately covered by the following laws and regulations:
The Regulations of Ownership of Properties for Citizens of GCC States in a GCC Member State (ratified by Royal Decree No M/55 dated 27/ 10/1405H corresponding to 16/7/ 1985G and modified by the Royal Decree No M/8 dated 15/2/1422H corresponding to 9/5/2001G), which provides the conditions and restrictions for companies and individuals from GCC states to own real estate (GCC Regulations);
The Law of Non-Saudis Proprietorship and Investment of Real Estate issued by the Royal Decree No M/15 dated 17/04/1421H corresponding to 20/07/2000G, which provides the conditions and restrictions on real estate ownership by non-Saudi individuals or companies (Non- Saudi Proprietorship Law); and
Foreign Investment Law issued by the Royal Decree No 1 dated 5/1/1421H corresponding to 10/4/2000G, which deal with foreign investment in KSA and the rights and obligations of foreign investors (FIL).
It is also important to note that there is strict anti-harboring legislation in place in the form of the Anti Commercial Covering- up Law (Anti-harboring Law) issued by Royal Decree No M/22 dated 4/5/ 1425H, corresponding to 22/6/2004G.
Article 1 of that Law prohibits a non-Saudi from investing or practising, for his own personal account or in collaboration with others, any activity that the FIL or other related Laws and instructions do not allow him to do. Moreover, any Saudi citizen who enables inappropriate investment or practice is considered to be a covering up (harboring) accomplice. Severe penalties, including imprisonment, apply.
Investment by GCC Members
A GCC company (with shareholders who are all GCC nationals) or an individual (who is a GCC national) is allowed to take land on lease and invest or use it for any licensed business activity (Article 8 of GCC Regulations).
By virtue of the GCC Regulations, GCC entities are also allowed to own properties in KSA, subject to the restrictions and conditions mentioned below.
In the case of a GCC company wholly owned by GCC nationals
the property shall be dedicated for the purpose of the need of the business that the GCC company is licensed to do in KSA (Article 7 of GCC Regulations);
the property size shall be appropriate for the needs of the business as determined by the competent authority (Article 7 of the GCC Regulations);
the ownership of the property shall not be transferred unless the company has ceased to conduct licensed business or the licensed business permits the sale of property (in case of real estate development); and
the property must not be situated within the vicinity of Mecca and Al Madina Al Munawara.
A GCC company partly owned by non- GCC nationals (other than a GCC public company) would be treated as a foreign company and therefore the restrictions mentioned below would be applicable.
This applies irrespective of whether the foreign ownership is a minority or majority interest.
An individual who is a GCC national is not allowed to own more than three pieces of property (unless so authorized by the competent authority in residential areas only and with no more than 3,000 square meters of area (Article 1 of the GCC Regulations);
is allowed to own property only for residential purposes for himself or his family only (Article 2 of GCC Regulations);
must, where the property is in the shape of land, complete the construction thereon within six years from the date of registration of the land ownership in his name, otherwise the government has the right to confiscate the property and compensate the owner for an amount equal to the purchase or sale price, whichever is lesser, or extend the period of six years mentioned above if the competent authority is satisfied with reasons of the delay (Article 3 of the GCC Regulations);
shall not transfer the ownership of the property unless four years have lapsed since the registration of the property in his name or he has a prior authorisation to do so from the competent authority (Article 4 of the GCC Regulations); and
if his nationality is because of naturalization, may be the subject of a stipulation by the competent authority that at least five years should have lapsed in order for him to have the right to own a property (Article 6 of GCC Regulations).
Further, if the GCC national is licensed to undertake a profession or business in KSA by the competent authority, then all the restrictions mentioned above in relation to GCC companies would apply.
Foreign ownership
The investment laws combine to confer a number of benefits, incentives and guarantees on licensed foreign investment projects in order to promote equity amongst wholly Saudi-owned companies.
One of the key recipients of these benefits are foreign investment projects which can be (or need to be) enhanced by the ownership of the real estate associated with the particular investor's licensed activities.
However, whilst that may constitute a benefit, it is also a restriction in that foreign ownership of KSA property must be linked to a particular project and is not a general right.
The Non-Saudi Proprietorship Law entitles foreign investors to own real estate in KSA which is required for:
the conduct of their professional, technical or economic activities;
private residences for housing of a licensed project's employees; or
residential use by individuals with normal legal residency status.
As noted above, even the smallest minority interest held by a non-GCC national will be sufficient to make a corporate entity "foreign".
Importantly, any foreign ownership of land requires the granting of a license from the Saudi Arabian General Investment Authority (SAGIA).
If that license permits property development, then the total cost of the project (both land purchase and construction cost) must be:
at least SR 30 million; and
invested within 5 years from the date of purchase of the land.
In relation to the second point, it is unclear whether the reference to 5 years is to commencement or completion of construction or sale/lease, or even to final realisation of the investment.
Further, the official annotation on the SAGIA website puts a totally different slant on the 5 year period by construing it in the sense of a requirement to retain ownership for at least 5 years.
At this stage, instead of designating areas for possible foreign ownership in the nature of free zone jurisdictions and investment zones, KSA has left the licensing of sites to the discretion of SAGIA and simply stipulated two areas where there is a prohibition or foreigners acquiring real estate, namely land within the city limits of Mecca and Al Madina Al Munawara. However, foreign Muslims may rent property in these two areas for renewable terms of no more than two years.
Conclusion
The promotion and stimulation of investment opportunities, co-ordinated by SAGIA, will inevitably lead to greater foreign ownership of real estate in KSA, a result that the Saudis not only accept but appear to embrace.
By Alan Hall & Mothanna El Gasseer Saudi Arabia Office
© Al Tamimi & Company 2008
