A reported US$600 billion worth of investment opportunity is up for grabs in the Kingdom between now and 2020, and with the country leading the region in the World Bank ease of doing business rankings, it’s attracting increasing interest.
The Saudi Arabian General Investment Authority (SAGIA) is dangling a juicy investment carrot in front the regional and international community as the country looks to attract local and foreign direct investment by offering US$600 billion worth of opportunity across virtually every asset class and province.
New demand drivers such as the improvement of transportation systems and major infrastructure plans are creating exciting investment opportunities, and the authority is pulling out all the stops to secure long-term economic prosperity, as well as diversity, by playing on Saudi Arabia’s current status as the Gulf region’s most attractive business destination. According to the latest World Bank Ease of Doing Business Index, updated in October 2011, the Kingdom is ranked as the 12th most business-friendly destination in the world.
SAGIA is also hyping the advantages of investing in this emerging Middle East market with a raft of value-added business services and solutions for investors and business owners, including a one-stop-shop centralised services offices and its role as intermediary between new market entrants and national and regional agencies, as well as licensing capabilities under the new Foreign Investment Act, which allows for 100 per cent foreign ownership.
Investment interest in the Kingdom is going global, say market pundits, with companies from China to the US keen to secure a foothold in local industries; and with the International Monetary Fund predicting that the economy will expand by four per cent in 2011, as increased public expenditure smoothes the path of sustained economic stability, real estate and the construction industry are preparing to reap the future benefits.
Investment Drivers
At the start of 2011, the Jones Lang LaSalle (JLLS) Top Trends for 2011 report identified Government stimulus packages as the vehicle to drive the real estate market and help build sustainable communities. The country’s relative stability and strong long term fundamentals are also helping to cement Saudi Arabia’s reputation as a strategic commercial location for the region.
New laws designed to protect public company investors have also been issued by the Capital Market Authority, and Ministry of Commerce and Industry, and the liberalisation of investment rules is benefiting all market sectors with more favourable regulations offering an advanced degree of comfort for investors.
For the office sector, the JLLS report also stated that injections of new supply will tip some markets in favour of tenants, which will require leasing strategies and frameworks that ensure occupancy, led by large multinational tenants that prefer to lease space managed by professional management firms.
The delivery of world-class assets will also shift focus from development to operations, and to the protection of the long-term value of investment, which also opens up opportunities in the facilities management arena.
Economic Cities
While greater foreign involvement in economic development is being used to leverage potential investment, it is the much hyped and large scale initiatives such as King Abdullah Economic City (KAEC), situated directly north of Jeddah, that have been garnering most of the attention to date.
As the first freehold city in Saudi Arabia, with five more to follow, KAEC is angling for foreign investment under the new Economic Cities Act, which was issued in 2010 but is yet to come into full effect. The law will allow foreign investors, individuals and companies to purchase property in designated areas. Under development by Emaar -The Economic City, the US$27 billion Government-sponsored project is aiming to attract two million residents and generate one million jobs upon completion in 2025. Situated just five kilometres from Madinah, the 65-square-mile city will offer a technology park, medical centre, business district, major retail hub, residential units, a convention centre and hospitality complex.
However, despite its high profile positioning, this particular mega project hasn’t come through the downturn entirely unscathed, with customer defaults and construction delays the direct result, as owners struggle to make payments.
Investment into Greenfield sites like economic cities remains tempting, although the level of potential involvement is still dependent on crucial elements such as Government guarantees and assurances, and the clarification of project timelines. But the Public-Private Partnership (PPP) model is one that SAGIA, and the Government in general, is eager to promote in order to marry international expertise and knowledge with Saudi financial capital to develop world-class communities that will anchor future economic development.
Religious Tourism
The Kingdom’s two holy cities are also attracting development interest according to a 2010 report from global real estate advisory Jones Lang LaSalle, which highlighted opportunities for hospitality market expansion with the forecast increase of religious tourists from 7.8 million to 13.75 million by 2019.
Foreigners are still prohibited from owning land in the holy cities but savvy investors are partnering up with Saudi developers through joint venture agreements.
Several upscale hotel brands have already opened properties in Makkah and Madinah including Fairmont, Oberoi and Raffles, with other leading chains such as Marriott and Sheraton also announcing new projects.
Snapshot Riyadh
Radwan Hariri, Head of Development & Operations, Oger Real Estate, sees huge opportunity in Riyadh’s residential and hospitality sector, as he explains: “We believe that housing and hospitality remain as the most attractive asset classes after infrastructure. The Government is focusing on attracting investment mainly into the lodging sector, although we believe that the injection of foreign capital into the housing sector, coupled with expertise and innovation, will be very beneficial.”
Khaled Madkhali, founder of Sogouf Real Estate agrees. “The residential sector currently offers the highest investment potential, with a return reaching an average IRR of almost 15 per cent, followed by hospitality with an average IRR of 12 per cent. We believe that demand will exist [in these sectors] for the coming five years, and the market will expand, but tentatively – given the unrealistic price inflation situation in the real estate market, which is not controlled, and which is supported by the lack of a law forcing landlords to sell or develop their land,” he says.”
According to Hariri, the scarcity of availability of large plots of land in Riyadh is merely one aspect of a wider number of challenges. “There is also the issue of delivery with private real estate developers experiencing real problems in finding quality contractors to deliver their projects,” he says.
“In terms of product, in certain asset classes we are looking at potential excess supply, such as the Riyadh office market, contrasted with the significant problem of the expected housing supply,” he adds.
Both Madkhali and Hariri are confident that Riyadh has the ability to remain fairly well isolated from global turbulence, but not without having adequate contingency plans in place.
“No economy is isolated and all economies are connected. That said, the Kingdom has a solid economy driven by wise leadership and the conservative policies of the Central Bank,” remarks Hariri.
Madkhali adds: “We don’t believe that Riyadh is isolated [from the global situation] but it has a thicker buffer zone that will enable it to partially absorb the impact of the financial crisis for some time to come. We need to take advantage of that buffer zone and plan well to minimise damages.”
From the Cityscape magazine.