Just a short drive north of Jeddah lies one of the world’s most extraordinary real estate projects. Announced in 2005 by Saudi Arabia’s King Abdullah, the city that bears his name screams superlatives. After passing through the arch that announces the entry point of King Abdullah Economic City (KAEC), visitors still face a 20-minute drive to the coral-strewn shores of the Red Sea, where the project’s headquarters are based. It is roughly the size of Washington DC, and almost as big as the emirate of Dubai. While estimates vary as to the actual cost of KAEC, around $100bn of investment is likely to be required before the city is finally completed – making this site perhaps the most expensive real estate project anywhere on the planet.
Fahd Al Rasheed appears to be impressively unfazed by the expectations that have been heaped on his shoulders. As the managing director and CEO of King Abdullah Economic City (KAEC), Al Rasheed has been tasked with no less a role than the construction of a city — complete with an industrial valley, what will become one of the world’s biggest ports, residential and retail areas and even a central business district, that will eventually house more than two million people — entirely from scratch.
Much has been written about KAEC, by far the largest and the most successful of the four economic cities that were launched back in the boom years of the last decade. Since taking his role four years ago, Al Rasheed has carefully steered the city’s masterplan through the toughest economic crisis in living memory. While other Gulf megaprojects may have stuttered over the last three years or so, a visit to KAEC cannot help but give the impression that the city is finally starting to come into its own.
“When you are building a city,” Al Rasheed says,” the first five years are very slow. But in the second five years, they don’t grow by five percent every year, they grow by 50, or 100 percent every year, because the initial population is so low. Once you attract the anchor tenants, all their peers in the industry have to be present.”
So why is the CEO so convinced that the city’s future is looking so rosy?
“For a project this big to be successful, it has to be based on sustainable economic foundation,” he says. “It cannot be ‘build it and they will come’ — it has to be focused on what the country can offer, what does it need, what is the competitive advantage, and so on”.
Instead of flinging up countless tower blocks to house future residents, then, the city’s planners have focused on building infrastructure. On the north side of the 168 square kilometre project, the world’s biggest dredger is hard at work on the first phase of a port that will open next year.
On the Jeddah-Madinah road leading past the city, earthworks that will carry the Haramain rail link are already in evidence. Again, that rail link to KAEC will open in 2104. Plots all over the city have pipes and wires sticking out of the ground, signifying that much of the underground utilities infrastructure has already been laid out. And the city’s first school —run by GEMS — and its first hotel are both set to open by the end of this year.
Not only that, but the city has positioned itself in what is fast becoming Saudi Arabia’s sweet spot; as Jeddah continues to encroach northwards, Rabigh is now playing host not only to KAEC, but King Abdullah University for Science and Technology (KAUST) and the $10bn PetroRabigh refinery as well.
In short, KAEC is ready for business. Thus far, according to Al Rasheed, there has certainly been no shortage of demand, with over 25 companies — a mixture of local and international — having already signed up for business.
“The international companies are all global powerhouses — so Mars, Sanofi-Aventis, Pfizer, Greif and so on – and many of them are actually coming to the Middle East for the first time,” he says. “So for Pfizer, for example, this its first manufacturing plant in the Gulf.”
Mars is projected to spend over $200m on a factory that will churn out its first chocolate bars in two years time. Meanwhile, construction on industrial packaging giant Grief’s 188,000 square metre factory is almost complete, with that plant set to become operational in September.
On the local side, particular interest has been shown in the city’s logistics capabilities. Abdul Latif Jameel, which owns the Toyota and Lexus car franchises for Saudi Arabia — with a 40 percent share of the local auto market – has earmarked the site as its hub for the kingdom. Jamjoom Company is also in the process of establishing warehouse facilities, while Al Rajhi Steel is building an integrated steel complex worth an estimated $4bn.
Al Rasheed keeps his cards close to his chest when asked about the companies with whom he is currently negotiating, but he does point out that the city has already exceeded its targets for next year.
“Our target was to develop four million square metres of land by 2013,” he says. “We have already developed and leased seven million square metres, and our target for next year is now twelve million — which is a 300 percent increase. There’s massive demand.”
But building an entire city from its foundations up has not, of course, come without its problems. Al Rasheed refers to the pre-2008 phase, when it was easy to obtain raw materials, manpower and the demand was exceptionally high. Post-2008, however, he admits that KAEC has had to reassess its offering.
“All projects have had to go through that kind of reassessment, and I think in many ways we’ve done that,” he says. “We’ve assessed our business model, particularly in terms of how much we can do on our own and how much government support we need. We were attracting a lot of interest before, but a lot of that interest had to be reprioritized post-2009 and 2009.”
The CEO is also keen to stress that KAEC’s funding model has remained on course during the economic slowdown. Whereas much of Saudi Arabia’s massive infrastructure investment is currently centrally funded, the government took the decision that the economic cities would be built by the private sector via the PPP model.
“The idea is very basic — you get the private sector, which is able to be much more nimble, fulfilling the requirements of the market - and you provide them with the right framework and the right support, and let them carry both the benefit and burden of building a city from scratch,” Al Rasheed says. “This has never been done before. Six years on, I believe that the government's bet on the economic cities has paid off: we have attracted investments of over $1bn in contractual commitments, created 12,000 jobs, and are already profitable as a company.”
That framework and support comes in the shape of the general act for the economic cities, which established the Economic Cities Authority (ECA), the regulator. The ECA has been instrumental in ensuring that KAEC offers a different value proposition from other Saudi investment locations. Both individuals and companies have been offered 100 percent foreign ownership, and a bonded zone allows for the customs-free movement of goods. In addition, government services in the city are offered on a 24/7 round-the-clock basis.
All that may look good on paper, but from a funding perspective, would it not have been easier to have had the government provide the financing, especially post-2008?
“Government today has taken over in most of the world in terms of its ability to fund,” argues Al Rasheed. “But with government funding comes all of the government regulations, and the way of doing business that the government has, so it doesn’t offer you any of the private-sector benefits which were the reason for doing the project in the first place.”
The CEO draws a distinction between KAEC and the work taking place in Jubail, over on the kingdom's east coast near Dammam, and nearby Yanbu, where the government has taken a lead in the redevelopment of those cities.
“Today, the government has not invested any significant amount of money [in KAEC], and is getting all the investment benefits, the tax benefits and the employment benefits,” Al Rasheed adds. “We ourselves, the private sector, have invested over $2.6bn, and we’ve attracted $13.3bn to the city. This was without government funding.
“So certainly the PPP model is working from the perspective of attracting investment and job creation. I think this model will be a model not just for Saudi Arabia, but for the rest of the world as well.”
The CEO also believes that the city chimes well with recent announcements from King Abdullah regarding the need for affordable property for the country’s citizens. Housing played a key role in royal announcements made last year that have stressed the need for Saudi Arabia to build an additional four million units by 2025 to keep up with demand from a youthful population. That figure is roughly double all of the homes that currently exist in the country.
Few can deny that housing is a colossal priority for Saudi Arabia. In the kingdom’s biggest cities, creaking infrastructure is struggling to cope with a booming populace. In Riyadh, the government is attempting to create a masterplan that will include widening key arterial routes that are permanently clogged with traffic. And in Jeddah, antiquated sewerage systems in the city’s southern half have forced both residents and businesses to move north. For both Al Rasheed and the government, the economic cities are well-placed to take up the slack.
“One model that we’ve pursued as part of our housing strategy is to attract the government to do some of those [housing projects in KAEC] and that’s what we’re doing now,” he says. “Of the four million housing units that Saudi Arabia needs, all we need is a tenth of that to build the city from end to end, which is very much doable”.
With much of the infrastructure laid out, the city’s residential areas are now very much in focus.
Demand for KAEC’s residential product mix, which has now seen the development of upper-end apartments in the 'Bay La Sun' district, upper-end residential lots within the 'Beachside Villa' complex and most recently the first middle-income residential land plot release with phase one of Al Talah Gardens in the ‘Esmeralda’ portion of the development, has been high. Thousands more homes — from villas to apartments — are in the pipeline.
“When you develop a city, you cannot afford to be just a middle-income, luxury or labour-housing developer — you have to provide the full gamut of solutions,” says Al Rasheed. “So our strategy right now, given that we have the demand, is to partner with companies that can deliver in all these areas. Some of it we will do on our own, and some of it we’ll partner with others. But part of what you will see over the next six months is announcing some of these.”
On the finance side, certainly, it also appears that last year was a turning point in the city’s cash prospects. Emaar The Economic City (EEC), the Tadawul-listed company tasked with developing KAEC made a full-year profit of $22m in full-year 2011, compared to a $156m loss the year before. For the first quarter this year, the results improved still further, with EEC posting a $12m profit.
Al Rasheed says that the switch into profit has actually taken place in shorter time period than for comparable big-city projects elsewhere in the world. More specifically, he puts the results down to a better understanding of what he terms “the investment psyche” of the country, and a tweak in KAEC’s offering.
“A lot of people want to buy units, and a lot of people want to lease in the industrial zone,” the CEO points out. “However, there is a big portion of the population that want to build their own homes. Second, a lot of the companies in Saudi Arabia believe that they need to own the land where their industry is — they see it as part of the investment, and they will leverage capital appreciation in the long term.”
“That was holding them back from investing in KAEC because they don’t believe in the lease model. So we’re tapping into this market – you can say that we diversified our product offering, which was very helpful from a development perspective.”
It seems, therefore, that 2012 is likely to be the tipping point for the Gulf’s most ambitious real estate project. If the good results continue, and companies carry on signing up to take advantage of the transport infrastructure coming online in 2013, then KAEC looks set to snowball. But when will the city be fully completed?
“Our target is 2025,” says Al Rasheed. “The city won’t grow in a steady manner, like New York, for example, which grows at around two to three percent every year. We have already attracted 12,000 jobs in the last three years — so the growth that will happen in the next five years will be massive.”
Fahd Al Rasheed on…
The progress of the other three Economic Cities:
“All of them are focused on different industries and different investor bases — they all have their own economic bases and their reason to exist. These megaprojects always struggle in the beginning to establish the right basis, but they are all moving in the right direction. Given how long it took KAEC to get where it is today, it is understandable for the others. But I think they all have major futures, and they will all be successful in their own way.”
The new port
“We’re not looking at competition [with Jeddah Islamic Port]. We think there is massive potential for further capacity because that location is constrained by the mere fact that it is in the middle of Jeddah, so it has no place to grow. We want to build a port that’s five times the size of Jeddah — so one of the world’s top ten ports. The first phase is going to be about four million TEU, and we are only building it because there is demand for it. The game changer for beyond the four million TEU is going to be the Landbridge project [connecting Jeddah to Riyadh and the Gulf]. If the government goes ahead with the Landbridge project — and I think it will, because the government is keen on investing in it and making it happen — then our port’s eventual capacity of 20m TEU will be easy to achieve.”
The Haramain rail link
“Firstly, it will connect us to the new airport that is currently being developed in Jeddah. The ride from the city’s station — which will open next year — to the airport will be 25 minutes. So it’s as close as any of the big airports to any of the biggest cities — which allows for great connectivity. But more importantly, it sets KAEC in the middle of the Western Region’s three major cities: Jeddah, Makkah and Madinah. You can set up in KAEC and service those three locations — you don’t need to have four sites. Between KAEC, KAUST, PetroRabigh and the Haramain link, you have the future of Saudi Arabia — 21st century Saudi Arabia.”