From the ground up: The new economic cities will provide housing and jobs

The story of the Gulf over the last decade has been one of transformation, with skyscrapers developing so quickly that they appear like an apparition, whole neighbourhoods arising in a matter of years. The incredible boon and subsequent danger this trend has engendered for the regional real estate industry is well documented. However, it appears that the time for Saudi Arabia to shine has arrived. The Kingdom intends to seriously capitalise on its potential, with plans to build four new cities in their entirety from scratch. While this should go a long way towards meeting demand supply across all segments of the real estate sector in the coming decade, it has also created some uncertainty regarding the timing of future inventory – both residential and commercial – and its potential impact on pricing and development throughout the country.

New Frontiers

Ever since the announcement of the concept in 2005, Saudi Arabia has been constructing four economic cities in Hail, Medina, Rabigh and Jazan. According to a report by the Saudi Arabian General Investment Authority (SAGIA), these urban developments are expected to directly contribute $150bn to GDP, create 1.3m jobs and house a combined population of up to 5m people by 2020. Per capita GDP in the cities is expected to reach $33,500, well above the current national level of SR78,906 ($21,030). The minister of economy, Mohammed Al Jasser, told the Financial Times, “It was felt that it would be good to create other growth centres, away from… Riyadh, Dammam and Makkah… and that is a very important objective.”

This rationale, creating alternative poles of growth and spreading the impact of urbanisation throughout the country, is not new. One of the aims in the construction of Brasilia, Brazil’s capital and the prime example of a planned city, was to improve wealth distribution throughout the country, lessening the concentration in Rio de Janeiro and Sao Pãulo. The city was constructed in just three years between 1957 and 1960. As with many planned cities over the course of the last century, Brasilia was bolstered by the government, created as a new seat of power, with the population supported by government jobs and the industries that circled around it.

Saudi Arabia’s new cities will rely on other points of attraction to generate growth and employment. Indeed, the government had called for the cities to foster private sector growth and be largely developed and funded by the private sector. The engine for growth in the economic cities will, therefore, come from industry rather than government. For example, the King Abdullah Economic City in Rabigh, which SAGIA has dubbed the “world’s next great economic city”, will be built around its port, focusing on logistics, light industry and services. The $27bn city, developed by Emaar, The Economic City, will generate employment for 1m people and will be capable of housing double that amount.

Building Up

King Abdullah Economic City is widely considered the flagship project in the development of these urban centres and its construction is well under way. Indeed, the seaport, which will generate much of the city’s income and employment, is expected to receive its first ships in 2013. Developer Emaar, The Economic City has set the ambition of making the King Abdullah Economic City seaport one of the top 10 in the world. Spread over 13m sq metres, it should have a capacity of 20m twenty-foot equivalent units (TEUs) of container traffic upon completion of all phases. The 18-metre deep berths will allow the port to handle some of the world’s largest cargo ships, enabling Saudi Arabia to capture an increasing share of the growing Red Sea traffic, which is expanding at a rate of 15% per annum, according to Emaar, The Economic City.

The port is the centrepiece of the development’s Industrial Valley, and together they make up 50% of the entire city. The Industrial Valley will house light and medium industries and will be fully serviced with infrastructure. The area has already begun marketing to prospective companies and has received a boost from some recent deals. For example, in February 2012, candy maker Mars Saudi Arabia announced that it will build a manufacturing plant in the King Abdullah Economic City. The facility will produce the Galaxy and Galaxy Jewels brands beginning in 2014. Mars is investing an initial $60m in the project, with a further $150m investment anticipated over the next 10 years. The acquisition of such a high-profile tenant should bode well for the Industrial Valley as well as King Abdullah Economic City in general. Since the Mars agreement, other firms have followed suit, with the local dairy giant Almarai signing an agreement to purchase 200,000 sq metres of industrial land for a plant in May 2012.

Settling In

However, it is not only industrial real estate that is generating interest; the new developments are also spurring demand for residential land. The Al Talah Gardens project, a 500,000-sq-metre development at the heart of the King Abdullah Economic City sold out phase I of the project in four hours in June 2011, and there is now a waiting list of 2500 people for plots on phase II. The demand for this development comes not only from employees of businesses setting up in the city, but also from the excess demand in the Jeddah real estate market. Land plots in Al Talah Gardens were selling for SR500 ($133.25) to SR700 ($186.55) per sq metre, which was competitive compared to prices in Jeddah. Indeed, according to a report by global property services company Colliers International, land prices in Jeddah increased by 30% in 2011 and now account for as much as 60% of development costs.

Meeting Demand

It seems that King Abdullah Economic City will help mitigate soaring prices in Saudi Arabia’s major cities, providing additional supply at a reasonable cost. The other new economic cities should also create new real estate markets, helping to cool prices in the capital and Jeddah. The Prince Abdulaziz bin Mousaed Economic City in Hail is expected to generate 55,000 new jobs and house 80,000 people. The city, which is being developed by Rakisa Holding, will require investments totalling $8bn and will focus on logistics, agribusiness, minerals and construction materials. In the south, Jazan Economic City will focus on energy and labour-intensive industries. Developed by MMC International, the city will require $27bn in investments and should create 500,000 jobs and house a population of 250,000. The city will also have a port as well as a large industrial area that will take up two-thirds of the land under development. The final planned urban development is Knowledge Economic City in Medina, which will focus on high-tech and knowledge based industries. The city will generate 20,000 new jobs and house 200,000 people at a cost of $7bn.

These developments should go a long way to equalising supply and demand in the Saudi real estate market, comfortably closing the 1m unit housing shortfall and generating further demand. On paper, therefore, the strategy should provide a shot in the arm for the real estate industry and its investors. However, as Al Jasser told the Financial Times, “These cities are going through the teething problems of new cities.” It is unclear whether the initial deadline of 2020 for the completion of the cities will be met, and the attempt to finance the developments through private funds and the public-private partnership model is proving difficult. As such, in 2011 the government provided a $1.3bn loan to Emaar, The Economic City and also underwrote a loan for a power plant in the King Abdullah Economic City.

Step By Step

However, it is not uncommon for planned cities to experience growing pains. Often cities that have been conceived from scratch have suffered timing problems. For example, in Australia, the states took nine years to decide on the location of Canberra even after the constitution stated that it should be within 100 miles of Sydney in New South Wales. Even once this decision was taken, the city did not rise quickly. It took another 17 years to construct a parliament building. Likewise, the conception of Brasilia was not a rapid affair. It may have only taken three years to construct the new capital, but the idea of this inland seat of power was first mooted in 1789, 171 years before it came into being.

It seems unlikely that any of Saudi Arabia’s new cities will take this long to fully come into existence. Nevertheless, the concern over execution, which is largely a product of the global financial crisis, does create uncertainty for the real estate sector. Saudi Arabia has built a reputation for sound and solid fundamentals in its real estate market, and investors and developers alike will be concerned about this going awry. However, the recent successes of the flagship King Abdullah Economic City, which has managed to attract significant interest and demand for both industrial and residential real estate, suggests that the country will indeed be able to surmount the tricky challenge of building cities from scratch.