Getting up to speed: Authorities focus on transport infrastructure and urban regeneration

The results of a concerted effort to address decades of rapid unplanned growth in Saudi Arabia’s second-largest city are beginning to become clear as transportation plans advance and major development projects get under way. These efforts look set to facilitate sustainable growth and diversification in the coming years and will ultimately help to bolster Jeddah’s position as both the commercial centre of Saudi Arabia and the gateway to Makkah for the world’s Muslim population.

INVESTMENT: Housing, urban regeneration, infrastructure and transport are all central to the future prosperity of the city, and development in these areas has been prioritised by the government, resulting in unprecedented levels of investment. Bank credit for construction projects in Saudi Arabia rose from $10.07bn in 2006 to $20.1bn in 2012, a compound annual growth rate (CAGR) of 12.2%, according to a report issued by the National Commercial Bank. As the scale and breadth of development projects continue to grow, the government is seeking to expand the role played by the private sector. According to the same report, the central bank is leading the way by increasing lending for construction projects in the Kingdom, with the aim of encouraging commercial banks to follow suit.

PUBLIC-PRIVATE PARTNERSHIPS: In Jeddah the public-private partnership (PPP) model is being employed extensively. The municipality established the Jeddah Development and Urban Regeneration Company (JDURC) as the vehicle through which it engages with the private sector (see analysis). Now in its eighth year, the company is actively working to facilitate private sector involvement by creating subsidiaries for specific projects that can partner with firms in the private sector. The JDURC is also working to remove bureaucratic hurdles, creating a number of attractive opportunities for private sector investors. As Nidhal Abdulrahman Taibah, the vice-president for development at the JDURC, told OBG, “Any asset the city has that can be the basis for a successful partnership with the private sector is potentially the foundation for a project, which would then become a subsidiary of the JDURC, and thus a potential opportunity for investors.”

REGENERATION: Local regeneration efforts are making headway and are set to continue. One major project covering the Middle Corniche is now complete, with hotels and retailers benefitting from the developments along the seafront down Falistine Street. The revamped Middle Corniche was eagerly anticipated by locals and is proving popular with families and visitors. This first phase of the project, covering 58,000 sq metres, was developed by the JDURC and opened in 2013, while rest, a further 269,000 sq metres, is still under construction and promises to generate opportunities for investors in the retail and hospitality sectors on completion. Additionally, the city’s historic district was declared a World Heritage Site in June 2014. Historic Jeddah, the Gate to Mecca, was recognised as a major port for Indian Ocean trade routes. Other regeneration projects include hotels, conference centres, medical, shopping and leisure facilities, the most notable of these being the Heart of Jeddah development (see analysis) and the historic district of Al Balad.

HOUSING: According to estimates, around 15% of Jeddawis live in unplanned districts and transforming these areas and providing them with modern residential stock is seen as crucial to meeting the housing needs of the growing population as well as achieving wider development goals. The government recognises the social and cultural ties residents of these areas have with their communities and is working to ensure that development is in line with these sensitivities. Taibah told OBG, “Studies are being carried out to limit feelings of uprootedness and help residents transition from the current chaotic urban situation to something more suitable for housing, attracting investment and creating jobs.” While relocation is one option, it is by no means the only approach. The JDURC made clear to OBG that its goals can also be met by regenerating public space in these areas, through creating wider streets, improving public services and infrastructure, and upgrading the existing housing stock. However its aims are achieved, the civil works will be managed by the municipality, while subsidiaries of the JDURC will form partnerships to further develop these areas, as is being done in Qasr Khozam and Al Ruwais.

In addition, the city’s infrastructure is also being revamped, especially in terms of water production and sewage management, as well as storm water, utilities and roadways (see analysis).

TRANSPORT: Work is under way to overhaul many of Jeddah’s main roadways, with projects worth some $238.8m due for completion by mid-2015 (see analysis). Rail, airport and seaport developments that will benefit the city are also in the works.

The Haramain High-Speed Rail link, a 450-km passenger train line linking Makkah and Medina via Jeddah and King Abdullah Economic City (KAEC), while designed mainly to accommodate Muslim pilgrims travelling between the two terminus stations, will undoubtedly bring economic benefits to the city as well. The link between Jeddah and KAEC is of particular importance, as it will bring the housing at KAEC into commuting distance from Jeddah, helping to alleviate part of the shortage in the city, as well as offering an alternative means of transport to private cars, which should go some way towards easing traffic congestion. According to the local press, Ministry of Transport officials expect the project will be completed by the end of 2015.

The first phase, the civil works and stations, was split into two packages, with the stations package then being split again into two. The second phase – the track, systems and rolling stock – was tendered as a single package. Managing the interchange between the different packages is seen as particularly time-sensitive and is understood to be the main cause of the delays that have occurred so far.

GETTING AROUND TOWN: More importantly perhaps, progress is being made on the Jeddah Urban Transport system. The JDURC is establishing a subsidiary to implement the $12bn integrated transport project, which will include a metro, bus feeder network, ferry system and waterfront tram along the corniche. The three metro lines will cover 152 km and serve 92 stations, with one line running 84 km north to south through the city, another 36 km from King Abdulaziz International Airport through the centre of town to south of Jeddah Islamic Port (JIP), while a third line will stretch 32 km east-west along Falistine Road. The two shorter lines will intersect at the multi-modal Al Muntalaq station, which is the focus of the multi-use mega-project planned for the site of the old Jeddah airport (see analysis).

Tenders are expected to be issued by the end of 2014, and it is understood that the municipality is still determining the best way to package the project. Doing so correctly will go a long way towards ensuring that good value for money is achieved for the government, while at the same time securing the necessary expertise from the private sector.

As Raed Tahseen El Jarrah, project development and control manager at the Saudi Binladin Group, told OBG, the municipality will have two options: “the Riyadh model, where the entire project is given to a contractor, who then has the work of coordinating the different elements of the project, or the Haramain High-Speed Rail and Makkah Metro model, in which the project is packaged into a number of tenders, which will achieve a better price, but with more coordination work for the project owner”. However it is packaged, bringing the project to fruition will require a significant level of private sector participation and the benefits, when completed, are set to be transformative for Jeddah.

AIRPORT EXPANSION: The expansion of the King Abdulaziz International Airport is on schedule to be completed in the first half of 2015. Phase one of the project will increase capacity to 30m passengers annually, with capacity slated to eventually reach 80m passengers per year. The airport’s upgrade is being managed by the General Authority of Civil Aviation (GACA), and is largely being funded by a state-issued sukuk (Islamic bond). According to the local press, the $4bn first phase of the project will see $1.2bn worth of sukuks issued in three separate tranches to finance construction of a new terminal.

RED SEA GATEWAY: The opening of the Red Sea Gateway Terminal (RSGT) at JIP in 2009 increased capacity by around 45%; however, as Taibah of the JDURC told OBG, while “the expansion of the port and electronic system is having a positive impact… it is a bit shy of what is needed for it to be as competitive as other ports around the world”.

Further expansion is therefore required, and in February 2014 it was announced that this extension would take place at the RSGT and would be completed by 2015, increasing the port’s capacity from 1.8m to 2.5m twenty-foot equivalent units (TEUs). The JDURC is heavily invested in the development of logistics and warehousing facilities to complement this growth. While the port’s management is working to increase capacity and efficiency, there is a considerable gap between supply and demand. As infrastructure projects are expected to further boost capacity requirements in the coming years, additional expansion of the port may yet be required.

HOUSING: The JDURC estimates that demand for new housing will stand at over 43,000 units per year by 2015 and 58,000 by 2025. While units are being developed, the figures suggest supply is not keeping up with the growth in demand. According to Jones Lang LaSalle’s (JLL) “Q1 2014 Real Estate Market Overview”, around 24,000 units are expected to be completed in 2014, adding to the city’s total residential stock of 754,000 units. A further 49,000 units are forecast for completion in 2015-16 – considerably below the expected demand – and these will mostly be built as part of large-scale projects.

One major development that will help to address the city’s housing shortage is the JDURC’s Salman Bay Housing Project. Providing 25,000 units and ultimately housing over 95,000 residents, the Salman Bay development is currently under construction. The JDURC plans to offer the first batch to the market in the fourth quarter of 2014 as a proof of concept. Phase one is more than 340 plots, with the first contract package for 250 apartment buildings on just under 1m sq metres of land. If the test batch is successful, the JDURC will seek out partnerships for the other packages soon after. As Taibah told OBG, “We are open to all kinds of scenarios taking the project forward, as long as they contribute to providing an expedited, effective and sustainable solution to the housing shortage in the market.”

Housing also forms a key component of a number of other projects, including the Heart of Jeddah and Wadi Al Asla developments (see analysis), with the latter alone set to provide 170,000 residences. At the higher end of the market, KAEC recently awarded an $83.4m contract to Rezaik Al Jedrawi Company for the construction of the first phase of its Al Waha residential community, which will comprise 650 units. The KAEC is designed to house 2m people in some 250,000 apartments and 56,000 villas by the time it is completed.

In the affordable segment, however, efforts to address the shortage of housing stock are being hampered by the city’s unplanned residential areas. Several projects to regenerate these locales are already under way, while others have been planned for the near future. In all such cases the municipality will carry out the infrastructural updates, such as constructing roads and storm drainage, while other elements of the regeneration projects, such as housing and retail facilities, will be handled by PPPs.

TOURISM: As it is the historic gateway to Makkah and Medina, Jeddah has long been a popular destination for both local and foreign pilgrims. According to a JLL report, hotel occupancy levels have increased continuously since 2010, but are now stabilising, with the third quarter of 2013 recording a slightly lower occupancy level of 78% compared to the same period of the previous year (81%).

Average daily rates (ADR) for rooms have risen steadily since 2010, with 2013 showing an 11.3% increase year-on-year. The combination of stable occupancy rates and higher ADRs has resulted in an 8.4% growth in revenue per available room (RevPAR) over the year to September 2012 at $193. Jeddah’s popularity spikes around holiday times, with the Arab News reporting that nearly all of the city’s hotels, resorts and 8000 furnished apartments were fully booked during the January vacation period in 2014.

BOOSTING NUMBERS: Building on the perennial draws of its seaside location, pleasant climate, and proximity to Makkah and Medina, Jeddah is working to attract more tourists. Improved transport links, urban regeneration and the inclusion of tourist attractions in major new projects should all help to add to the city’s appeal (see analysis).

Festivals are also seen as a way of boosting tourism numbers. The Hayya Jeddah Shopping Festival, for example, attracted 782,677 visitors in 2013 and the 2014 edition is expected to draw over 1m. The newly founded Jeddah Heritage Festival brought 750,000 visitors to the city’s historic Al Balad district in January 2014, while the Jeddah Summer Festival attracts around 1.5m annually. It is hoped the heritage festival will be an impetus to boost funding for the preservation of the area. Efforts to build a heritage hotel in the district are also expected to draw in investment, all as part of the wider drive to see Al Balad recognised as a UNESCO World Heritage Site.

BUSINESS TRAVEL: Business tourism is another target for expansion. The segment has already proved itself to be a significant earner elsewhere in the Kingdom. For example, according to a 2013 report by the Saudi Exhibition and Convention Bureau (SECB), business tourism accounted for about 12.2% of tourist expenditure in the Makkah region in 2011 – a considerable amount when one considers the total spent by religious travellers. The meetings, incentives, conferences and exhibitions (MICE) segment is seen as a major area for growth in Jeddah: the SECB has so far issued 194 exhibition licences for 2014, of which 61 were for Jeddah, a number that is expected to grow in the coming years.

Such exhibitions offer considerable opportunities, as demonstrated by the recent performance of the Jeddah International Exhibition and Conference Centre, which is the largest in the region with 10,000 sq metres of exhibition space. In 2010 the centre contributed $13.7m directly to Jeddah’s GDP and received 12.2% of business visitors to the region. There is clearly demand for more capacity, and efforts are being made to close this gap. A centre for conferences and exhibitions at the Prince Sultan Cultural Centre (PSCC) to the north of the city will increase Jeddah’s available conference space to 60,000 sq metres upon completion, with exhibition operator Reed International engaged to manage and operate the PSCC’s exhibition centre. MICE facilities will also be included in the Heart of Jeddah development (see analysis).

HOTELS: According to the “HotStats MENA Chain Hotel Market Review” for December 2013, hotel occupancy rates rose to 73.3%, a 5.2 percentage point increase from the same month in 2012. This growth was attributed to a rise in demand from the corporate and MICE segments, which comprised 54.5% of the market in December 2013. As of 2014, Jeddah had a total of 8150 hotel rooms, according to JLL’s “Q1 2014 Real Estate Market Overview”.

RETAIL: Jeddah has a total retail supply of 881,000 sq metres as of 2014, according to JLL’s overview of the market. This figure is expected to increase by 32,000 sq metres over the course of the year and by a further 131,000 sq metres in 2015, reaching a total of 1.04m sq metres in 2016. Vacancy rates for retail space are around 7% overall as of the first quarter of 2014, having fallen from 8% in the third quarter of 2013. The average rental price stood at SR2636 ($702.76) per sq metre per annum as of the first quarter of 2014, according to figures from JLL, up 4.7% since the third quarter of 2013.

MEDICAL: According to a recent report from Ernst & Young, GCC health care spending is expected to rise by a CAGR of 11.4% from 2010 to 2015, driven by growing, increasingly wealthy, populations with greater levels of non-communicative diseases and a desire for high-quality medical care.

Jeddah is positioning itself to take advantage of this demand, with medical facilities planned at both Wadi Al Asla and the Heart of Jeddah development, along with a health care centre at the PSCC, which will incorporate primary, secondary, tertiary, and long-term and rehabilitation care for patients and is set to open in 2018.

While estimates suggest government health care spending in Saudi Arabia increased by 10.3% to $26.1bn in 2013, compared with $23.7bn in 2012, there is considerable private sector involvement in the construction, development and operation of medical facilities and room for further private sector activity. As Imad U Bokhari, MENA transaction advisory services health care leader for Ernst & Young, told the local press in January 2014, “Health care in general is now a major topic for private investors, as it weathered the recent financial crisis. The inclusion of this sector as part of the overall investment strategy for major institutions has become vital.”

HUMAN RESOURCES: With so much focus on the creation of jobs within the region, significant attention is being paid to ensuring that young Saudis are adequately trained to fill these roles as they become available. Educational facilities are therefore an important component of Jeddah’s development plans and are being incorporated into the mega-projects being undertaken, adding to the city’s current roster of universities and colleges. Some of these developments are targeted at building a workforce to staff sectors expected the city is working to grow, such as the Prince Sultan College for Tourism and Business, which is aimed at the hospitality industry.

It is also hoped that the regeneration efforts and transport infrastructure upgrades, in combination with these educational facilities, will enable Jeddah to develop a knowledge-based economy by creating, attracting and retaining talent. As the JDURC’s Taibah told OBG, “Jeddah is well on its way to capturing the essence of having a knowledge-based economy, but this needs to be bolstered to as large an extent as possible – hence the focus on research and development elements of projects, along with social and cultural developments in the city.”

LAND SPECULATION & REGULATION: Land speculation has been a long-standing issue in Jeddah, and the lack of regulation has resulted in prime real estate in the city remaining undeveloped as owners wait for its value to appreciate. The Ministry of Justice has worked to improve the regulatory framework, specifically in regard to the land registry, a development that will help address this issue.

According to Taibah, this “represents a huge paradigm shift, the benefits of which are being felt already. We are noticing that it is far easier to recognise and monitor developments, see where the market is and where it is going. This completely does away with the possibility of double registry, duplication gaps, overlaps, making the entire system much more transparent and reliable.”

While further changes to planning regulations may help to alleviate speculation, and the mortgage law of 2012 is providing some assistance to buyers, Jeddah remains an attractive city in which to live and work and as such high land prices will likely continue to remain a challenge for the foreseeable future. This will be even more pronounced in the coming years as the numerous regeneration projects, transport development schemes and mega-projects now under way are completed.

OUTLOOK: Infrastructure, housing and transport developments in Jeddah are now in full swing, with the government boosting support for such projects by increasing investment and working to facilitate the participation of the private sector. Driven by the government’s desire to both improve standards of living for Jeddawis and maintain the city’s role as the commercial centre of the Kingdom, these projects will fuel growth in the construction and real estate industries over the coming years. However, given the fact that many projects are aimed at improving the urban landscape, most notably by easing movement around the city and expanding leisure areas, the benefits are expected to be felt across a range of other sectors as well, including retail and hospitality. The multi-use nature of the projects being undertaken will also generate opportunities in niche areas, such as medical and education investment.