Developments in the pipeline set to boost Jeddah’s profile

The Kingdom’s second-largest city and its most significant seaport, Jeddah is a key engine of the Saudi economy. The “Bride of the Red Sea” is currently experiencing rapid population growth, as rural dwellers and migrant workers arrive in search of jobs and opportunities. To meet the infrastructural challenge presented by the pace of growth, municipal authorities and the central government have embarked upon an ambitious programme of investment in infrastructure and housing, in which partnership with the private sector is a central tenet.

Residents Rising

According to government estimates, in 2015 the population of Jeddah will surpass 4m, as the city has continued to grow at a rate above 2.6% per annum. While population growth has decelerated steadily since 2011 – when it reached 3.4% and, alongside Riyadh, was ranked in the top three global cities for growth by the Brookings Institute – the 4m figure nonetheless means that Jeddah’s population has doubled since 1993.

This rapid growth has placed a strain on both housing and public infrastructure. As recently as 2010 a municipality report estimated Jeddah’s housing shortfall to stand at 283,000 units. While new housing stock has since been added, a recent assessment by Abdullah Al Balwi, a member of the Jeddah Chamber of Commerce’s real estate committee, estimated that at least 70m sq metres of additional residential real estate is currently required (see analysis).

Jeddah’s rapid growth does not appear to have hampered its economic prospects, however. According to the Brookings Institute’s most recent report on growth in global cities, GDP per capita in Jeddah increased by 2.4% in 2014, while employment rose by 3.4%. This performance was enough to rank the city 35th place globally (and 10 places behind Riyadh); among developed cities, Jeddah ranked fifth, behind only Macau, Dubai, Riyadh and London.

Economic Drivers

Jeddah’s economic strength is founded upon a few key pillars. The second-largest city in the Kingdom, it also contains the country’s largest port. It is the biggest city in the Makkah administrative region, which houses Makkah itself as well as Taif, and is the country’s largest region by population. Indeed, the city has long been known as the “Gateway to Makkah,” and, alongside the significant trade originating from its port operations, catering to the millions of annual religious pilgrims is a vital mainstay of the local economy.

Jeddah Islamic Port (JIP) has grown from a modest 10 operational berths in 1976 (the year the Kingdom’s Ports Authority was established) to 58 currently. The newest terminal to open at the port was the $510m Red Sea Gateway in 2009, whose four large container berths increased capacity by around 45%. At present JIP handles between 55m and 60m tonnes of shipped goods per year, including over 4m twenty-foot equivalent unit (TEU) containers.

Throughput

Throughput at the port peaked in 2012 at nearly 63m tonnes, having risen sharply in the previous two years in light of the new capacity at the Red Sea Gateway. Throughput has fallen back somewhat since, with 2014 in particular seeing a decline of 7.5%, in light both of poor global conditions and new facilities beginning to come on-line at nearby King Abdullah Port in King Abdullah Economic City (KAEC). Further expansion to JIP is planned, however, which is anticipated to increase capacity by an additional 45%, and bring the port closer to the highest international standards. For instance, Jebel Ali Port in Dubai on the opposing Gulf coast will in 2015 expand its container capacity to 19m TEUs, suggesting that further expansion of the Red Sea’s principal port is viable. Business Monitor International, an economic analysis company, has forecast a return to growth for JIP in 2015, with tonnage throughput anticipated to grow at an average of 5.2% through 2019, and container throughput at 7.6%.

Similar expansion is also under way at Jeddah’s King Abdulaziz International Airport (KAIA) – the first port of call for the Kingdom’s millions of annual religious pilgrims. KAIA first opened in 1981, and in its current configuration of two main terminals and a dedicated Hajj terminal serves around 18m passengers per year, making it the Kingdom’s busiest airport. It also serves as the home base for the nation’s flag carrier, Saudi Arabian Airlines (Saudia).

Given the growing number of pilgrims visiting the Kingdom – as well as an overall increase in regular demand – KAIA has been undergoing significant expansion for the past decade, in a project which amounts to the construction of an entirely new airport at the same site. Phase 1 of this work is to be completed in mid-2015, which will see the unveiling of a new, 670,000-sq-metre passenger terminal able to handle 30m passengers per year.

The new terminal, which has cost an estimated SR27bn ($7.2bn), will feature 46 gates, including double-deck boarding bridges able to accommodate the new Airbus A380. Successive expansion, which is expected to continue through 2035, will see capacity gradually increase at the new airport up to a potential total of 70m-80m passengers annually.

Pilgrimage

Of the 18m passengers currently passing through KAIA every year, a substantial proportion are engaged in religious pilgrimage to the Islamic holy cities of Makkah and Medina. In 2014 a total of 1.4m pilgrims from outside the Kingdom took part in the Hajj (which covers a five-day period that, in 2014, fell in early October in the Gregorian calendar).

Outside of Hajj – for which, owing to considerations of safety, numbers are strictly limited – an even larger number of pilgrims perform Umrah, the lesser pilgrimage that Muslims may undertake at any time of the year. In 2014 over 6m people from countries across the globe applied to the Kingdom’s authorities for a 15-day Umrah visa.

With the number of Muslims worldwide estimated at 1.6bn – for whom taking part in Hajj at least once is a religious obligation (provided the individual is physically and financially capable) – the expansion of infrastructure to cater for additional pilgrims is a priority for the Kingdom. Beyond expanding KAIA, the government has also invested billions of riyals in the Haramain High-Speed Rail. The 450-km railway – whose name means “two holy sanctuaries” in Arabic – will link the two pilgrimage sites of Makkah and Medina with KAIA, downtown Jeddah and KAEC.

While addressed primarily towards religious pilgrims, the Haramain railway will also substantially improve connectivity along Saudi Arabia’s Red Sea coast. Indeed, the key route will be between Jeddah and Makkah, with current plans proposing seven trains per hour between the two cities, and a total capacity for the track of 19,600 passengers per hour.

The technical demands of the project (which has required embedding concrete flats in some of the more challenging desert sections) has led to some delays, but it is hoped that sections of the railway will be up and running from December 2016. By helping to further integrate markets within the region, and generally increase economic activity along the Red Sea coast, the economic benefit for Jeddah is likely to be significant in the long run.

Tourism Growth

Beyond being a gateway to religious pilgrimage, Jeddah is also becoming increasingly significant as a centre for visitors in its own right. Domestic tourism within the Kingdom has surged in recent years, with spending almost doubling between 2010 and 2014 from SR59bn ($15.72bn) to SR103bn ($27.45bn). While some of this spending has been driven by an increase in religious pilgrimage, the majority appears to have come from Saudis looking closer to home for their holidays.

With its attractive coastal location and historical heritage, Jeddah has been among the top locations to profit from this trend. Jeddah has recently been reaping the benefits of a concerted effort by local and central government authorities to protect and improve the city’s cultural heritage (see analysis). Following a significant government-backed regeneration scheme of the city, UNESCO award Jeddah’s historical centre World Heritage status in 2014. A number of popular festivals have also helped draw crowds of domestic visitors to the city.

The Jeddah Summer Festival, for instance, regularly attracts 1.5m visitors, while the Jeddah Heritage Festival (which was held for the second time in 2015) and the Hayya Jeddah Shopping Festival also attract upwards of 1m guests each.

As well as cultural tourism, Jeddah is an essential and growing market for the Saudi business tourism sector. Meetings, incentives, conference and exhibitions – also known as MICE – tourism in the city centres around the Jeddah International Exhibition and Conference Centre, which with 10,000 sq metres of exhibition space is the Kingdom’s second largest after Riyadh. Currently, around one-third of exhibition licences issued by the Saudi Exhibition and Convention Bureau are for events taking place in Jeddah.

Industry

Besides trade and tourism, Jeddah also boasts a significant industrial presence. Jeddah’s first industrial city was established in 1973, and is located 5 km south of the city, covering an area of around 12m sq metres. A second industrial city was added in 2009, located a further 30 km south. It will cover an area of 8m sq metres once completed.

Further investment in industry is also under way to the north of the city. In a recent announcement, the municipal authorities presented plans for three new city developments in the outskirts of Jeddah (see analysis). Two of these – Salman Bay and Murooj Jeddah – will be primarily residential and recreational. The third will be dedicated to light industry, and located in the Asfan area. Developed as a public-private partnership overseen by the Jeddah Development and Urban Regeneration Company (JDURC), the plan advocates developing the Asfan industrial city as an alternative to the current Al Nuzha industrial zone, located near the city centre and just south of KAIA. The first phase, measuring approximately 1m sq metres, is slated for completion in early 2016.

However, perhaps the most significant long-term development in industrial capacity within the wider Jeddah region will be KAEC, which was founded in 2006 some 50 km north of Jeddah, on the road to Rabigh, which is home to a significant oil refinery and petrochemicals plant. KAEC has already attracted over 60 companies to its industrial valley complex, located near the King Abdullah Port area, including international names like Danone and Pfizer. The Economic Cities Authority – the regulatory body responsible for all the Kingdom’s economic city developments, and headquartered in KAEC – hopes to attract investment in six key industrial areas: fast-moving consumer goods, pharmaceuticals, plastics, building materials, logistics and the automotive sector. As well as industry, the city will also eventually be home to 1.7m residents, who will be within easy commuting distance of Jeddah thanks to the Haramain railway.

Government

 As mentioned previously, Jeddah forms part of Makkah Province, which is the largest of the Kingdom’s 13 provinces. Though not the regional capital, Jeddah’s position as the region’s largest city means that it has its own governor, who since 1998 has been Prince Mishaal bin Majid.

At the local level, the key government institutions responsible for Jeddah’s economic development are the municipality, the Chamber of Commerce and Industry (CCI), and the JDURC. The municipality deals with an annual administrative budget in the region of SR1.6bn ($426.4m), according to the most recently available figures. However, actual government spending in Jeddah is likely to be significantly higher, as a sizeable share of the Kingdom’s $11bn budget for infrastructure investment for 2015 is being directed towards projects in the region, including the Haramain rail project and KAIA expansion.

Key to the local authorities’ current economic development strategy is private sector engagement. The CCI, for instance, has been working hard to position Jeddah on the global investment map, with the Jeddah Economic Forum, founded in 1999, evolving into a mainstay of the global economic events calendar. The CCI has also launched an internet portal for inward investment called the Jeddah Gateway.

Master Planner

However, arguably the most significant spur to private sector involvement has been the creation of the JDURC – a delivery agency empowered by the municipality in 2006 to enact the authorities’ various master plans for the city.

According to Nidhal Abdulrahman Taibah, vice-president for development at the JDURC, the company’s objectives are three-fold: the privatisation of municipal assets and concessions; the development of public-private partnership models that will help improve the standard of services rendered by the city; and the introduction of new projects that support the strategic directives of Jeddah’s master plans.

In practice, the JDURC’s remit is very broad. Current projects are divided along a series of key verticals, the most significant of which are the mega (or pioneer) projects designed to ease pressure on Jeddah’s current housing shortage. Chief among these are the two new cities – Salman Bay and Murooj Jeddah. The next vertical is also related to housing, and involves the redevelopment of some of Jeddah’s unplanned settlements – in some cases through carrying out renovation works, and in others through providing compensation and relocating residents.

Further verticals include urban infrastructure, with the Middle Corniche and Palestine Street having been recently redeveloped, and attention now turning to the North Corniche. Alongside this, the JDURC is also involved in projects relating to environmental sustainability, such as managing an old landfill site that has been capped and is being considered for gasification, and planning a waste management system for the UNESCO area of old Jeddah, as well as projects relating to the privatisation of municipal concessions, like public parking and outdoor advertising.

For Taibah, the JDURC’s added value is its understanding of both public and private sector viewpoints. “The JDURC straddles the fence between public and private,” he told OBG, “which puts us in a situation of broader exposure to the challenges on both sides of the fence, and also gives us a unique position to facilitate and create synergies for turning public-private interactions into win-win situations.”

With only 70 permanent employees, the JDURC relies to some extent on outsourcing and bringing in expertise, particularly when it comes to complex types of project management. Such partnerships with the international private sector are seen as fundamental in encouraging knowledge transfer and improving skills within the local public sector.

Investment

As well as the projects directly managed by the JDURC, Jeddah is on the cusp of a sustained investment in public transport infrastructure. Following on from Riyadh, the Jeddah municipality has recently put in place a master plan for an integrated public transport network, the centrepiece of which will be a SR45bn ($12bn) underground metro system.

Jeddah Metro Company, a public company and an affiliate of the JDURC, has been established to oversee the project, and three contracts have been tendered relating to consultancy services. The first, an SR276m ($73.55m) contract to provide preliminary engineering designs, was won by French consultancy firm Systra in July 2014. The second, for project management consultancy, was awarded to AECOM Arabia in August 2014, while the third – relating to architectural consultancy for the 46 stations – has been awarded to British firm Foster + Partners. The metro is anticipated to be ready for public use by 2022.

Beyond public projects, Jeddah is also currently enjoying success in attracting significant private investment. Emaar Middle East is involved in two major mixed-use projects: Jeddah Gate and Emaar Square, the former with a built-up area of around 400,000 sq metres, and the latter 45,000 sq metres. Largest of all will be the planned Kingdom City in Obhor to the north of Jeddah, currently under development by Prince Alwaleed bin Talal’s Kingdom Holding Company and the Jeddah Economic Company, a part-owned subsidiary.

The project is designed to encompass a 5.3m-sq-metre built-up area, and its centrepiece will be the world’s first building over 1 km tall, Kingdom Tower. The tower’s final height is currently unknown, but the building is expected to have a total floor space of 500,000 sq metres, and construction will cost an estimated SR4.6bn ($1.23bn). The planned 170-storey building had reached six floors by the end of 2014, and, according to Prince Alwaleed, a new floor is currently being added nearly every four days.

According to global property investment and management firm JLL, investment in office and retail space has seen capacity in these segments grow substantially since 2013, with office space expanding from 622,000 sq metres to 821,000 sq metres, and retail climbing from 780,000 sq metres to 923,000 sq metres. Despite this expanding supply and planned further developments, demand has remained high, with vacancy rates in each sector low, at 6% and 7%, respectively, and the rental outlook positive, even if it is unlikely to be linear.

Outlook

Jeddah remains among the most economically dynamic cities in the Middle East region, benefitting not only from consistent and reliable drivers of growth such as religious pilgrimage and shipping, but also actively seeking new opportunities, particularly in domestic tourism and the involvement of the private sector in the municipality’s ambitious regeneration and development projects.

Both its UNESCO status and (once finished) the world’s tallest building will attract additional global attention to the city, but the most important drivers for Jeddah’s future growth will be the less-heralded investments in infrastructure and housing. These will expand the city’s growth outwards, helping it to avoid the overcrowding that comes with rapid population expansion, and maintain the high standard of living for which the city is famous throughout the Kingdom. With municipal authorities actively seeking private sector participation in both of these areas, Jeddah is proving itself very much open for business, displaying a diverse range of investment opportunities.