Emaar set to create Dubai along Red Sea

 
Emaar Properties, after having mobilised Dubai’s property market, is now involved in creating another Dubai along the Red Sea through its Saudi-based associate company, Emaar Economic City (EEC). Emaar holds a 31 per cent stake in the company.

Located in Rabigh near Jeddah, King Abdullah Economic City (KAEC) is the single largest private sector project in the region with a total land plot area of 168 million square metres, which generates a built-up area of 144.75million sqm. It has the potential to create one million jobs and be home to 1.5 to two million residents.

KAEC is one of the six economic cities being set up in Saudi Arabia to promote balanced regional development, achieve economic diversification, create jobs and upgrade competitiveness.

Clustering of businesses, human capital and industries in these cities is expected to work as stimuli throughout the country. The other cities include Knowledge Economic City (Madinah), Jazan Economic City and Prince Abdulaziz bin Mousaed Economic City in Hail.

The Saudi Arabian General Investment Authority (Sagia) is taking the lead role in translating these strategic directives of the Saudi Government to diversify and power the Saudi economy into an operational plan.

KAEC, like other economic cities, will offer a well-planned city based on one coherent masterplan taking into consideration modern requirements of people and businesses. The plan includes developing well-defined residential and commercial districts including a central business district with a financial island. 

KAEC project is being developed on the Red Sea coast and within Saudi Arabia’s most populous region, the Western Region which includes the Holy Cities of Makkah and Madinah and Saudi Arabia’s second largest city and commercial hub, Jeddah. It is a region with a total population base of eight million. Makkah alone attracts an estimated 10 million visitors annually.

Since, Saudi Arabia offers some of the lowest prices in the world to its industries on natural gas feedstock and electricity, an obvious strategy for EEC is to attract energy intensive industries such as aluminium and steel.

EEC has already signed an a memorandum of understanding with Emirates Aluminium (EMAL),  a joint-venture between Dubai Aluminium (Dubal) and Mubadala Development Company for the establishment of an aluminium smelter with an initial capacity of 700,000 tonnes per annum starting 2010. The plan is to eventually increase that capacity to around 1.4 million tonnes, making it the largest aluminium plant in the world. According to EEC, the planned initial investment from EMAL is estimated to be around SAR18.4 billion (Dh18bn). 

In addition, EEC and Sagia plan to encourage plastics conversion and light manufacturing facilities to set-up operations in KAEC’s Plastics Valley in the industrial zone – both are identified as key growth drivers for the Saudi economy.

The SAR37bn PetroRabigh integrated refining and petrochemicals complex, located in the vicinity of KAEC, is expected to provide feedstock for KAEC’s industrial activities.

However, the confidence to create a vibrant, self sustained economy in a remote piece of desert stems from many other factors working in EEC’s favour allowing it to leverage its locational advantage and the credibility that Emaar brings to EEC. First, is the sheer size of the project. With a land bank measuring 168 million sqm in plot area and 144.75 million sqm in built up area (BUA), EEC is potentially the largest developer of real estate in the Gulf region. For instance, EEC’s land bank exceeds the combined total of Gulf land owned by Jabal Omar, Dar Al Arkan, Emaar Properties (equity adjusted), Aldar Properties and Sorouh Real Estate.

Aware of the difficulties in attracting fresh migration to an erstwhile inhospitable desert, EEC has reinforced the importance of scale with plans for comprehensive facilities to overcome the inertia of both buyers and investors. The company plans to invest in the utilities (electricity, water and district cooling) required by KAEC through joint ventures with specialised service providers.

Most importantly, complementing the land bank and amenities are government granted rights such as the sea port, industrial zone and the economic city status – completing the virtuous cycle of triggers essential for creating a self sustained, economically viable city from scratch.

Establishment of a port aims to attract industries and facilitate their growth and trade; a logistics hub around the port and industrial area, that benefits from exemptions on import duties for goods intended for re-export, to stimulate the city’s economy;  the growing economy and the job opportunities created by the industrial and port initiatives, in turn, to facilitate establishment of companies with supporting services, and channelise part of the real estate demand in Saudi Arabia into KAEC.

As a result, the company’s immediate focus is on development of the industrial zone and the sea port, with the first leasable plots expected to be handed over to industrialists in 2008, and the sea port expected to commence operations in 2010-2011. EEC signed a memorandum of understanding with Dubai Ports World (DPW) for development and operation of a 20 million TEU capacity port.

The first industrial plants are expected to be operational next year, just after the first residential units are expected to be ready.

REGULATORY ENVIRONMENT

While economic city status facilitates 100 per cent foreign ownership of business and property within KAEC’s boundaries, Sagia promises smoother bureaucracy for these new cities, an attractive regulatory environment, and better communication channels between investors and residents on the one hand, and government ministries and municipalities on the other.

Although the master developer for KAEC will be EEC, the project will clearly benefit from the combined expertise of Sagia, as an overall supervising authority, and that of Emaar as a facilitator and a field specialist.

At the same time, the concept of economic cities, like any other concept which is yet to be proven, carries risks on many fronts.

Despite the solid experience in real estate development provided by the backing of Emaar Properties to EEC, neither side has the experience of creating a city and an economy.

This is not to say that creating a Dubai on the Red Sea in 17 years, as per the company’s plans, is impossible, but that it is certainly a sizeable venture.

In the first instance, the objective to complete the development of the entire economic city by 2024 appears far too ambitious. Although, the concept of building cities has a historical precedence but the context in this particular case is unique.

Against the project’s background and ambitions comparable to those behind the development of Washington, Brasilia, Canberra and Islamabad, is the fact that KAEC is not a planned capital city. Hence, it will not benefit from the “push” associated with moving all government institutions and offices to the city as a new capital city.

The second challenge in developing the KAEC project into a prosperous city with homogenous components that blend together to make KAEC a home, a place for work and a holiday destination will be to ensure simultaneous and co-ordinated progress on multiple fronts. Failure to co-ordinate development of various key aspects could dampen investor’s nascent interest.

Unlike any other property development that creates supply based on strong market fundamentals, KAEC is aiming at creating belief in the viability of the concept to attract a proportion of the growing real estate demand in Saudi Arabia into KAEC.

 

DEMAND FOR HOUSING

Precedence proves that it is indeed possible, but the question is to what extent and in what time? Let’s not forget that EEC is competing in a favourable growth environment. The development is situated in Saudi Arabia, which is the Middle East’s largest economy and the largest oil exporter in the world benefitting from growing current account surplus in an increasingly liberalised economic environment. It is also a country in which demand for housing and all other real estate projects has been fuelled by pyramid shaped population demographics, increasing wealth, economic activity and improving financial infrastructure.

Based on the Population Reference Bureau’s expectation that the Saudi population is going to double by 2050, the country would need around 5.5 to 6 million new residential units over the next 43 years if we assume the average household size for the period to be 4.5.  An estimated 32 per cent of the total demand in Saudi Arabia is expected by the government to come out of the Western Region, which is the location of KAEC.

Looking at other segments of the market, demand for office properties is coming from the accelerating pace of economic growth in Saudi Arabia, the growing need to “update” the ageing stock and develop well defined business districts. Moreover, the expected emergence of new cities such as KAEC, is expected to further diversify the sources/locations of demand for office space.

The Saudi Arabian retail property market is also undersupplied relative to the neighbouring markets of Abu Dhabi and Dubai with gross leasable area (GLA) per capita in Riyadh and Jeddah is around 0.6sqm per capita as compared to around 1sqm in Dubai and Abu Dhabi.

 

REVENUE BASE

Although faced with the prospect of huge organic growth evident from the arguments above, EEC has been cautious to diversify its revenue base. The company aims to sell around 44 per cent of its 144.75 million sqm of BUA land bank as serviced land plots to third party developers. A further 18 per cent is expected to be developed and sold as residential, retail and office units.

The remaining 38 per cent will primarily be utilised to generate recurring cash flows from: land on long-term lease to industrials, investment properties (retail, office and hotels/resorts) and concession fees from the port operator.

Also, it is highly likely that EEC could gain the exclusive right to provide fixed-line, internet and pay-TV services within KAEC.

Drawing from above, projected 2008 revenue is SAR402m compared to no revenues to date; by 2009 revenue is expected to reach SAR954m before escalating all the way up to SAR6.38bn in 2012. A small part of the push in 2011 will be from the anticipated first contribution from the company’s hotels & resorts joint ventures and from concession fees on the initial phase of the DPW operated sea port at KAEC.

The estimated CAGR of revenues is 100 per cent for the period between 2008 and 2012, which is high due to the expectation that the next five years represent the take-off stage.

Also, EEC is projected to record SAR33.9m in 2008 net profits compared to SAR26.3m in 2007, followed by SAR88.7m in 2009 and SAR224.6m in 2010 on the back of a higher EBITDA.

Net profits are expected to expand at a CAGR of 164 per cent before they reach their five-year peak in 2012 of SAR1.66bn.

While there are early indicators that the company is leveraging its strategic advantages with superior execution, EEC is in position now to exploit long-term opportunities.

- The writers are part of Shuaa Capital’s research team