Three completely new cities, focused on developing business in Saudi Arabia, are destined to rise from the sands alongside the kingdom’s existing main population centres. This new generation of so-called ’economic cities’ is emblematic of the oil-powered boom that has transformed the economy over the past three years.

The urban development plans also represent Saudi Arabia’s biggest recent business innovation. They are more than simply industrial zones to existing cities – although plenty of those are also planned – they are being envisaged as all-encompassing developments. The projects have been conceived and launched by the state’s Saudi Arabian General Investment Authority (SAGIA), but they are largely – and in some cases completely – financed by the private sector, including a significant participation from foreign investors.

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The real estate sector is expected to attract $22bn in foreign investments in the next three years. Most foreign funds are likely to come into the market through real estate investment trusts, the value of which increased to $2bn in 2004 from only $42m in 2002.

Saudi membership of the World Trade Organization, finally agreed in December 2005, was preceded by changes to the real estate law, which further opened the property market to foreign investment.

This has caused central bank the Saudi Arabian Monetary Agency (SAMA) to worry that the economy will not be able to handle such a large amount of liquidity in the short term. SAMA estimates that every extra riyal of government spending multiplies up to SR16.6 ($4.43) more liquidity, so it is discouraging the return of capital invested abroad. The value of Saudi-owned foreign assets is forecast to rise to $221bn by the end of 2006, from $194bn at end-July.

Key trends, such as a growing shift towards commercial and speculative property development, have been accentuated in a market driven by huge liquidity. The government’s strong focus on economic diversification, to help free the world’s largest oil exporter from its long-term dependence on crude, has pushed up the price of industrial property.

Several market observers note the large premium being paid on high-quality modern office space in Riyadh and Jeddah. In a report published in April, Samba Financial Group, one of the kingdom’s leading banks, estimated that average prices for land and commercial office space in Riyadh had increased by 16.5% and 15.2% respectively between 2002 and 2005. Samba estimates there is a 94% occupancy rate in the city.

Tourism explosion

Hotel development has become another massive boom sector since the kingdom started issuing tourist visas in May 2006.

This is in addition to the traditional Haj and Omra traffic to – and investment in – Saudi Arabia’s holy places. Recent years have seen ever-greater influxes of pilgrims to the holy cities of Mecca and Medina, driving up prices to unprecedented levels. Major hotel and housing projects near the Great Mosque in Mecca include some of the kingdom’s largest projects, such as the soon-to-be-completed ZamZam Tower with its 1240 luxury suites.

Real estate is one of the few sectors of the Saudi economy in which the private sector has taken a lead role ahead of the government. Samba estimates that the government will finance no more than 30% of the $283bn investments in planned ‘super projects’ across all sectors of the economy.

While real estate will see almost no government investment, private firms will invest approximately $40bn into the King Abdullah Economic City at Rabigh, the Prince Abdul-Aziz Bin Mousaed Economic City at Ha’il and the Knowledge Economic City at Medina.

The Saudi government regards these cities as a key component in its development strategy to generate regional growth and to create thousands of private sector jobs in diverse economic sectors. In this way, commercial real estate is effectively advancing hand-in-hand with economic diversification. SAGIA has dubbed this the “360 degrees of opportunities” programme. It hopes to generate significant spill-over effects by driving growth into the residential and commercial real estate sector and increasing the economic activity in the surrounding areas.

A competitive economy

According to SAGIA governor Amr Al Dabbagh, the three economic cities launched to date will promote investments into the most competitive business sectors: King Abdullah Economic City will promote energy and transportation-related industries; Prince Abdul-Aziz City will be designed around transportation and related logistical services; and the Knowledge Economic City will be a centre for knowledge-based industries.

The biggest of the three cities, the $26.7bn King Abdullah Economic City, is located by the industrial city of Rabigh on the west coast. This is the kingdom’s single largest private investment and since July its biggest experiment in popular capitalism too. Some 10 million Saudis, more than half the adult population, bid for shares in an initial public offering (IPO) to help finance the ‘Emaar the Economic City’ development consortium (which is led by Dubai-based property giant Emaar), whose backers include a clutch of Kuwaiti, Bahraini and Emirati investment companies and their Saudi partners.

The city will spread over 55 million square metres (m2) of greenfield land, and its promoters expect it to include a world-class seaport, an industrial district geared towards downstream petrochemicals, pharmaceuticals and research and development.

The development’s ‘financial island’ will offer 500,000m2 of office space, while 35 kilometres of shoreline will be developed with hotels and luxury villas, and will boast an international class 18-hole golf course. Emmar the Economic City says the first batch of commercial houses and residents are expected to take possession in the last quarter of 2008.

Financial opportunity

The next big financial opportunity in the sector was launched in September, when investors were invited to participate in six parallel mutual funds to finance transport, mining, food industry, infrastructure, education, tourism and housing developments in the $8bn, 156 million m2 Prince Abdul-Aziz Economic City, located 700km north of Riyadh.

The government, which owns 30% of the development, plans an IPO targeted at Saudi nationals to finance the scheme later this year.

The $6.7bn Knowledge Economic City in Medina will include a technology zone, an advanced IT studies institute, a campus for medical research and life sciences, and an interactive museum on the life of Prophet Mohammad alongside a retail zone, business district and residential zones including high rises, houses, fully serviced apartments, shopping malls and a mosque with a 10,000-worshipper capacity.

The Knowledge Economic City is closed to foreign investment as are all real estate developments in Medina and Mecca. For now, Saudi real estate plays will mainly involve finance sourced in the kingdom, or from its Gulf Co-operation Council partners.