Saudi Arabia is becoming a hotspot for retail, hospitality, and mixed-use complexes, says John Harris, regional director of Jones Lang LaSalle in Saudi Arabia.
Giving details about several mega projects under way in Makkah, Riyadh and Jeddah, Harris tells Diana Al-Jassem of Arab News in an exclusive interview in Riyadh that there is an urgent need to speed up residential projects in order to address the need of the growing population.
Harris says he expects a boom in the Saudi travel sector due to greater capacity and infrastructure, such as the Jabal Omar project with 37 hotels.
The following are excerpts from the interview:
Jones Lang LaSalle has advised on projects in excess of $ 100 billion across Saudi Arabia in the last two years. Could you tell us in detail the development of these projects and the implementation strategies?
With sustained economic growth, the Kingdom has found the resources to embark upon several large scale development projects across the country. The most exciting project that we are involved with is the King Abdullah Financial District, which is the largest urban development currently under construction anywhere in the world. The project value is close to $ 8 billion. The first office, apartment and retail buildings are now available for lease. The first phase will open this summer we have four office and four apartment buildings and a conference center, in addition to a beautiful mosque and public plaza. The rest of the project will be completed over the next two years. The public will enjoy shopping in over 400 retail units, and will be several attractions such as a science museum and an interactive museum for children. Also, there will be three new hotels, including the Intercontinental and Wyndham. Jabal Omar in Makkah is another high-profile project that we are currently working on. We have been working for three years with the developer, banks and project managers and we have been leasing and managing the Jabal Omar shopping center which has just opened and is becoming very popular with pilgrims. We have also been working with our international clients to help them open new businesses in Saudi Arabia or to expand existing operations. The IT sector seems to be enjoying strong growth at the moment and we have been advising Microsoft, IBM, Ericsson and several others. We are pleased that we have also been able to secure some major Saudi corporations as clients.
According to statistics, Saudi Arabia is ranked the largest real estate market in the Gulf and is poised to be one of the fastest growing markets in the region over the next 3 years. What kind of projects you did in 2012 and what are the plans for the coming five years?
The combinations of population size and wealth have contributed to make Saudi Arabia the most important market in the region. With the majority of the population approaching the years of marriage and employment, there is obviously a high demand for household related sectors: housing, retail, education, health care. There is also a lot work being generated by investment in the economic capacity of the country, especially transportation infrastructure, industrial cities, economic clusters and universities. Most of this has some kind of support from the government. Compared to other countries, the involvement of capital markets has had less of a role, although we know many local and international investors who are hunting for investment-grade assets but can’t find the opportunities.
From your point of view, what are the reasons that contribute to speed up the Kingdom’s need for residential projects?
The government is offering help to Saudi nationals through the Real Estate Development Fund for building or purchasing homes, but employment and affordability remain the key challenges. The working age population is growing fast while the supply of new jobs is struggling to keep up. Even with the new mortgage laws, banks will only be able to lend to people with a steady income. The high cost of housing, raw materials and land is also a problem, especially given the traditional preference for large villa units. I think we are seeing Saudi families becoming more flexible with regard to smaller housing types. Perhaps there is also an impact from those who are studying abroad who have become more confortable with different styles of housing, such as apartments. Statistics also suggest that household sizes are declining, which can hopefully allow for more flexibility.
How do you see the competition among real estate (local and foreign) companies in the Saudi market?
I think a lot of foreign companies and developers are studying the Saudi market, but they still perceive that this is a risky market. They find it difficult to obtain clear market information and data which they can use for their business case. Developers who are already in the region, from Kuwait or the UAE, seem more comfortable with the environment, but the most successful residential developers are local groups.
Could you tell us your expectations of the Saudi commercial and real estate market in the coming few years, especially in the post-mortgage law period?
The introduction of mortgage law may encourage foreign contractors, but I don’t see that many foreign contractors at present. I believe that foreign contractors are looking to be involved in certain projects where they might have a technical expertise, such as tall buildings or transportation systems. In general projects, we see Saudi have more experience and the ability to deploy resources locally.I think mortgage law will have a positive impact. I expect it will generate more fund formation and deals, by enabling asset-based lending. The mortgage law will not solve the housing problem by itself, but it will increase the supply of capital to families and developers.
The first three quarters of 2012 showed a marked improvement in hotel occupancies with a 5 percent increase year-on-year. Reports indicate that growth in business travel is expected to fuel hotel demand, especially during the holy seasons. What’s your evaluation of Jeddah’s hospitality sector performance and domestic tourism over the long term?
With new roads, rail systems, ports, and the new airport, we expect tourism in the Makkah region to be a hotspot in the coming few years. The supply of hotel rooms in Jeddah and Makkah is also poised to increase substantially. Jabal Omar is about to open its first phase of nine new hotels to be followed 26 additional towers. Umrah tourism and the expansion of Grand Mosque is also helping to generate more traffic. The visa process in Saudi Arabia for business tourism is improving but the whole experience upon arrival could be more efficient and create a better first impression. In Riyadh, we do have some concern that the amount of new supply will have a downward impact on average revenue and occupancy rates, but that will be good news for visitors.
The residential sector remained the hotspot during 2012. Custodian of the Two Holy Mosques King Abdullah decided to spend $ 130 billion on extra subsidies for housing and benefits. Do you expect a continued growth in real estate financing and private sector lending?
The demand fundamentals are strong across most sectors and cities, in particular for residential and for expatriate compounds. The number of expatriate professionals continues to increase, and until now supply has struggled to meet demand. We have also been very impressed with demand in the retail sector, especially when consumer-spending rate is growing very quickly to an estimated 20 percent per year. The supply of malls and shopping centers was restrained after 2008, where banks pulled back from funding the projects, so the market returned to balance and investors and lenders are back. We also expect to see more new mixed-use projects that combine offices, hotels, apartments and shops. The demand for office space is growing in all major cities, but there is some risk of oversupply in Riyadh. The office markets in Jeddah and Eastern Province seem more balanced.
What do you think of the demand and supply expansion in Riyadh during 2013-2014?
In Riyadh, the demand for residential units is high, but we still don’t see enough residential large scale residential development. The time scale and infrastructure investment is challenging.
With the increasing number of expatriates in Saudi Arabia, and an unstable political situation in parts of the MENA region, do you expect further growth in Saudi Arabia, where foreign investors find investment environment the best?
We know that international investors are interested in Saudi Arabia, which is a positive thing. There are two main challenges. One, the supply of investment is very limited in Saudi Arabia. The second challenge is that Saudis are very good competitors and good buyers where foreigners cannot compete. There are some areas where foreigners can make a difference like health care, retail and mixed-use complexes.
The Ministry of Labor’s decision to force expatriates to pay an extra SR 2,400 per year has raised the anger of real estate development companies. What are your views over such huge taxes, and how would it impact the Saudi real estate market?
Certainly this step will increase costs, but it is probably an important and worthwhile step in moving to a more productive economy with more local employment. It is not the end of the world. This step will reduce the number of unqualified workers, and they will need to be replaced with more skills and automation. When I visit building sites or look at facilities management here I see so many laborers engaged in really low value activities — in other countries you need a lot less people to create the same result.
