Economic cities — opening vistas of growth in the Kingdom

Economic cities — opening vistas of growth in the Kingdom of Saudi Arabia

Economic cities — opening vistas of growth

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Contents Executive summary

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Introduction4 Economic diversification — facilitating real estate sector growth 1.1 Macroeconomic and non-oil diversification 1.2 Real estate industry insights 1.3 ECs and cross-sector links

ECs — opening floodgates of growth 2.1 ECs — primary objectives 2.2 ECs — snapshot and development matrix 2.3 Real estate sector components of ECs 2.4 Benefit for investors 2.5 Top challenges to the development of ECs

Stakeholders’ role and outlook 3.1 Shaping ECs — SAGIA and ECA 3.2 Real estate regulations in ECs 3.3 Perceptions of key developers, contractors and consultants 3.4 Outlook for real estate development of ECs

EY’s role


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Executive summary

The Kingdom of Saudi Arabia (KSA) is currently investing heavily in real estate and infrastructure projects. This is a part of the Kingdom’s efforts to resolve the housing and employment crisis, resulting from a growing population, and economic diversification. The current trend of increased investments in real estate and infrastructure projects would invariably help the Kingdom build a strong industrial base to sustain its economy in the future as oil reserves shrink. However, the KSA’s strong oil reserves and the Government’s resolute economic development plans provide robust support in moving ahead with its infrastructure development projects. The KSA continues to attract attention worldwide despite the global economic slowdown and instability in the Middle East and North Africa (MENA) region. The Kingdom’s position among the top world oil producers and its ambitious program of developing four economic cities (ECs) have placed the country in the limelight. Economic cities are considered a significant step toward the long-standing vision of positioning the Kingdom as a leading destination for both tourists and investors on the world map. Each of the ECs will have its own area of specialization — being developed around at least one global competitive cluster or industry. They are constructed in compliance with environmental guidelines using state-of-the-art greenfield

solutions. ECs are expected to create job opportunities for the private sector, along with attractive lifestyles, thus providing a business-friendly atmosphere. The KSA Government sees ECs as drivers of growth, opening up the economy and attracting more foreign and local investments. The ECs are expected to allow foreign real estate investors to own property. Efficient administration there would ease turnaround time on simple transactions, like visas and custom documents. ECs would have relaxed social rules, improving women’s rights in the cities and promoting a mix of Western and Saudi styles. The EC projects would bring in modern technology, management skills, corporate governance and new industries, making the economy less dependent on oil and gas. Economic cities — opening vistas of growth is a thought leadership paper by the EY Middle East Transaction Real Estate Advisory Services Team, based on their experience of carrying out market assessments, feasibility studies, and asset and facilities management for Government agencies and private institutions. It offers useful insights of the four EC projects in the KSA. Besides providing an analysis into the market drivers and restraints on the current KSA construction market, the paper provides a snapshot of the EC projects and their objectives, regulatory frameworks and incentives for investors.


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ECs in Saudi Arabia

Introduction The Government of KSA is pursuing investments and reforms, enabling the oil-rich nation to become one of the most competitive economies in the world, by the beginning of 2020. Through the ECs initiative in Rabigh, Hail, Madinah and Jazan regions, the Government aims to develop vibrant urban areas with a business-friendly environment. This would leverage the KSA’s competitive advantages — low-cost energy and strategic locations.

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EC projects are more than giant industrial zones. They are cities that will nurture new businesses and residential communities in areas that have had limited investment to date. They are expected to translate into employment growth in the cities; as a result, the ECs are expected to see positive growth in population, resulting in higher demand for real estate in the ECs.

Economic diversification — facilitating real estate sector growth 1.1 Macroeconomic and non-oil diversification According to the BP Statistical Review of World Energy 20141, the KSA remains a major player in the global oil market, with an estimated reserve base of 265.8 billion barrels. The Kingdom possesses about 17% of the world’s proven oil reserves, ranks as the largest exporter of total petroleum liquids in the world and maintains the world’s largest crude oil production capacity. The US Energy Information Administration (EIA) estimates that the Kingdom can keep pumping oil for the next 70 to 80 years, given its enormous oil reserves. Oil, together with the Holy Cities of Makkah and Madinah, provides the country’s Government with wealth, power and influence. The KSA has an oil-based economy, with strong Government controls over major economic activities like upstream oil, mining and quarrying, petroleum refining, electricity, gas and water. According to the Central Department of Statistics & Information (CDSI), the petroleum sector, inclusive of upstream crude petroleum, natural gas and petroleum refining, accounts for roughly 80% of the budget revenues, 42% of the GDP and about 85% of the export earnings. BP Statistical Review of World Energy 2014, January 2015

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The Ministry of Finance of the KSA has estimated that the country’s GDP reached US$752.5b at the end of 2014, achieving a growth rate of 1.09% (in current prices) compared with US$745.3b in 2013. According to the CDSI2, the Saudi economy grew by 3.6% in 2014, up from 2.7% in 2013. With an increase in oil production, by 0.8%, year-on-year (y-o-y), and commissioning of Yasref refinery, a joint venture between Saudi Aramco and Sinopec, in 2014, the overall oil sector growth remained positive at 1.7% while the non-oil sector maintained a growth of over 6% in 2014.

National Accounts Indicators 2014 — CDSI, March 2015

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5

40.2%

10.4%

US$752.5b 5.1% 9.4% 5.4%

1.2%

10.8%

Agriculture, Forestry and Fishing Mining & Quarrying

800

Manufacturing

600

Electricity, Gas and Water

500

Construction Wholesale & Retail Trade, Restaurants & Hotels Transport, Storage and Communication Finance, Insurance, Real Estate and Business Services

The non-oil manufacturing growth is expected to remain robust, following a growth of 6.3% and 6.5% in 2013 and 2014, respectively. Strong construction project activity and rising domestic demand would sustain strong growth in the non-oil sector. The US$93b King Abdullah Economic City (KAEC), the KSA Ministry of Housing’s US$67b 500,000 Houses Program, the US$40b Sudair Industrial City, the US$20b Kingdom City community development, the US$7b Waad El Shammal Mining City, the US$5.3b King Abdullah Medical City, and others are some of the key non-oil construction projects being developed in the country. In March 2014, the Council of Ministers approved the establishment of the US$530m Saudi Arabian Industrial Investments Company. The company will engage in an investment program worth US$2b in the 2015–2020 period, targeting conversion industries that rely on non-oil manufactured products, including petrochemicals, plastic and steel. The KSA’s economy is expected to maintain its growth momentum in 2015, backed by strong Government spending. For 2015, the Government has set budget spending of US$229.3b, focusing on priority investment programs that enhance sustainable and strong economic development and employment opportunities for Saudi nationals. The Government generally ends up spending substantially more than its budget plan, overspending by an annual average of 25% in 2004–2013.

744.2

10.0% 526.7

10.0%

8.0% 5.4%

300

6.0% 3.6%

4.8%

2.7%

200

0

4.0%

2.0%

100

2010

2011

2012

Nominal GDP (US$b)

2013e

2014e

0

Real GDP Growth (%)

Source: Central Department of Statistics and Information (CDSI).

Key budgetary allocations for 2015, US$b Education and manpower

42.7

Health and social affairs 16.8

57.9

16.0

10.7

Transportation and infrastructure Water, agriculture and manufacturing Municipality services

Source: CDSI, SAMA

Key construction projects allocated • 164 new projects • Rehabilitation of 500 school buildings • Rehabilitation of 11 sport centers • Three new universities • 27 new hospitals and health facilities • Funds for 117 hospitals already under construction • 8 medical cities (ongoing construction) • 5 centers for individuals with special need Source: NCB Saudi Budget Report 2015.


12.0%

669.4

• 16 sports clubs

6

752.5

400

Other services Source: Saudi Arabian Monetary Agency (SAMA) Annual Statistics

733.9

700

US$b

1.9%

15.6%

KSA nominal GDP and real GDP growth rate, 2008–14

Percentage

KSA GDP breakdown by economic activity, 2014

According to the Ministry of Finance, the country’s Government spending reached a record of US$293.3b in 2014, 28% above the originally planned US$228b3. The number of contracts signed for Government projects with the private sector in 2014 was 2,572, with a total value of US$49b. The budget will focus on infrastructure, education, health, security, social services, municipal services, water treatment services, roads and highways, with special emphasis on science and technology projects, as well as eGovernment services.

Key drivers in the KSA’s RHC market Developments in the real estate sector are expected to gain greater significance, given the increase in population and the customers’ growing desire for innovative real estate solutions that suit different incomes. Furthermore, massive investment in mega infrastructure projects, such as ECs and general transportation plans are boosting the growth of the RHC sector in the KSA.

Globally, oil prices have fallen by nearly 60% since June 2014, but the KSA’s economic performance will remain largely insulated from the recent decline in international oil prices. Supported by high Government spending on construction, transport, retail and utilities, the GDP growth in the oil-rich nation is projected to remain strong at around 4.5% in 2015, according to the International Monetary Fund (IMF).

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Religious tourism

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Demography

1.2 Real estate industry insights In an attempt to reduce dependence on natural resources and the negative influence of oil — price fluctuation on the Saudi budget, the Government is making efforts to diversify from its reliance on oil. Since its accession to the World Trade Organization (WTO) in 2005, the Saudi Government has improved its regulatory regime and opened up many sectors to foreign investors. The Government is prioritizing the real estate, hospitality and construction (RHC) industries as key areas for investments. The Saudi Government has invested heavily in national infrastructure to attract investment. Foreign direct investment (FDI) is seen as one of the most effective ways to diversify the economy and provide employment for younger generations. The authorities welcome FDI for its ability to transfer technology, employ and train the national workforce, foster economic development and enhance local raw materials. The country’s controlled inflation and relatively stable exchange rates and openness to foreign capital in upstream gas as well as extensive privatization programs are among the advantages attracting the investors into the country. Also, access to the world’s largest oil reserves, very low energy costs and a high standard of living are decisive factors for foreign investors. In March 2015, the Saudi Arabian General Investment Authority (SAGIA) reported that it intends to invite foreign Investors for transport and health care projects over the 2015–2020 period, with a combined value of nearly US$140b. Oil revenue is now directed into major social infrastructure projects, to attract foreign investment. The Government has allowed foreign ownership in ECs by allowing investments in transportation, education, health, information and communications technology, life sciences and energy. The RHC market is set to gain from the Government initiatives to diversify and build the economy.

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Non-oil diversification

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Ease of doing business

RHC market drivers

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• Fluctuations at the global level are cushioned by the non-oil sector diversification • Cluster development plans fuel real estate and construction development activities

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• The growing population base and expanding urbanization translate into increased demand for residential and commercial office properties

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• Religious tourism boosts real estate development in the Kingdom as the KSA is home to the Muslim world’s two holiest shrines of Makkah and Madinah

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• Simplification of procedure for business start-ups is expected to reduce the delays for starting construction projects • Relaxation of foreign investment laws are expected to permit and promote 100% foreign ownership • Mortgage law is expected to boost real estate financing and demand for housing

Source: NCB Quarterly Construction Contract Awards Review

BP Statistical Review of World Energy 2014, January 2015

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With a population of about 30 million, the KSA has one of the largest real estate markets in the MENA region. The Jeddah Chamber of Commerce and Industry valued the KSA real estate market in 2014 at US$347b4. The Chamber expects the value to top US$400b within the next few years, with growth averaging about 5% to7% year over year. Local and foreign investors, who are realizing the potential of the relatively immature market which could offer high returns, will drive this growth. According to the Chamber, the real estate market further requires US$171b of investments to meet the demand by 2020.

KSA RHC opportunities • World’s 8th highest education spender

Education

• Building new educational institutes and funding overseas degrees and training programs for Saudi students

Recent trends The measures that the KSA Government introduced in Q1 2014 and 2015 and the investor-friendly environment should help promote the development of the RHC sector. The introduction of these policies reflects a move towards a more westernized framework for the real estate sector, which should help promote the RHC industry as a destination for international investment on a similar level with neighboring states, such as the UAE, Qatar and Bahrain. KSA’s commitment to the RHC sector • Real Estate Development Fund (REDF) approved US$2.1b in housing loans to build 19,406 housing units

• Largest construction market in the Middle East

Construction

Economic cities

• A new court solely dedicated to tackling real estate disputes. • KSA created its first housing committee, grouping its public and private sectors, to deal with the construction of nearly 250,000 houses in Jeddah during the 2015–2025 period

2015

• KSA Government to construct 3,000 new schools and 117 hospitals over the 2015–2020 period • Ministry of Housing will launch housing projects on 56 million sqm of land in Jeddah, Taif, Eastern Province, Al Qassim Province and Hail

Source: Saudi Gazette‎, NCB Capital, Global Investment House

Jeddah Chamber of Commerce and Industry — Jan 2015

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• ECs are being developed to satisfy the needs of the growing KSA population by providing new living space and employment opportunities combined with world-class infrastructure • Economic incentives for investors

• New regulations, introduced in July 2014, have made it compulsory for all real estate firms to join the electronic Ijar system

2014

• Government focused on improving infrastructure, transport and real estate

Industrial cities

• As part of diversification, Saudi Industrial Property Authority (MODON) is developing new industrial cities focused on petrochemicals, plastics, metal goods, construction materials, electrical appliances and more • Largest market for medical equipment and healthcare products in the Middle East health care

Healthcare

• Focused on building additional health care facilities by the construction of new hospitals, clinics, medical education and research facilities

Source: SAGIA, MEED, Zawya, BMI Reports

1.3 ECs and cross-sector links The Kingdom’s Government budget reflects the importance of ongoing growth in the construction sector. Turning to the composition of the budget, the provisions for 2015 suggest continuity across the country’s key strategic areas for spending and investment: education is allocated 25%, while health care and social development receives 19% of spending. Additionally, a general revival in the Saudi economy is likely as demand for projects continues to increase further, improving the financial climate. The RHC sector in the KSA has great potential for growth as demand rises for residential, commercial, housing and institutional construction. The housing segment, in particular, is likely to grow the most as the Saudi population is rising by 2.7% a year.

ECs of the KSA Prince Abdulaziz Bin Moussed Economic City

Hail

Knowledge Economic City

Madinah Rabigh

Riyadh King Abdullah Economic City

Saudi Arabia

Jazan Economic City

Jazan

ECs are greenfield developments, which cluster residential and commercial buildings, and also feature industrial facilities

The ECs will offer a huge range of contracts and potentially present contractors with more opportunities from port and industrial infrastructure packages to a full range of residential and commercial real estate developments. 2.7m

US$135b 1.17m Project value

Employment (persons)

Housing (persons)

Source: ECA, SAGIA


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ECs — opening the floodgates of growth 2.1 ECs — primary objectives The objective of ECs is to grow the national economy and raise the standard of living for Saudis through enhancing the competitiveness of the economy, creating new jobs, improving Saudis’ skill levels, developing regions and diversifying the economy. The private sector is developing each city around at least one globally competitive cluster or industry, which will serve as an anchor and a growth engine for the city, around which other businesses will be located.

• Economic diversification • Pilot for base economy

ECs’ objectives and expected benefits

• Regional development • Job creation for nationals • Domestic and foreign direct investments • Unique lifestyle options • Innovation

Source: SAGIA, ECA

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2.2 ECs — snapshot and development matrix SAGIA acts as the regulator, facilitator and promoter of the ECs in the Kingdom. The private sector will work as the capital provider, land owner and developer of the ECs. The ECs, according to SAGIA, are estimated to contribute 20% of the Kingdom’s GDP by 2020. Spread out around a country the size of Western Europe, the new cities will take the pressure off Riyadh, Makkah and the Eastern Province, which now house almost 65% of the population, and are home to 75% of the businesses. The table below provides a snapshot of the ECs. Snapshot of ECs in the KSA King Abdullah Economic City (KAEC)

Prince AbdulAziz Bin Mousaed Economic City (PABMEC)

Knowledge Economic City (KEC)

Jazan Economic City (JEC)

Master developer

Emaar the Economic City

Al Mal Investment Company

Knowledge Economic City Company

Saudi Aramco

Contractor

Saudi Building & Construction Management (SBCM)

Consultants

LJA Engineering, Saudi Consulting Services (infrastructure design), Skidmore Owings and Merrill (SOM), WATG, Turner Arabia (PMC)

KEO International Consultants

AECOM, Dar Al-Handasah (Shair and Partners) SAL, JV of HOK, Inc. — Dubai and Branch and IBI Group

Timeline

2006–2029

2009–2025

2006–2020

2007–2037

Current status

Construction — execution

On hold (after design execution)



Expected population (million)

2

0.3

0.15

0.3

Investments (US$b)

93

8

7

27

Employment (persons)

1,000,000

55,000

20,000

100,000

Description

Saudi Binladin Group Al Dar, Al Arabia Architecture & Construction Company Limited (Phases 1 and 2), AlRajhi Holding Group

Sources: SAGIA, Zawya Projects Monitor (as of 31 December 2014), MEED Projects (as of 31 December 2014)

2.3 Real estate sector components of ECs Real estate components of ECs

Key components

KAEC

PABMEC

KEC

JEC

Airport Seaport Educational Commercial Residential Hospitality and leisure Logistics, warehouses, industrial Health care Sources: SAGIA, ECA


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King Abdullah Economic City Launched in 2006 to promote economic diversity in the Kingdom, the King Abdullah Economic City (KAEC) has six components — seaport, industrial district, educational zone, central business district, resorts and a residential area. The King Abdullah Economic City

King Abdullah Economic City

KAEC Location • Rabigh, area: 168sqkm

Focus • Logistics • Light and processing industry • Financial services

Rabigh

Key components • industrial district • Seaport • Residential area • Central business district • Resorts • Educational zone Sources: SAGIA, KAEC website

Features of KAEC The table below describes the key components of the KAEC.

Key components Description industrial district

• An industrial district covering an area of 64.8sqkm • The zone will accommodate around 2,700 manufacturers and logistics companies in a special economic zone • A seaport covering an area of 14.0sqkm

Seaport

• Handling capacity of 20 million twenty-foot equivalent units (TEU) • Facilities to handle cargo and equipped to receive the world’s largest vessels

Residential area

• A fully integrated 48sqkm residential zone, providing housing for all income groups • The residential area is planned to include 260,000 apartments and 56,000 villas • Will be divided into smaller residential, commercial and recreational areas

Central business district

• A 13.5sqkm central business district, featuring high — density living and commercial zone, a financial island and a central park

Resorts

• A 27.0sqkm resorts area that will feature luxury villas, townhouses, seaside resorts and spa, shopping centers and other recreational facilities

Educational zone

• The number of hotel rooms and suites are estimated to be 11,000 in more than 70 hotels • An educational zone covering an area of 5.0sqkm • Multi-university campus designed to accommodate 18,000 students

Source: SAGIA

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Prince AbdulAziz Bin Mousaed Economic City The Prince AbdulAziz Bin Mousaed Economic City (PABMEC) is the second economic city launched (after KAEC) in the KSA. The ground-breaking took place in 2009 and the city is expected to be fully completed by 2025. The main objective is to position the new city as the premier commerce, industry, transportation and logistics hub in the Middle East region. The Prince AbdulAziz Bin Mousaed Economic City

PABMEC Location

Key components

• Hail, area: 156sqkm

• Logistics and transportation center • Agro-industrial zone • Knowledge center • Petrochemical industries district • Residential area • Entertainment area • Mining center

Focus • Logistics and transportation • Agriculture • Minerals • Construction materials

Hail

Prince Abdulaziz Bin Moussed Economic City

Sources: SAGIA, PABMEC website

Features of PABMEC The table below describes key components of the PABMEC.

Key components Description Logistics and transportation center

Agro-industrial zone

Knowledge center Petrochemical industries district Residential area

Entertainment area

• An international airport, expected to serve 3 million passengers per year • A supply chain center and a multi-modal passenger station • Dry ports with an annual capacity to handle over 1.5 million tons of cargo • An expanded railway system and road connections to the rest of the KSA, to Jordan and Iraq • This area will group a number of services through activities linked to stages of crop growing, harvesting and processing • An agricultural research center that aims at increasing output with the help of modern production plants • A knowledge center featuring colleges, research centers, vocational and training centers, as well as public and private schools • The education zone will be spread across 10sqkm and is expected to serve nearly 40,000 students • Petrochemical industries district will included an oil refinery, natural gas processing plant, and production facilities for producing pharmaceuticals, fibre, rubber, plastics, basic chemicals, fertilizers and petrochemical feedstock • The residential area will cost about US$2.7b • Employment and living facilities, with 55,000 potential employment opportunities and up to 15,000 residential units • Hotels, shopping centers and entertainment facilities • Expected to attract nearly 70,000 tourists annually, providing additional investment opportunities in hospitality and tourism-related industries • Visitors will also benefit from a host of health care facilities

Mining center

• Mining center will include a minerals laboratory; land surveying and geotechnical services firms; mining equipment rental companies; and processing facilities for limestone, kaolin, silica sand and phosphate.

Source: SAGIA


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Knowledge Economic City King Abdullah bin Abdul Aziz launched the Knowledge Economic City (KEC) in Madinah in June 2006. It is the third of the four ECs in the Kingdom. The KEC is designed as a project to position the KSA and young Saudi Arabian entrepreneurs as internationally respected leaders in knowledge-based industries. It aims to attract and develop talent from around the world. Knowledge Economic City

Knowledge Economic City

KEC Location

Key components

• Madinah, • Complex for technology area: 4.8sqkm and knowledge based economy • Technological and administrative Focus colleges • Islamic civilization studies center • Knowledge• Campus for medical studies, based biological sciences and health industries services • Tourism • Business center • Services • Transport • Lifestyle • Commercial plaza • Residential areas

Madinah

Sources: SAGIA, KEC website

Features of KEC The table below describes key components of the KEC.

Key components Description Complex for technology and knowledgebased economy

• To support technological research and development in the region

Technological and administrative colleges

• Technological and administrative colleges will offer advanced technical study options and facilities, including scientific research laboratories, IT, software development, automation, multimedia and business administration

Islamic civilization studies center

• Focused on collecting, developing and transmitting the knowledge, values and artwork of Islamic civilization, as well as finding Islamic solutions to contemporary problems

Campus for medical studies, biological sciences and health services

• The complex has extensive facilities and support services focused on eGovernment, e-libraries, e-education, Arabic language technologies and technologies for managing religious tourism

• To provide medical services to visitors and residents • Campus for biological sciences will concentrate on fields critical to the KSA, such as vaccine development, crop engineering and biotechnologies for waste and water treatment

Business center

• Advanced infrastructure, including conference halls, exhibition centers and offices accommodating up to 10,000 employees

Transport

• A central transportation station will connect the city with Prince Mohammed Bin Abdul Aziz International Airport and the city with Makkah, Yanbu, KAEC and Jeddah

Source: SAGIA

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Key components Description • Commercial complexes • Residential and hospitality facilities • Theme park (Seera Land) Lifestyle

• King Abdul Aziz Mosque capable of accommodating 10,000 worshippers • The project will include a shopping mall implemented in two phases. Phase 1 will be 100,000 sqm and will include 300 shops, 4,000 parking lots and a hypermarket. Phase 2 will increase the retail space to 300,000sqm

Commercial plaza

• The main plaza in the center of KEC is surrounded by pedestrian walkways, forming a point of connection between visitors, workers and residents of Madinah, as well as hotel towers and residential apartments

Residential areas

• Residential areas including two villa areas, mid-to high-rise residential buildings, serviced apartments, green spaces and hospitality facilities provided for 30,000 visitors and 150,000 residents at a time

Source: SAGIA


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Jazan Economic City The Jazan Economic City (JEC) was launched as the fourth Economic City in November 2006 and is located 60km northwest of Jazan City. The JEC will be divided into industrial and non-industrial areas made up of four zones. JEC’s industrial zone will represent two-thirds of the city and will comprise a primary and heavy industry zone, secondary industry zone, and human resources and work development zone. Jazan Economic City

Jazan Economic City

JEC Location

Key components

• Jazan, area: 113sqkm

• Power plant

Focus

• Industrial port

• Heavy, secondary and labor-intensive industries

• Aluminum smelter

• Agriculture

• Ship building

• Water desalination plant

• Refinery • Iron ore complex

• Energy

Jazan

Sources: SAGIA, JEC website

Features of JEC heavy industry zone The table below describes the key components of primary and heavy industry zones in the JEC.

Key components Description

Power plant

• The power plant consists of the main power plant, associated balance-of-plant, electrical substation and fuel storage facilities • Using a steam cycle technology firing on Arabian crude oil, the power plant will be built with sufficient capacity to provide for the power needs of the Economic City

Water desalination plant

• The desalination plant will be capable of providing about 50,000 cubic meters of potable water per day to cater to the internal requirements of JEC as well as to supply water to the distribution network

Industrial port

• The industrial port will provide an additional terminal on the Red Sea’s coast, becoming one of the biggest ports in the region

Aluminum smelter

• Aluminum smelter with an annual production capacity of one million metric tons; this development is a joint venture between MMC Malaysia Group, Saudi Binladin Group and China Aluminium Company

Refinery

• Refinery standards with a production capacity of 250,000–400,000 barrels per day • Phase 1 of the South Steel Company (SOLB)’s project aims to produce iron billets with an annual production capacity of one million metric tons

Iron ore complex

• The project will also comprise a complex for iron raw trade and a raw iron fabrication factory with a production capacity of six million tons per year • An iron plate and fabrication plant with an annual production capacity of two million tons

Ship building

• A dry anchor will annex the main port for the purpose of repairing and maintenance of ships and fishing boats

Source: SAGIA

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Features of JEC secondary industry zone The table below describes the key components of the secondary industry zone in the JEC. Components of JEC secondary industry zone

Key components

Description

Silicon processing

• Silicon processing industry being planned due to abundance of silicon in JEC’s vicinity

Tech/agri-tech park

• Tech-park focused on manufacturing, research and development from a wide range of public and commercial sources • Agri-tech industry to add value to the regional agricultural industry and to make improvements in management of livestock and crops

Textile industry

• JEC will host a significant artificial textile fiber industry

Food processing

• Food processing is a main focus in JEC, particularly to provide healthy nutritional food to satisfy the requirements of the KSA

Pharmaceutical industry

• Development of industries involved in the manufacture of nutraceuticals and health-food products, drawn on agricultural resources in the Jazan region

Source: SAGIA

Features of other zones of JEC Components of JEC nonindustrial zone

Key components

Description

Human resources and work zone

• A technical training zone of 100sqm business zone, research and study centers, exhibition and conference halls, and commercial zone

Residential

• Residential spaces, 8,000 residential units, public utilities and integral recreational services, and a waterfront that will include 7,000 villas, chalets, hotels, resorts and a marina

Social infrastructure

• 1,000sqm land area for health facilities, 1,400sqm land area for education centers, 200sqm land area for social facilities

Other amenities

• 3,200sqm land area for sport and recreation facilities, 5,500sqm land area for commercial centers and 800sqm land area as green spaces

Source: SAGIA Following is some additional information on the Jazan Economic City. This information is not available for the other cities referenced in this report.


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2.4 Benefit for investors Description

Investor benefits

Foreign ownership

• 100% foreign ownership of projects, including property required to support the business activities, in addition to owning private residences and employee accommodation

Employee sponsorship

• No restrictions on sponsoring foreign employees

Capital requirement

• Minimum capital requirement and no restrictions on repatriation of capital • Ability to carry forward losses indefinitely

Ease of doing business

• Accelerated investment application, business registration and setup process, with a guaranteed decision for foreign investment applications within 30 days of submission to SAGIA

Taxation

• No personal income tax and a minimal 20% corporate tax for foreign companies • Exemption from import fees for selected raw materials imported for manufacturing products

• No export duties within the 17 countries of the Greater Arab Free Trade Area Export/import duties • Few restrictions on currency conversion, exchanges and transfers and transaction incentives • Duty drawback, a customs refund for raw material imports that are processed and exported as finished goods • Preferential treatment for national products in Saudi Government procurement • Export credit, financing, guarantees and insurance through the Saudi Export Program Industrial incentives

• Financial support for the training and employment of Saudis from the Human Resources Development Fund • Low-cost loans from the Saudi Industrial Development Fund and Public Investment Fund • Customs duties exemption on imported machinery, equipment, raw materials and spare parts, if they are for industrial use

Leasing and contract terms

• Net leasing rate/annum: SAR700/, service charge: SAR120/sqm (total service charge: SAR820/sqm, to be paid annually in advance on a quarterly basis) • Contract term: minimum two years; no escalation during the first two years, year three onward, 5% per annum)

Source: SAGIA

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2.5 Top challenges to the development of ECs Challenges of ECs

Global slowdown

• Uncertainty around global economies might impact private sector participation, e.g., following to the global financial crisis, plans to develop several infrastructure components of the JEC project were delayed. SAGIA terminated the contract awarded to the joint venture of MMC Corporation Berhad and Saudi Binladin Group in 2013

Supply shortages

• Developers faced a shortage of contracting capacity while contractors found it difficult to source labor and materials during many phases of the ECs project development

Oil price decline

• Recent declines in hydrocarbon prices will impact oil revenues and influence the Government’s spending plans. According to the NCB Quarterly Review of Contract Awards, the KSA construction sector witnessed a significant drop in value of contracts awarded during Q3 2014. Contracts worth US$9.14b were awarded; a 77% decline compared with Q3 2013

Project delays deter investments

• Delays in awarding projects and challenges developers face while raising funds will hamper the progress of the ECs project. Two ECs planned in Tabuk and Eastern Province have yet to make any progress since the launch in 2006

Source: EY analysis


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Stakeholders’ role and outlook

3.1 Shaping ECs — SAGIA and ECA The establishment of the SAGIA in 2000 was a key milestone in the KSA’s drive to build a world-class economy. SAGIA aims to promote, attract and retain quality local and foreign investments in untapped sectors by developing an optimal business environment.

Economic Cities Authority (ECA)

• Started as an agency in 2006 within SAGIA and launched the four ECs • In 2010 by a Royal Decree the ECA was spun off from SAGIA as the regulator and supervisor of the ECs

• Supervise, serve, and regulate the ECs, including: • Oversee developers to ensure value proposition of the ECs • Support the Kingdom’s socioeconomic development objectives • Monitor developers’ projects’ deadlines • Develop and enforce global reference regulations and standards • Provide world-class services through the 60 minutes an hour, 24 hours a day and 7 days a week (60x24x7) concept • Develop and monitor public–private partnership (PPP) models • Contribute to the promotion of ECs Source: SAGIA, ECA

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Key stakeholders and their roles in ECs projects

SAGIA/ECA

• Regulator, facilitator and promoter of ECs

Master developer (MD)

• Capital provider • Land owner (only for KAEC and PABMEC projects) • Develop and operate ECs • Promote investment in ECs

Consultant

Contractor

• Planning and urban design

• Project construction and maintenance

• Landscape architecture

• Preparation construction phase plan

• Civil engineering • Project management • Contracts and quantity surveying • Maintenance of cost and schedule control system • Other preconstruction services

• Management of subcontractors • Risk management • Liaison with parties involved in ECs project • Workforce and vendor management

• As described in the Developer Agreements executed between the MD and SAGIA and/or the ECA, the MD of each economic city will have the power to contract, outsource or license any and all of its duties, powers or responsibilities as permitted by the Developer Agreement. • All developers, sub-developers, contractors, sub-contractors, outsource contractors and licensees shall comply with the master plan. Source: SAGIA, ECA

Source: SAGIA, SUSRIS, ECA


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3.2 Real estate regulations in ECs

Land ownership and development in ECs

• SAGIA’s license allows the MD to establish and carry out investment projects in the ECs. • MD will enter into a master developer agreement with SAGIA. • MD will establish a project company (PC) to undertake the development of the ECs. • The PC will be required to offer 30% of its issued share capital to retail investors.

Rights of property ownership

• Non-GCC/Saudi nationals are covered by the Foreign Investment Law and the Law of Non-Saudis Proprietorship and Investment of Real Estate issued by the Royal Decree 15 dated 17/4/1421H (Foreign R/E Ownership Law). • GCC nationals are covered by the GCC Nationals Royal Decree No. 4 dated 12/7/1415/H and Executive Rules (GCC R/E Ownership Law).

Project land ownership in ECs

• For KAEC and PABMEC projects: the MD acquires land for the EC; the MD will then transfer the title to the land that will then transfer to the PC. The PC will transfer the land to investors under a long-term lease or develop the land for sale to third parties or retain ownership of the land and manage the developed property or enter into strategic partnerships, alliances or joint ventures for the development of components of the EC. • For KEC and JEC, the land remains under the ownership of SAGIA and is managed by MD (under Royal Decree number M/15 dated 11/03/1424 (H.) corresponding to 13/05/2003 (G). Source: SUSRIS, SAGIA, ECA

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Foreign investment restrictions in the ECs

• SAGIA has issued a list of some business activities prohibited to foreign investment. These include manufacturing of military materials, equipment and explosives, oil exploration and production, services related to security, real estate brokerage and land transportation services (excluding trains).

Opportunity

• 100% foreign land — ownership is allowed in the ECs, except for KEC in Al Madinah Al Munawara.

3.3 Perceptions of key developers, contractors and consultants Voices of key stakeholders “As of 2014, KAEC had attracted more than 70 leading local and international companies, which will use the Industrial Valley as their base of operations.” “Many companies have chosen to invest in KAEC because of its world class service facilities, highly developed infrastructure and the strategic advantages of its location.” “The direct link between the Industrial Valley and King Abdullah Port in KAEC makes it an important logistical hub and an access point to reach 250 million consumers in the Middle East and North Africa.”

Rayan Qutub, CEO — KAEC Industrial Valley

“King Abdullah Port in the KAEC has the potential to become a global logistics hub, handling trade for the entire region. The port has a capacity for 1.3 million containers in operation and is planning four million in the next two years and seven million by 2017.”

Fahd Al Rasheed, CEO — Emaar Economic City

“The investment market in the KSA is considered to be the most advanced in the region.“ “The country is currently witnessing significant and unprecedented development and the absorptive capacity of the Saudi economy is huge, while big spending on development projects creates countless investment opportunities. The conditions are very favorable to encourage the entry of promising investment for the national economy.”

Nasser Al-Tawayan, Communications Director, SAGIA

“Jazan Economic City will become a key contributor to the KSA’s economy as current infrastructure and projects development will provide a solid base for further investments in heavy and secondary industries, petrochemicals, mining and conversion industries.” “Saudi Aramco has been entrusted to build Jazan’s strategic infrastructure through the development of a refinery and terminal, a power plant, a commercial seaport, a water desalination plant, roads and water and sanitary drainage systems, in addition to connecting electricity.”

Khalid A. Al-Falih, President and CEO, Saudi Aramco Sources: Arabnews, Zawya, Saudi Gazette


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3.4 Outlook for real estate development of ECs With depleting oil reserves and the necessity to rope in private investment to sustain its ambitious investment plans, including that of the four ECs, the KSA Government is currently focusing on developing clusters to feed the Kingdom’s growing economy. The construction of four integrated ECs promises to considerably alter the economic landscape and provide a wealth of exciting greenfield opportunities to investors. ECs will act as engines for industrial growth, real estate development, seaport and dry port development, and educational advancement in the Kingdom. The ECs are expected to bring a considerable economic and construction boom, with global investors and companies pumping in billions of riyals. The new ECs, according to SAGIA5, would contribute US$150b to the GDP by 2020. They will also provide a living environments for 4 to 5 million people and increase per capita GDP from US$13,000 in 2007 to US$33,500 by 2020. The private sector develops each city by generating private investments in infrastructure, real estate and industry. By identifying and attracting core investors, additional jobs are created, which will then spur jobs in other supporting services. The ECs will be offering an attractive lifestyle to grow beyond a mere industrial free zone. The cities enjoy a globally competitive, business — friendly regulatory environment. While the regulatory climate is more rigid as compared with its Gulf Cooperation Council (GCC) counterparts, the Saudi Government’s liberalization measures to simplify procedures were put in place to make the new mortgage laws more transparent. Foreign investments are likely to help attract investment in the ECs and spur growth across the real estate, hospitality and construction industries in the Kingdom.

JEconomic Cities Authority Overview - HR Forum” — January 2015 “Saudi Arabia’s Economic Cities — Economic Cities Agency SAGIA” , January 2015

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EY’s role • We perform financial and commercial due diligence on any target acquisitions in real estate and hospitality sector that clients intend to make.

EY’s Middle East Transaction Real Estate Advisory Services Group is an integrated, cross-functional network of experienced real estate and hospitality professionals who focus on providing value-added multidisciplinary services and cutting-edge strategies to companies that own, develop or operate real estate and hospitality assets and project management services.

• We can benchmark your property and help you identify your key opportunities for improvement: renovation, re-branding, cost containment, enhancing product/service quality, increasing product/service differentiation, improving sales/marketing strategy in rooms, food and beverage, meeting/banquet and all other revenue-generating departments.

• We advise developers and investors on the highest and best use of their lands, taking into account location and site attributes, market dynamics and competitive landscape. • We perform market studies for developers and investors to assess opportunities and keep them abreast of market performance, trends and outlook. • We offer development advisory services or review and refine clients’ facilities programs. • Our services are designed to select a management company/ operator on a timely basis to meet our clients’ needs as well as to provide professional advice during the contract negotiation process. • We help clients assess the fair market value of their real estate assets through market and/or income-based approaches.

• Our restructuring advisory services include guiding your company through the liquidity management process focused on operational cost savings, developing and evaluating your business plan and strategic alternatives, providing alternative debt/equity structures based upon your asset base and/or anticipated cash flows, advising on negotiations and on pre-bankruptcy and divestiture planning. We also provide financial advice throughout Chapter 11 proceedings, and advise on tax aspects of restructuring in and out of bankruptcy.


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EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. The MENA practice of EY has been operating in the region since 1923. For over 90 years, we have grown to over 5,000 people united across 20 offices and 15 countries, sharing the same values and an unwavering commitment to quality. As an organization, we continue to develop outstanding leaders who deliver exceptional services to our clients and who contribute to our communities. We are proud of our accomplishments over the years, reaffirming our position as the largest and most established professional services organization in the region. About EY’s Global Real Estate Sector Today’s real estate sector must adopt new approaches to address regulatory requirements and financial risks while meeting the challenges of expanding globally and achieving sustainable growth. EY’s Global Real Estate Sector brings together a worldwide team of professionals to help you succeed — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Sector team works to anticipate market trends, identify their implications and develop points of view on relevant sector issues. Ultimately, this team enables us to help you meet your goals and compete more effectively. © 2015 EYGM Limited. All Rights Reserved. EYG no. DF0210 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

ey.com/mena

Key Contact Yousef Wahbah Middle East and North Africa Real Estate, Hospitality and Construction Leader + 971 4 312 9113 [email protected]

Contributors Maya El Assaad Assistant Manager, TREAS — MENA [email protected]

Sajith P Assistant Manager, Business Research [email protected]

Harish Krishnamoorthy Associate, RHC, Business Research [email protected]

Sarah K K Associate, TAS research support, Business Research [email protected]

Economic cities — opening vistas of growth in the Kingdom

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