Lessening Saudi Arabia’s dependence on oil istop of the agenda for the country’s rulers. Nadia Elghamry reports on plans afoot to attract more foreign investment and create employment
Dallas meets the cradle of Islam. That is how most people picture Saudi Arabia. Arabs and oil money – and buckets of it. It is, however, an outdated image and one the kingdom is keen to move away from.
True, Saudi is floating on about a quarter of the world’s oil reserves – the largest in the world. True also, that petroleum accounts for roughly three-quarters of budget revenues, 90% of export earnings and nearly half of the kingdom’s Riyal 936bn (£153bn) GDP. Yet therein lies the problem.
Its reliance on oil makes Saudi Arabia’s accounts vulnerable to fluctuating commodity prices. It has fragile fiscal accounts and an over reliance on foreign workers, while its universities continue to churn out thousands of home-grown graduates each year.
In addition, its oil industry is threatened by cheap, non-OPEC controlled Russian oil imports, and uncertainty over the US role in Iraqi oil fields.
Analysts estimate that Saudi Arabia is also in debt to the tune of around Riyal 655bn (£107bn), it has a swelling population and rocketing unemployment. In addition, Riyadh is expected to have a budget deficit this year.
In 2002, economic output was a mere 0.7%, and although figures are hard to extract, external analysts believe output will continue to spiral downward.
To address these problems, Saudi is turning its attention to private-sector growth to lessen its dependence on oil and provide jobs for its 23.5m population.
But attracting foreign companies is easier said than done. The kingdom of Saudi has taken steps to open up the country, including rejecting a 10% tax on expatriates and lowering the tax bracket on foreign corporates from 45% to 25%. Nevertheless, its complicated investment and ownership laws and strict Islamic culture are still a barrier.
But the kingdom is trying. Don Bradley, who heads Cluttons’ Middle East practice, explains that Saudi Arabia allows up to 70% foreign ownership of companies, and eventually non-nationals will be allowed to own land as the country moves towards fulfiling its WTO obligations.
But, he admits, further work needs to be done to liberalise the country’s social structure. Bradley visualises a time when the country realises it is losing out to other Gulf states, which have been much quicker to liberalise their laws, and is forced to change.
“I think it has to come but I just don’t know the politics on high,” he says. “But there is definitely a realisation that the old model needs to change.”
Retail is where international operators have made the greatest inroads. The likes of Debenhams and Starbucks are well known names in Saudi shopping malls. But most of these are linked with a Saudi sponsor either through a franchise or a joint venture.
It is easy to understand why. According to Retail Trade International – a retail database – the size of the population, the high proportion of young people and high levels of disposable income have made Saudi Arabia the fastest-growing consumer products market in the Middle East.
It has also made some of the Saudi elite even richer. Prince Alwaleed bin Talal Abdulaziz al Saud is one of them. He is reportedly the fifth-richest man in the world and described in the property industry as a “legendary investor in the region”.
He owns most of Citibank and Disneyland, as well as the Four Seasons hotel chain. But it is his latest venture that has got Saudi tongues wagging.
The Kingdom Centre, a Riyal 1.9bn (£310m) mixed-use scheme in Riyadh won him the Skyscraper 2002 award for the best new skyscraper in design and functionality.
At 302m, it is the same height as the Eiffel Tower, and its 41 floors boast a five-star hotel, shopping mall, a sports club, a wedding and conference centre, and an apartment complex, all topped off with a 56m skybridge complete with observation deck for the brave.
A 99-year lease on a four-bed apartment in the tower would set an investor back nearly Riyal 5m (£817,000).
But the Kingdom Centre did not have the best of starts. Nigel Gimbert, leasing manager for the scheme, admits to being more than a little nervous when he opened the doors of Saudi’s tallest skyscraper on 15 September 2001, just four days after the New York tragedy.
“Nobody expected us to open, but we did,” Gimbert says. He need not have worried. Shopping is a sport in Saudi, as there is little else in the way of entertainment. So save for a small blip in May following the terrorist bombings in Riyadh, the centre welcomes around 20,000 visitors a day spending Riyal 100 (£16.30) a time.
It took just four months to let 80% of the 315,000m2 retail centre. Today it has a mere 5% vacancy rate. Rents vary by floor, but prime space in the only all-female mall costs Riyal 1,800 per m2 (£294).
High fashion names have flocked to the centre, which is anchored by SAKS Fifth Avenue, Debenhams and Marks & Spencer. But the pride and joy, says Gimbert, is Louis Vuitton which has just signed a lease.
There is a little remorse in Gimbert’s voice when he recounts how the centre’s main competitor, Al Faisalia shopping centre boasts a Harvey Nichols.
Despite this, Gimbert is not overly worried by the competition provided by the 267m tower designed by Foster & Partners. “Our target market is different. We are top end in terms of target market,” he explains.
Introducing new western brands into the Saudi market is vital, says Robin Williamson, general manager at DTZ, in Saudi Arabia.
“What they need is new occupiers, not another Debenhams or Starbucks. There is nothing new,” he says.
Saudi Arabia’s rulers will also have to go a long way to rebuilding confidence in the government. Multinational oil companies got their fingers badly burnt in June when two-year negotiations with the government to open up the country’s Riyal 97.9bn (£16bn) gas reserves fell through over arguments about returns.
The government moved swiftly to repackage the deal and two major oil companies have since signed agreements. “This is good news,” says Williamson. “It is very good for the occupier market as they will have a large requirement for offices, and the sheer volume of spend will help the economy,” he adds.
This will not just benefit the petrochemical industry but will be a boost for everyone. “It would bring fashion, holidays, cars, residential, everything,” says Williamson.
Spiritual holidays
Spiritual holidays are a growth market in Saudi. Each year, more than six million people visit Islam’s holiest cities, Mecca and Medina, in the west of the country.
Prince Sultan bin Salman bin Abdulaziz, the head of the newly-created supreme commission for tourism and the first Arab in space, is hoping to increase this number to more than 15m.
Last month the prince outlined a comprehensive masterplan aimed at creating a viable tourism infrastructure, creating 2.3m jobs and £14bn in revenues over the next 20 years.
The visitors will need somewhere to sleep, and the country’s infamous bin Ladin family is busy constructing a pilgrim’s hotel next to the holy mosque.
The hotel will cover 1m m2 over 17 floors. It will have 100 elevators and five towers, four of which will hold serviced apartments.
Don Bradley, head of Cluttons Middle East operations, has been heavily involved in the project.
“Every Muslim has to do Haaj once in their lifetime, so with two billion muslims in the world, the figures add up,” he says.
Life as an expatriot
It is 7.30am, the start of the Saudi day, and already the temperature is nearing 40¡C.
Despite this, it is a comfortable life, says Don Bradley at Cluttons, which has a small office in Jeddah. Expats are housed in compounds containing everything for daily life, including sports clubs and restaurants, and transport to take children to school.
Life nears normality, but as a “dry” country a quick pint after work is out of the question. Working in the property market, the main problem is the lack of statistics, says Bradley, which can cause problems with valuations. In the main, leases are short, and property companies have to offer the full range of services right through to managing a property.
Because of the immaturity of the property market, the worth of valuations is not appreciated, explains Bradley.
“All valuations are to the RICS Red Book, but we have had to be fastidious and we’ve had to break new ground establishing it,” he says.
Privatisation programmes have helped educate the Saudi market in due diligence and international standards, but this is still in its infancy.
While the projects can be as large as any in the world, the concept of market-driven development is non existent, says Robin Williamson, general manager at DTZ Middle East.
“You can’t compare the UK and Saudi markets,” he says, “Supply is basically what is up there, and if you own land you build on it,” he adds.
Williamson is involved with a £25m sale-and-leaseback for a multinational company. But these are rare. “Most people hear what we are doing and think there must be a problem.”
Despite this, a job in the Middle East will not do an agent’s career any harm, says Joanne Davies, a recruitment consultant at McDonald & Company.
While surveyors are not classed as a profession in Saudi Arabia, the RICS is working hard to get that changed.
“People are worried they are sacrificing their career, but the scale of developments you work on in terms of size, and the experience and skills gained, mean you actually jump ahead of your London colleagues.”
But do not underestimate cultural differences, says Russell Bowyer at McDonald & Company. People do not realise how different it is in Saudi, especially at Ramadan when smoking, eating and drinking in public is forbidden.
“It is difficult to live a normal lifestyle, and anyone who manages more than a year in Saudi is doing well.”
Bowyer’s advice is not to be picky about your destination. “A lot of people have to compromise, go anywhere to start with and work your way through the Middle East to get to where you want to eventually.”
Expats have definitely thinned out since the terrorist bombing in May. The foreign office still advises against all non-essential travel to the country warning that there is a continued threat of large or small-scale attacks against Westerners.
Security has been stepped up, says Nigel Gimbert at the Kingdom Centre. And the positives definitely tip the balance.
“It is an incredibly interesting job,” says Gimbert. “If you are married and living in a compound, it is close to normality. The money is good, the schooling is excellent and, with four children, there is no way I could have afforded private education in the UK.”
