Economic cities — opening vistas of growth in the …

1 1 Economic cities opening vistas of growthEconomic cities opening vistas of growth in the Kingdom of Saudi ArabiaEconomic cities opening vistas of growthContents Executive summary 3 Introduction 4 Economic diversification facilitating real estate sector growth Macroeconomic and non-oil diversification Real estate industry insights ECs and cross-sector links 9 ECs opening floodgates of growth ECs primary objectives ECs snapshot and development matrix Real estate sector components of ECs Benefit for investors Top challenges to the development of ECs 19 Stakeholders role and outlook Shaping ECs SAGIA and ECA Real estate regulations in ECs Perceptions of key developers, contractors and consultants Outlook for real estate development of ECs 24 EY s role 253 Economic cities opening vistas of growthExecutive summaryThe Kingdom of Saudi Arabia (KSA) is currently investing heavily in real estate and infrastructure projects.

2 This is a part of the Kingdom s efforts to resolve the housing and employment crisis, resulting from a growing population, and Economic 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 KSA continues to attract attention worldwide despite the global Economic slowdown and instability in the Middle East and North Africa (MENA) region.

3 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 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 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 KSA Government sees ECs as drivers of growth , opening up the economy and attracting more foreign and local investments.

4 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 EC projects would bring in modern technology, management skills, corporate governance and new industries, making the economy less dependent on oil and 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.

5 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 cities opening vistas of growthIntroductionThe 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.

6 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 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 in Saudi Arabia5 Economic cities opening vistas of Macroeconomic and non-oil diversificationAccording 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 billion barrels.

7 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 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.

8 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 BP Statistical Review of World Energy 2014, January 2015 The Ministry of Finance of the KSA has estimated that the country s GDP reached US$ at the end of 2014, achieving a growth rate of (in current prices) compared with US$ in 2013. According to the CDSI2, the Saudi economy grew by in 2014, up from in 2013.

9 With an increase in oil production, by , 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 while the non-oil sector maintained a growth of over 6% in Accounts Indicators 2014 CDSI, March 2015 Economic diversification facilitating real estate sector growthAgriculture, Forestry and FishingMining & QuarryingManufacturingElectricity, Gas and WaterConstructionWholesale & Retail Trade, Restaurants & HotelsTransport, Storage and CommunicationFinance, Insurance.

10 Real Estate and Business ServicesOther servicesNominal GDP (US$b)Real GDP growth (%)0100200300400US$ GDP breakdown by Economic activity, 2014 KSA nominal GDP and real GDP growth rate, 2008 14 Key budgetary allocations for 2015, US$bEducation and manpowerHealth and social affairsTransportation and infrastructureWater, agriculture and manufacturingMunicipality construction projects allocated 164 new projects Rehabilitation of 500 school buildings Rehabilitation of 11 sport centers Three new universities 27 new hospitals and health facilities Funds for 117 hospitals already under construction 8 medical cities (ongoing construction) 16 sports clubs 5 centers for individuals with special needUS$ cities opening vistas of growthSource: Saudi Arabian Monetary Agency (SAMA) Annual Statistics Source.