Doing Business in Saudi Arabia – III Part: Residential Real Estate Market May 18, 2009
Posted by jgarciaalvarez in Competitiveness, Emerging Markets, Middle East, Private Equity, Real Estate, Saudi Arabia.add a comment
Starting a blog is a relatively easy thing to do. Writing a weekly blog post is a not an easy habit to develop. This is why I commend Seth Godin (one of the blogs I frequently read), for posting his 3000th blog post earlier this year. This is why I also apologize for my absence from this open-source writing canvas for the last four months. I most appreciate you growing with me via your reading and comments!
Saudi Arabia residential real estate market is attracting local and foreign players. Unlike most of its counterparts in the GCC region, which have seen unprecedented growth over the last years, Saudi Arabia real estate market is poised for development and growth.
The residential sector accounts for 70 percent of all the Saudi real estate market. Strong domestic demand for housing accommodations is estimated to be an average of 200,000 units per year. A fast-growing young population fuels a shortage in the supply of affordable housing units. An increasing number of professional Saudis stimulate an upgrade in the quality and the design of new homes.
These factors combined with favorable macroeconomic conditions, expected real estate legislative improvements, low home-ownership levels, and decreasing construction costs, have catapulted the Saudi Arabia residential real estate market to the center stage in the Middle East region.
At the same time, the bar for success in the Saudi residential real estate market has been raised. Over the last year, impetus to tap into the Saudi residential sector has exposed developers lacking a crafted defined strategy. Such projects have been preceded by a questionable conception of project size and a poor understanding of the potential home-buyer. Such projects have been followed by inflated quality-cost price structures and delayed or non-deliverable promises.
Should new foreign entrants clearly address the issues mentioned above, other local challenges, including but not limited to labor, government processes, foreign ownership regulation, and project and mortgage Sharia-compliant financial mechanisms, become secondary to succeeding in the Saudi residential real estate market.
Dreams of Lawrence of Arabia: Allow me to share with you an empowering quote from this great adventurer. T.E. Lawrence, a former graduate from Magdalen College at Oxford University, wrote in the introductory chapter of his book the Seven Pillars of Wisdom, “All men dream: but not equally. Those who dream by night in the dusty recesses of their minds wake in the day to find that it was vanity: but the dreamers of the day are dangerous men, for they may act their dream with open eyes, to make it possible. This I did”.
Doing Business in Saudi Arabia – II Part: Building Long-Term Trustworthy Relationships January 16, 2009
Posted by jgarciaalvarez in Competitiveness, Emerging Markets, Entrepreneurship, Innovation, Middle East, Saudi Arabia, USA.2 comments
Understanding the history of modern Saudi Arabia requires reflecting upon the old and the new. As you set on this journey, several recesses are key stops. For instance, you may start by exploring how Ibn Saud leveraged ancestral claims to become the ruler of a region that acknowledged his political authority after he had captured Riyadh in 1902. Then, you could continue by reading about the early years of the American Company Standard Oil of California (SOCAL), its growth and consolidation into Saudi Aramco, and the contribution and effects of this anchored institution in Saudi society. Consequently, you could look into understanding the title of King Abdullah bin Abdulaziz, Custodian of the Two Holy Mosques, and why his leadership position in Saudi Arabia and the holiest shrines of Islam is a concern to millions of Muslims across the world. Although daunting at first, this process of reflection challenges us to contextualize historical events with current Saudi and Middle East politics.
Understanding the modern business environment in Saudi Arabia requires reflecting upon the prudent steps and interpersonal time needed to build trustworthy loyal client relationships. Take, for example, the Majlis, traditionally hosted by oasis emirs and tribal shaykhs, which were meetings known in Arabia for centuries designed to mediate, settle disputes, renew allegiances, and represent power[1]. Although aspects of this tradition have changed in modern Saudi Arabia, the business environment does require a high level of trust and long-term relationships building to make business progress. Furthermore, in many instances, your personal word and honor becomes your presentation letter to, not only the person you are conducting business with, but also to the person’s closest circle of family, friends, and colleagues. In lieu of the mistrust and uncertainty that has resulted from the turmoil of the financial markets and the global economic recession, it is suggested that the Arab ways of building trust, serve to remind Western people about the basics of human social interaction.
Historical Anecdote: Did you know that in 1923, a New Zealand Oil entrepreneur named Major Frank Holmes, negotiated an oil concession with Ibn Saud? Five years later, Holmes could not find an oil company interested in buying it. In 1933, the SOCAL started exploration for oil. In 1938, the first valves pumping oil in commercial quantities were turned on. Just Imagine if Mr. Holmes had showed up a few years later! Talk about timing…
[1] Al-Rasheed, Madawi. “A History of Saudi Arabia”, Cambridge University Press, 2002.
More than Oil to Saudi Arabia: The Economic Cities October 8, 2008
Posted by jgarciaalvarez in Colombia, Competitiveness, Emerging Markets, Entrepreneurship, Innovation, Latin America.4 comments
Few people would be surprised to know that the production of oil and gas in Saudi Arabia is equivalent to each national citizen producing 0.7 barrels of oil per day. With 23.5 million citizens and approximately 5.5 million non-nationals, it is understandable that experts envision Saudi Arabia having oil revenues between $2.8 and $5.5 trillion in the period 2007-2020 due to oil prices between $50 and $100 a barrel [1].
Maybe half of you then, would be surprised to know that, unlike previous periods of booming oil prices, a significant share of today’s wealth is targeting domestic investments. The McKinsey Global Institute suggests that between ⅕ and ¼ of the money will be deployed domestically. These investment rates are aimed at getting the “economic house in order”, diversifying the oil-based economy, funding educational initiatives, generating jobs, increasing government salaries, and building infrastructure and new vibrant cities.
Perhaps a larger number of you then, would be surprised to know that Saudi Arabia has an innovative strategy to boost the Kingdom’s competitive environment and to attract domestic and foreign investment.
The Economic Cities, is a cluster-based program designed to establish 6 integrated cities (“live, work and play” concept) expected to collectively create by 2020 over 1.5 million jobs and livable conditions for more than 2.5 million residents.
This public-private partnership strategy is led by the Saudi Arabian General Investment Authority (SAGIA) and intends to decentralize and balance Saudi’s economy. As Mr. Amr Bin Abudllah Al-Dabbagh, Governor, SAGIA, suggests, these cities are not “free zones”, “zonas francas” or “economic zones”, these are vibrant urban centers with living environments and service provisions.
The six cities are King Abdullah Economic City (KAEC in Rabig), Prince Abdulaziz Bin Mousaed Economic City (PABMEC in Hail), Knowledge Economic City (KEC in Medina), Jazan Economic City (JEC in Jazan), Tabouk Economic City (TBD), and Eastern Province Economic City (TBD).
The KAEC, with an area of 168 million sq m, is the largest of these centers focused on massive port infrastructure, light industry, and services, including logistical and financial. The PABMEC, with an area of 156 million sq m, intends to become the largest transportation, logistics, and supply chain hub in the Middle East. The KEC, with an area of 4.8 million sq m, plans to build a large technological park supported by advanced academic and research institutions, as well as to develop an Islamic civilization studies centre. The JEC, with an area of 100 million sq m, seeks to anchor diverse industries such as desalination, refining oil, aluminum, copper, food processing, and regional agricultural producers.
Saudi Arabia has a vision for the next years. Take advantage of its abundance of low-cost energy and strategic location to build the foundations of a modern economy. A mission accomplished will then prove there is more than oil to Saudi Arabia.
Food for thought…
- What lessons can political and business leaders in Asia, Africa, South Eastern Europe, and Latin American, draw from The Economic Cities’ experience?
- What commercial or trade opportunities will exist for the expansion of Colombia’s products and services into the Middle East?
- How can small and medium enterprises across emerging markets leverage this opportunity to achieve size and scale?
[1] The McKinsey Quarterly, “Investing the Gulf’s oil profits windfall”, May 2008, & Author analysis.
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