Saudi Arabia, immersed in the process of using its oil wealth for building sustainable economic strength, has set its eyes on a business bonanza that could provide unending riches: becoming the host for a major international financial market. To tap into this permanently renewing resource, the kingdom is pouring billions into the creation of two financial hubs.
The first of these finance centers is part of the King Abdullah Economic City (KAEC), which the Saudi king announced to the world in December 2005. The second is new. It is the King Abdullah Financial District (KAFD) project in the Saudi capital, Riyadh.
Investments into KAEC are slated in a dimension of more than $26 billion only in the first phase—which includes infrastructure development and industrial and residential structures, but not the financial island which will cover 14 hectares. The cost of developing the new metropolis’s financial center—a super-glitzy city-within-a-city, shining in the designer impressions with glass and high rise architecture—will be determined later, when the second phase of the KAEC project goes to construction around three years from now.
“We are in the first phase of the project and therefore there is not an exact amount of money for the financial district but the first phase will be completed in three years from now and will cost SAR100 billion,” said Mohammad Samman, the director of investor relations at Emaar the Economic City (EEC), a company formed for developing KAEC.
The cost of KAFD will be between SAR10 billion and SAR12 billion and the project will be developed on three stages, according to the KAFD master plan that was approved last month by the executive committee in charge of the project.
On paper, the rationale behind the mega-investments is compelling. Saudi Arabia has a rapidly growing economy that needs to secure future employment for its millions of young people, and this would be part of a move, since 2005, to set up of economic cities in four regions in the country.
In the past five years, the kingdom has issued new licenses for specialized banking and financial services providers that include leading international and regional banks from HSBC and Deutsche Bank to Lebanon’s Audi Saradar Group, UAE-based Al Mal Securities, and Egypt’s Beltone Investment Banking.
These institutions have been attracted by the growing needs for banking in the largest Arab economy and for financial intermediation on the expanding Saudi Stock Exchange. But to give further incentives to international financial firms and develop a center of excellence that can leverage the value of the Saudi market place into becoming a banking center of global weight, Saudi Arabia needs to develop its financial culture a lot further.
“The kingdom is growing at a huge potential and the number of companies that are being established is growing by 25% to 35% annually,” Samman told Executive.
The Financial District
“The Public Pension Agency is the main developer of the KAFD and it has started with the dredging works along with Capital Market Authority (CMA) which is its strategic partner,” Fahd Al Hussayen, general manager for real estate marketing at the Public Pension Agency, told Executive.
“The first phase will take four years to be completed and we are already signing memoranda of understanding with several banks which will have a presence in KAFD,” Hussayen said.
He added that the banks which signed the MoUs include Al Rajhi Bank, Arab National Bank, Audi Saudi Arabia, Samba Financial Group, Saudi Fransi Bank and Al Bilad Bank.
The KAFD will be constructed over 3 million m2 of land and will house the headquarters of the CMA and the Saudi Stock Exchange, along with an academy for finance professions. On the private sector side, the district aims to become the home of banks, brokerage services, law offices, accounting and auditing firms, analysts, rating agencies, consultants, IT providers, and other auxiliary enterprises.
The master plan for the KAFD divides the new financial center into three areas—the Leaf, the northwest area, and the south area.
The Leaf will be the heart of the KAFD. It will be a mixed-use area, consisting of 23% residential, 5% retail and the rest high-quality office space.
Two-thirds of the area will be public realm, including major attractions such as an aquarium, a museum, hotels, an exhibition center, a conference center and, of course, mosques.
Support services, utilities and parking will be located in the northwest area. The south area will be residential and office accommodation.
The first excavation work is scheduled to begin within weeks and the first building is expected to open around the end of 2008. It is expected that KAFD will offer around 43,000 job opportunities. The site is 1.6 million m2 but the built-up area is around 3.3 million m2.
Because it is owned by the Public Pension Authority (PPA), the project will create revenue streams for public sector retirees and their dependents.
“The whole Saudi economy will benefit—but especially the PPA’s pensioners, who will gain from the profit generated from our ownership and management of the KAFD project,” enthused Mohammed Bin Abdullah Al-Khrashi, governor of the Public Pension Authority.
The Economic City
To be built near the town of Rabigh on the Red Sea, the financial district of the KAEC may be a little away from the center of Saudi Arabia but the entire city aims at creating a new economic center right from the first phase, which includes an industrial city, a huge port and residential projects.
EEC had a net loss of 12.8 million Saudi riyals ($3.4 million) in its first three months of operation, ending December 2006, but reports said that the financial results were expected as the company did not close any sales deals in that period. Its marketing activities have commenced recently.
Another noteworthy aspect of the KAEC project is that it is being developed with the private sector and with wide stakeholdership by Saudi citizens. EEC undertook an initial public offering in which more than 10 million people, approximately half of the kingdom’s citizens, subscribed to shares.
While the concept of stomping two new world-class financial districts out of the ground is appealing, the timeframe for the two cities may just a bit behind. In Dubai, Qatar, and Bahrain, three ambitious emirates are already a good piece of the way into shaping their versions of financial hubs, which will be established entities when KAFD inaugurates its first buildings in 2008-09; the KAEC financial center is only scheduled to begin construction at that time.
The size of the Saudi market is a strong selling point, and local banks will in any case make it a matter of pride to be present and very visible in KAFD and later on in KAEC financial center. That will widen the Saudi financial scene and elevate its profile, but it will not by itself fulfill the vision for the two huge projects. Then again, it must be true for new financial districts what is true for the whole world of finance: without risk, there can be no profit.
