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Mid-term uncertainties mar Emaar progress at KAEC

JEDDAH: Deutsche Bank , Germany's leading banker, has expressed concerns about the mid-term prospects of Emaar Economic City (EEC) , the main developer of the King Abdullah Economic City (KAEC). The bank says that over 90 percent of the project is on paper.

The bank's report on the company also says the "long-term growth story" of the SR400-billion ($110 billion) economic city on the Red Sea coast at Rabigh near Jeddah has been "eclipsed by mid-term ambiguity."

KAEC is one of four mega-cities launched by the Saudi Arabian General Investment authority ( SAGIA ). To be completed by 2025 in four phases, it aims at creating 500,000 jobs and housing for over 1.5 million people. It is considered vital for the socio-economic growth of the Kingdom and, therefore, has the full backing of the government.

EEC is a Tadawul-listed company formed in 2006 with the sole purpose of developing KAEC. The company began work on the first phase in 2007 with the delivery of infrastructural, residential and industrial projects due in 2009.

While acknowledging KAEC as an attractive long-term story offering exposure beyond the growing Saudi real estate sector, Deutsche Bank says, "Nevertheless, we remain concerned by mid-term uncertainties. According to our estimates, over 90 percent of the project is on paper. Securing finance and attracting industries/businesses is key, but it is difficult to come by in the current financial environment."

The bank says that given its strategic location on the Red Sea and status, KAEC has an edge. "In the long term, the city should see impressive growth driven by demand for housing, industrial, commercial spaces and port capacity. However, over 90 percent of the project is in the planning stages, thus increasing cyclicality risk. Also, limited company guidance and the novelty concept have made the project difficult to read. We expect EEC to require at least around SR15 billion of external funding over the next five years, for which little visibility exists."

The bank further says, "We view the company favorably in the long term, while in midterm we see ambiguity playing spoilsport ... The complexity of the project coupled with limited company guidance increases investor uncertainty, in our view. The current economic crisis and low interest in Greenfield projects have slowed down the city's growth and we expect many timelines to be pushed forward. In our view, securing funding and attracting industries/businesses (vital for the city's growth) pose a challenge in the current environment. Having said that, we believe that KAEC is an obvious candidate for financing from the Public Investment Fund. We appreciate financial support from the government which could trigger the pace of development and visibility of the project."

EEC enjoys implicit government backing as the city is closely linked to the government's initiative to foster socio-economic growth.

It has an agreement with the SAGIA to facilitate development of the city and 100 percent foreign ownership of business and property. Its status as an economic city will benefit from liberal policies and less bureaucracy. Unlike most developers, EEC is permitted to make off-plan sales and offer products to foreign investors with fewer restrictions.

However, the final regulatory framework needs to be approved.

The bank says so far that the company has sold close to SR2 billion of residential properties, while recognizing only SR166 million as revenues (due to the 20 percent project completion criterion). "We estimate that 2009-end revenues will be driven by development properties (98 percent of the total)," the bank says.

The company has aligned with contractors including Saudi Binladin Group , Freyssinet and other local contractors to develop the city. It will not develop the whole city itself; it will sell a portion to other developers with pre-specified layout/designs.

Dubai-based Emaar Properties holds a 31 percent stake in the company, while other promoters hold 39 percent. The remaining 30 percent is free floating.

EEC is the master developer of the entire city that includes six economic zones. Out of this, the company intends to sell roughly 45 percent as developed land, 17 percent as development properties and retain 38 percent, including a seaport, as investment portfolio. The company plans to develop the integrated city in four phases, with the first expected to be completed by 2012 and the remaining by 2025.

"However, given the magnitude and complexity of the project, we expect the timelines to be delayed," the bank adds.

© Arab News 2009