What is the business model behind Jeddah’s plans for the world’s tallest tower?
Words by Shane McGinley
“The world’s cities are in the midst of a skyscraper building boom,” is the conclusion of the latest Skyscraper Index from real estate analyst Knight Frank this month.
Skyscrapers — classed as buildings over 350 feet (106 metres) high – are a rising tide in the modern global city, it claims. London has added 23 new skyscrapers since the year 2000, compared to just 17 during the previous four decades.
New York, often considered the birthplace of the skyscraper, added four new towers in 2014 alone and Dubai, which has firmly snatched the title from the Big Apple in recent decades, has built nearly 190 skyscrapers in the last 15 years.
However, while Dubai’s 828-metre, 163-storey Burj Khalifa currently holds the record as the world’s tallest tower, the title will soon move to a rather surprising location: Jeddah in Saudi Arabia.
In the past, New York decided to build upwards because land prices were so steep in the popular Manhattan business district, while Dubai’s Burj Khalifa was designed to be part of its drive to diversify from oil and help be a showcase for the emirate’s drive to attract 20 million visitors a year by the year 2020. Jeddah is hardly short on land, while its observation deck is unlikely to show anything more than sand dunes. So what is the thinking behind Kingdom Tower?
“First of all the tower is the brainchild of His Royal Highness Prince Alwaleed Bin Talal and I think the tower will reposition the city of Jeddah alongside international cities and it will have an icon, it will have a landmark,” says Mounib Hammoud (pictured left), CEO of Jeddah Economic Company (JEC), the company behind the construction and development of Kingdom Tower.
“It is an expression of the ingenuity of people. It is about government and economic growth and economic power. It is a statement to the whole world. In Egypt, when the Pharaohs were powerful they built the pyramids; when Napoleon came back from war he built the Arc de Triomphe and when the church was in Europe it built these huge cathedrals. Today is the time of expressing how our materials are powerful and how our people are intelligent.
“I think with the experience and ingenuity of the designers, the consultants, the contractors and my team, nothing will be impossible,” says Hammoud. While ingenuity is a word he uses constantly throughout our chat, you do get the sense that this tower fits very much in the mindset of ‘build it and they will come.’
“The main mission of Jeddah Economic Company is to build Kingdom City. Over 5.3 million square metres of land we will develop a new city centre and position the city of Jeddah on the international scene of modern regional cities, alongside the downtown of Beirut and Downtown Dubai,” he reiterates again.
But you only have to look at the experiences of some iconic skyscrapers to see some of the warning signals along the road to a tower’s success. The famous Empire State Building was opened in 1931 and New York was instantly hit by the Great Depression of the 1930s. For years New Yorkers derided it as the “Empty State Building” and it lay mainly vacant for decades, failing to turn a profit for 20 years until the economy picked up once more.
Even last year, the Shard in London, which was built with Qatari money, was launched during the global economic crisis. While it garnered massive headlines, recent reports claim the 72-storey tower, which is Western Europe’s tallest building, is largely vacant. Another London landmark, the Gherkin, opened ten years earlier and took a decade to fill its floors.
In Dubai, when the Burj Khalifa opened in January 2010 – in the midst of the city’s property crash when prices slumped by nearly 60 percent – it was claimed that
825 of the tower’s 900 apartments lay empty and rents quickly dived by around 40 percent.
With Kingdom Tower being launched in the midst of the decline in the price of oil – Saudi Arabia’s main cash driver – I ask Hammoud how long he expects it to take before the landmark makes a profit, but again he reverts back to form: “The business model is the shareholder and will make money when we start selling land and we create the value. At this time the objective of management really is to build all of this.”
As a result, it is no wonder that with a billionaire backer, Hammoud doesn’t seem worried by the potential impact of the drop in oil prices.
“In our plans, there is no slowdown and we will go at the speed set. For the price of oil the Saudi budget is the highest in history. These are major projects so they will continue to grow, regardless of the price of oil, and in June 2015 the market will open for foreigners, which will bring more liquidity for investors.”
As the tower quickly rises out of the ground, Hammoud reveals that residential apartment sales at the tower are slated to start later this year, with handover set for 2018 and 2019. The Kingdom Tower will have a gross floor area of 245,000 sq m and include offices, a 200-room Four Seasons hotel, 121 serviced apartments and 360 residential apartments.
The apartments “will be for sale. Maybe we will rent some, pool some for rental or do [investment] funds on a few – it depends on the market,” Hammoud told reporters in his typically vague style. While JEC is currently collecting applications from potential buyers, citizens of Saudi Arabia, Kuwait, Qatar, Oman, Bahrain and the UAE are eligible to buy units, but other potential investors will require government approval.
As JEC begins to lay out its stall for potential buyers, the economics in Jeddah show a generally positive picture for most sectors, except residential. Commenting on the Jeddah market, Jamil Ghaznawi, national director and country head of property consultancy JLL’s Saudi office, concludes: “The real estate market in Jeddah is showing continuous signs of growth across most sectors. Although the residential sector saw rents decrease, sale prices have increased, particularly for apartments.
“The hotel and office sectors continue to perform well, experiencing an increase in rental rates and ADRs [average daily revenues], while vacancy rates remain relatively stable and in some cases are decreasing. The retail sector has experienced a marginal increase in vacancy rates, which are likely to increase as more supply enters the market. This has not affected retail rents which are showing overall healthy growth.”
Kingdom Tower’s key target is likely to be the office market, which is performing well in Jeddah. Office vacancy rates have remained stable at 6 percent over the last quarter, according to JLL’s first quarter report. This is most likely due to the limited office space entering the market in the first quarter of 2015. Average market rents remained unchanged during that period, but increased by 6.5 percent during the previous twelve months to SR990 ($263) per square metre. Prime rents have continued their upward trend and have increased to SR1,900 per square metre.
With the Four Seasons hotel set to occupy the bottom floors of the tower, the good news is the hotel market is performing well in Jeddah and remains healthy, with occupancies remaining relatively stable year-on-year at 73 percent. ADRs are solid, having decreased by a marginal 0.4 percent to $241, compared to the same period last year. Revenue per available room has decreased by just 2.8 percent to $175, compared to the same period last year.
JLL’s only warning signal is the residential market. While sale prices have continued to increase and rents have jumped 7.5 percent, the number of transactions registered by the Ministry of Justice substantially decreased as a result of the 30 percent mortgage law and falling oil prices. Since the stricter mortgage regulations came into law in November 2014, transactions for apartments have decreased by 27 percent.
Despite the mixed market forecasts, Hammoud reports the project is currently being funded through a loan from Saudi banks, which will be finalised this year. According to a report by Bloomberg last year, the company is in talks to bring in Riyadh-based Alinma Bank as an advisor and lender, while Hammoud previously said BNP Paribas was advising it on its financial details.
Another option to raise cash is to float the company. Hammoud says JEC could go public “in due time” but doesn’t give any concrete timeframes or schedule. Luckily, the financial burden is not all on Prince Alwaleed’s shoulders, as Jeddah-based Abrar Holding owns 33.4 percent of JEC, while the main contractor, Saudi Binladin Group, and Kilaa Jeddah Co own about 16.6 percent each and help spread the costs and challenges.
“There is no project without challenge, without difficulty: construction, wind, façade, sustainability, fire safety, you name it. I think with the experience and ingenuity of the designers, the consultants, the contractors and my team nothing will be impossible. We will overcome all challenges and all difficulties. We are adopting the latest and most cutting-edge things,” Hammoud says optimistically.
One area that is totally breaking ground, literally, is in the construction of the tower. At 1km tall, it is literally building up into the unknown. How will labourers be able to work at such heights?
“I don’t have an answer for that yet frankly,” he admits. “This [issue] is the field of the contractor and to my knowledge we have three shifts of eight hours each. The safety measures, every meeting it is on the agenda: no joking, no risks, no nothing. We set the pace and, as we go higher, health and safety becomes more of a challenge and really we have to teach people from day one to respect the rules.
“What has been done before has been done on other buildings around the world and our contractors are experienced in the kingdom, they built the Clock Tower in Makkah – that’s 650 metres high – so they have achieved this height already.
“From now to then our consultants have hired some of the most talented people who have worked on high buildings around the world. It is about the ingenuity of people and the experience and know-how.”
With just three years until the inevitable opening, many would say it is unlikely Kingdom Tower will see the over-the-top style fanfare of the sort bestowed on Burj Khalifa by Dubai, with its fireworks and lavish parties, especially with the more conservative approach adopted in Saudi Arabia.
However, Hammoud says it should not be underestimated: “We are thinking outside the box.
“We are thinking of a major entertainment offering. We are talking to consultants and if you have any ideas you are welcome [to provide them].”
Only time will tell, but in 2018 Jeddah will rise onto the world’s stage and everyone will wait to see what it has to offer. Will it stand the test of time like the Great Pyramids or will it be the biggest white elephant in the world? It’s still too early to say, but going on previous record-breaking towers’ experiences, it might be a while before the final accolades can be made from an economical perspective.