Al KhafjiShoppingMall CompleteDraftReport

Feasibility Study for Establishing a Shopping Mall in Al-Khafji

Kingdom of Saudi Arabia September 2006

Fahed S. Al Dhowayan & Partner Co.


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Table of Contents 1 Executive Summary...................................................................................................................6

2 Introduction ...............................................................................................................................9

2.1 Overview of the Project..............................................................................................9 2.2 The Projects Objectives.............................................................................................9 2.3 Methodology of Work ................................................................................................9 2.4 Structure of the Report .............................................................................................11 2.5 Project Shareholders (owners).................................................................................12

3 Overview of Saudi Economy...................................................................................................13

3.1 Country Overview ....................................................................................................13 3.2 Macro Economic and Demographic Analysis ..........................................................14

3.2.1 Saudi Economy in Brief ...............................................................................14 3.2.2 Gross Domestic Product (GDP) ...................................................................15 3.2.3 External Trade Statistics...............................................................................17 3.2.4 Oil Production The Driver of Saudi Economy ..........................................20 3.2.5 Population.....................................................................................................23 3.2.6 Real Estate Sector in Saudi Arabia...............................................................24

4 Why to Invest in the Eastern Province ....................................................................................31

5 Market Analysis and Research Findings .................................................................................35

5.1 Introduction ..............................................................................................................35 5.2 Shopping Malls Market Research ............................................................................36

5.2.1 Available Facilities and Services..................................................................36 5.2.2 Rental Fees Analysis ....................................................................................39 5.2.3 Promotional Tools ........................................................................................41 5.2.4 Supplementary Service and Utilities ............................................................43 5.2.5 Turnover Rate and Contract Period..............................................................44 5.2.6 Visitors Mix..................................................................................................44 5.2.7 Competitive Advantage ................................................................................45 5.2.8 Obstacles Facing the Shopping Malls ..........................................................46 5.2.9 Recommendations for establishing a Modern Shopping Mall .....................46

5.3 Shopping Outlets Market Research ..........................................................................48 5.3.1 Rental Fees Analysis ....................................................................................48 5.3.2 Method of Payment ......................................................................................49 5.3.3 Breakdown of Shopping Malls Visitors by Nationality..............................50 5.3.4 Expansion Plan .............................................................................................51 5.3.5 Potential for Investing in Al-Khafji City Center ..........................................51 5.3.6 Expected Area to Rent..................................................................................53 5.3.7 Suggestions and Recommendation...............................................................54

5.4 Consumer Market Research .....................................................................................55 5.4.1 Shopping Patterns.........................................................................................56



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5.4.2 Criteria for the Selection of a Shopping Mall ..............................................58 5.4.3 Promotional Media .......................................................................................59 5.4.4 Share of Heart...............................................................................................60 5.4.5 Preferred Banks ............................................................................................60 5.4.6 Launching Al-Khafji City Center .................................................................61 5.4.7 Suggestions and Recommendations .............................................................62

6 Proposed Marketing Strategy ..................................................................................................63

6.1 Positioning Strategy..................................................................................................63 6.2 Services Strategy ......................................................................................................64 6.3 Pricing Strategy ........................................................................................................70 6.4 Promotion Strategy...................................................................................................73

7 Anticipated Sales Revenues ....................................................................................................77

8 Technical Study .......................................................................................................................79

8.1 Mall Location ...........................................................................................................79 8.2 Detailed Description of Mall Facilities ....................................................................79 8.3 Civil Engineering Work ...........................................................................................80

8.3.1 Total Construction Built-up Area .................................................................80 8.3.2 Project Cost ..................................................................................................83 8.3.3 Land Cost......................................................................................................83

8.4 Utilities .....................................................................................................................84 8.5 Manpower Requirement ...........................................................................................84

8.5.1 Organizational Structure..............................................................................84 8.5.2 Human Resources Required .........................................................................87

8.6 Mall Security ............................................................................................................88 8.7 Fire Precautions ........................................................................................................88 8.8 Environmental Aspects of the Project ......................................................................89 8.9 Implementation Schedule .........................................................................................92

9 Financial Study and Project Profitability Evaluation ..............................................................93

9.1 Total Investment Cost...............................................................................................94 9.2 Project Financing and Capital Structure...................................................................95 9.3 Anticipated Sales Revenues .....................................................................................96 9.4 Operating Expenses ..................................................................................................98 9.5 Projected Income Statement ...................................................................................101 9.6 Projected Cash Flow Statement..............................................................................103 9.7 Profitability Analysis..............................................................................................105 9.8 Feasibility Indicators ..............................................................................................106 9.9 Sensitivity Analysis ................................................................................................107



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List of Tables Table 2-1: Break-down of Sample Size (Proposed and Actual)....................................................... 10 Table 3-1: Saudi Economic and Demographic Indicators................................................................ 15 Table 3-2: Saudi Total Imports during (1998-2005) ........................................................................ 17 Table 3-3: Saudi Total Imports during (1998-2005) ........................................................................ 18 Table 3-4: Rental Yield Rates comparison in 2005.......................................................................... 28 Table 4-1: Available Sectors Investment Opportunities .................................................................. 34 Table 5-1: Comparison between the Major Shopping Malls in the Eastern Province ..................... 36 Table 5-2: Comparison between the Surveyed Malls in terms of Customer Services Provided...... 38 Table 5-3: Average Rental Fees in SR for Outlets, Food Courts and Kiosks .................................. 39 Table 5-4: Advertising Tools Used by the Shopping Malls ............................................................. 41 Table 5-5: Promotional Facilities Provided by the Surveyed Shopping Malls ................................ 42 Table 5-6: Preferred Methods of Payment ....................................................................................... 50 Table 5-7: Breakdown of Visitors by Shopping Mall and Nationality ............................................ 51 Table 5-8: The Most Preferable Banks by the Respondents. ........................................................... 60 Table 6-1: Proposed Tenants Mix ................................................................................................... 65 Table 6-2: The Proposed Service Hours for the Mall....................................................................... 68 Table 6-3: Average Rental Fees in SR ............................................................................................. 71 Table 6-4: Proposed Rental Fees Structure for Al-Khafji City Center ............................................ 72 Table 6-5: Recommended Promotional Media and Messages ......................................................... 74 Table 7-1: The Projects Anticipated Sales Revenues ..................................................................... 78 Table 8-1: Total Built-up Area for Shopping Outlets ...................................................................... 81 Table 8-2: Total Built-up Area for the Food Court .......................................................................... 81 Table 8-3: Total Built-up Area for the Hyper Market ...................................................................... 81 Table 8-4: Total Built-up Area for the Amusement Center ............................................................. 81 Table 8-5: Total Built-up Area for the Parking Area ....................................................................... 82 Table 8-6: Total Built-up Area for the Services Area ...................................................................... 82 Table 8-7: Total Built-up Area for the Other Unspecified Area ...................................................... 82 Table 8-8: Summary of Total Built-up Areas................................................................................... 83 Table 8-9: Breakdown of Project Construction Cost ....................................................................... 83 Table 8-10: Cost of Projects Land .................................................................................................. 83 Table 8-11: Cost of Human Resources Required ............................................................................. 87 Table 8-12: Project Implementation Schedule ................................................................................. 92 Table 9-1: Total investment Cost ..................................................................................................... 94 Table 9-2: Capital Structure of the Project....................................................................................... 96 Table 9-3: Average Rental Fees for the Mall Facilities ................................................................... 96 Table 9-4: The Projects Anticipated Sales Revenues ..................................................................... 97 Table 9-5: The Projects Expenses ................................................................................................. 100 Table 9-6: The Projected Income Instatement................................................................................ 102 Table 9-7: The Projected Cash Flow Instatement .......................................................................... 104 Table 9-8: Results of Project Sensitivity Analysis ......................................................................... 107



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List of Figures Figure 3-1: Saudi GDP and its Growth Rate during (1998-2005).................................................... 16 Figure 3-2: GDP per capita during the period (1998-2005) ............................................................. 17 Figure 3-3: Top 10 Importing Countries to the Kingdom ................................................................ 18 Figure 3-4: Top 10 Exports Markets for Kingdom .......................................................................... 19 Figure 3-5: Saudi Trade Balance during the Period (1998-2004) .................................................... 19 Figure 3-6: Crude Oil Production and Daily average during the period (1998-2004) ..................... 21 Figure 3-7: Saudi Oil Production, Exports and local Consumption during the Period (1998-2004)22 Figure 3-8: Oil Prices in Real and Nominal terms ........................................................................... 22 Figure 3-9: Number of Population in Saudi Arabia ......................................................................... 24 Figure 3-10: Number of Population in Saudi Arabia classified according to gender ...................... 24 Figure 3-11: Real Estate and Construction Contribution to GDP during the period (1998-2004)... 27 Figure 3-12: Market Share of Real Estate Developers..................................................................... 29 Figure 5-1: Relative Importance of the Promotional Tools Used by the Studied Malls .................. 41 Figure 5-2: Visitors Mix of the Surveyed Malls .............................................................................. 45 Figure 5-3: Breakdown of Shopping Malls Visitors by Nationality ............................................... 50 Figure 5-4: Willingness of the Surveyed Tenants to Invest in Al-Khafji City Center ..................... 52 Figure 5-5: The Outlets Motives to Open a Branch in Al-Khafji City Center................................ 53 Figure 5-6: Shopping Patterns .......................................................................................................... 56 Figure 5-7: Preferred Time of Shopping. ......................................................................................... 56 Figure 5-8: Shopping Company ....................................................................................................... 57 Figure 5-9: Criteria for the Selection of a Shopping Mall................................................................ 58 Figure 5-10: Promotional Media ...................................................................................................... 59 Figure 5-11: The Most Preferable Banks by the Respondents. ........................................................ 61 Figure 5-12: The Respondents Motives for Launching Al-Khafji City Center................................ 61 Figure 8-1: Location of the Proposed Project................................................................................... 79 Figure 8-2: Proposed Organizational Structure ................................................................................ 85



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1 Executive Summary Fahed S. Al Dhowayan & Partner Co. is a Saudi limited liability company established as a continuation to Saad Bin Mahammad Al Dhowayan Company with 32 years of experience in trade and construction sectors in the Kingdom of Saudi Arabia (KSA), the Company plans to construct Al-Khafji City Center (the new mall) that will be the first shopping mall in Al-Khafji city with a total area of 40,080 square meters, including the hypermarket and the amusement park.

Al-Khafji city is located within the Eastern Province, and this specific province was chosen by the Company to construct the mall for its main characteristics that include:

Strong and dynamic economy Unique and strategic location Social and political stability Modern and developed infrastructure Attractive investment climate Expanding market Vast natural resources and raw materials Sectors investment opportunities

Positioning strategy for Al-Khafji City Center is concerned with identifying and maintaining the favorable image needed to occupy a distinguished place in the customers mind and to be apart from its potential direct competitors as well.

The malls service strategy is to have a variety in tenants mixture and highly emphasize on providing excellent and distinguished supplementary services that are bundled with core services through facilitating the use of core services and enhancing its value and appeal, search for competitive advantage, and differentiate service offerings over competitors.

The most appropriate pricing strategy to be adopted by the malls management is Rapid Skimming Pricing Strategy.

Taking into consideration the pricing strategy and objectives of the mall, the rental fees for Al-Khafji City Center were estimated using the following equations:

Rental Fees for Shopping Outlets, Restaurants and Cafes, and Kiosks = Average Market Rental fees 55%

Rental Fees for the Hypermarket and the Amusement Park = Average Market Rental fees 55%



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Further, the rental fees for the mall are calculated as follows. Rental Fees / m2 Facility SR USD

Shopping Outlet 1,131 301 Restaurants and Cafs 1,691 451 Hypermarket 468 125 Amusement Park 495 132 Kiosk (Per Year) 32,175 8,580

The mall will enjoy 80% occupancy rate of the shopping outlets in the first year and then increase by 5% per year to reach 100% occupancy rate by year 5 of the project life.

Overall cost for capital expenditures is estimated at USD 15.0 million. Total investment is estimated at USD 15.7 million, out of which USD 3.9 million to be injected by the shareholders, with the remaining balance of USD 11.8 million to be financed in a form of a 10-year loan.

It is expected that the total cash inflows during the first year are estimated at USD 1,052,906 and will reach USD 2,745,030 during the 10th year of operation. Net cash flows during the first year are estimated at USD 1,052,906 and will reach USD 1,567,426 during the 10th year of operation. The net residual value for the project is estimated at USD 8,776,018.

The Project will be profitable and generate enough cash flow to cover loan amortization even under the worse case scenario. Under the base case assumptions, the internal rate of return is 22.73% and the net present value at a 10% discount rate is USD 4,443,101. Under reduced profitability and output scenario the Project remains profitable.

During the first year, the net profit margin is expected to be 1.5%, 25% during the second year and will reach 54.94.2% during the 10th year of operation.

The Return On Investment (ROI) for the first year will be 0.28% and will reach 9.31% during the 10th year of operation.

The contribution margin during the first year is estimated at USD 2,579,309 (94.82% of sales revenues), and will amount to USD 3,811,406 (94.34% of sales revenues) during the 10th year of operation.

The break-even point during the first year is estimated at USD 2,677,292 (98% of sales revenues), and will amount to USD 1,631,394 (40% of sales revenues) during the 10th year of operation.

The Company will payback its investment within the 7th year of operation.

The table below summarizes the main scenario indicators:

Indicator Value

Internal Rate of Return (IRR) 22.73% Present Value (PV) USD 8,368,672 Net Present Value (NPV) USD 4,443,101



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Indicator Value

Net Profit Margin Year 1 1.50% Net Profit Margin Year 10 54.94% Return on Fixed Assets (ROA) Year 1 0.28% Return on Fixed Assets (ROA) Year 10 22.74% Return on Investment (ROI) Year 1 0.28% Return on Investment (ROI) Year 10 9.31% Contribution Margin Year 1 USD 2,579,309 Contribution Margin Year 10 USD 3,811,406 Contribution Margin Ratio Year 1 94.82% Contribution Margin Ratio Year 10 94.34% Break-even Point Year 1 USD 2,677,292 Break-even Point Year 10 USD 1,631,394 Break-even Point Percentage of Sales Revenues Year 1 98% Break-even Point Percentage of Sales Revenues Year 10 40% Profitability Index (PI) 2.13 Payback Period (PP) Year 7

It is assumed under the stress scenarios that changes in revenues and total investment costs incur as shown in the following table:

Feasibility Indicators Item Change (%) IRR NPV (USD) PI -10% 16.98% 2,489,723 1.63 Revenues +10% 28.70% 6,396,479 2.63 -10% 27.64% 5,469,200 2.55 Investment Cost +10% 18.79% 3,415,436 1.79



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2 Introduction

2.1 Overview of the Project

Fahed S. Al-Dhowayan and Partner Company have perceived the enormous need for establishing a shopping mall in Al-Khafji district in compliance with state-of-the-art shopping malls. Currently, there are no shopping malls operating within Al-Khafji city. Therefore, those citizens who are willing to enjoy the experience of real shopping need to leave Al-Khafji and go for shopping malls either in the Eastern Province or Kuwait to satisfy their shopping needs and buy the required commodities.

To seize such a promising opportunity, a contract was signed between SAD and Elite Consulting to carry out a feasibility study to assess the viability of commencing the first shopping mall in Al-Khafji (Al-Khafji City Center) with a total area of 40,080 square meters, including the hypermarket and the amusement park.

2.2 The Projects Objectives

The main objective of this consulting assignment is to help the owners of the project to make the right decision of establishing a shopping mall in Al-Khafji district and provide them with more insight of the viability of the investment; through studying and analyzing the shopping malls industry in the Eastern Province and identifying the shopping patterns and trends of Al-Khafji citizens. Additionally, all technical aspects associated with the project, investment and operational requirements, as well as the financial analysis that identifies the feasibility of the project will be completely investigated.

2.3 Methodology of Work

Elites teams of consultants have professionally adopted a practical methodology of work to successfully prepare the market study, in light of the stated projects main objectives. The following paragraphs give a detailed insight of the main steps of the methodology undertaken in preparing the market study.

a) Market Researches

With the aim of getting properly the required data and information, three market researches were carried out targeting the main market players in the shopping malls industry. The first research covered a sample of 69 of Al-Khafji residents, who will be potential targeted customers for the project at hand. The selection of respondents in the survey of residents was based on random sampling; however; an attempt was made to include respondents belonging to different income levels and nationalities keeping in view the characteristics of potential customers.



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The second research included 42 outlets in the four major shopping malls operating in the Eastern province. Finally, the third research targeted the four major shopping centers in Al-Dammam and Al-Khobar, namely: Al-Rashid Mall, Mall of Al-Dhahran, Al-Dammam Marina Mall, and Al-Shatea Mall.

Major steps were executed during the market research and are as under:

1) Questionnaire design;

2) Sample size design;

3) Data collection;

4) Quality control measures;

5) Data entry and verification; and

6) Tabulation and statistical analysis.

A brief description of each task is as follows:

Questionnaires designing: Draft questionnaires were administrated and developed by Elites consultants for the 3 types of market researches. Then, they were thoroughly reviewed by the projects manager to ensure a successful achievement of the main objectives of each of the three researches, as planned.

Sample size: It was agreed between Elite consultants and the projects representatives on the sample size to be selected along with the actual number of targeted parties surveyed as shown in the table below:

Table 2-1: Break-down of Sample Size (Proposed and Actual)

Sample Size Category Agreed Number Actual Number Surveyed Visitors 50-75 61 Shopping Malls 4 4 Outlets 50 42

Data collection: Structured personal interviews with targeted parties were conducted as part of the process of gathering data and information needed for market study purposes.

Quality control measures: Quality control measures were adopted to ensure high quality of collected data. These mainly included:

- Scrutiny of filled-in questionnaires by supervisors.

- Random spot checks by the projects manager.

Data entry and verification: The scrutinized data from questionnaires was entered into computers using a custom-made data entry program in SPSS and excel. The entered information was verified against the information in the questionnaires. Any entry errors detected were immediately corrected.



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Tabulation and analysis: The field questionnaires were entered into the computers and analyzed by using SPSS program.

b) Desk Research

The secondary information and data required to achieve the objectives of the study were collated from its official sources operating in the Eastern Province. The secondary sources include governmental agencies such as Ministry of Planning, Department of Statistics, Ministry of Industry and Commerce, Chamber of Commerce and Industry, Saudi Arabia General Investment Authority (SAGIA) and other trusted on-line statistical directories. The following summarize all the information gathered from the secondary resources:

Overview and historical statistics on the Saudi Economy. Background information on Al-Khafji District. Investment incentives in the Eastern Province.

2.4 Structure of the Report

The report has been divided into seven chapters. Brief introduction of each chapter in the report is given below:

Executive Summary This part provides brief facts on the main findings of the market analysis, technical study and the major financial indicators extracted to assess the economic feasibility of the proposed project.

Introduction This chapter provides the projects background, objectives of the project and the adopted methodology undertaken to execute this assignment.

Economic Background to Saudi Arabia This chapter provides a summary of the Saudi economy, key economic indicators and main productive economic sectors.

Market Analysis This chapter provides a detailed and comprehensive analysis of findings raised from the three market researches conducted, proposed marketing strategy and anticipated sales revenues.



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Technical Study This chapter provides a detailed technical analysis of the project in order to determine all types of costs incurred in connection with this intended investment.

Financial Analysis Detailed financial study to evaluate the feasibility of the project based on a set of financial indicators. This section will include the cost of investment, labor, maintenance, management, research and development, annual operating costs, income statement, cash flow statement, sensitivity analysis and all required profitability indicators.

2.5 Project Shareholders (owners)

Fahed S. Al Dhowayan & Partner Co. is a Saudi limited liability company established as a continuation to Saad Bin Mahammad Al Dhowayan Company with 32 years of experience in trade and construction sectors in KSA. The companys main activity was in the field of building materials' trade for a period of 27 years, with branches in all of the Eastern and Central regions of KSA, and considered as a main provider of building materials imported from Italy, Spain, Britain, Germany, Lebanon, and USA. The company had various real estate investments and other business investments. After the death of the founder (the late Saad Al Dhowayan), " Fahed S. Al Dhowayan & Partner Co." replaced the later company.

Upon emergence as a new company, there was a need for restructuring and developing the line of business to grasp the emerging market opportunities and cope with changing market trends. A Business Plan was prepared for that purpose, the company now is engaged in investment in different sectors and in and real estate sector, in particular. Moreover, the company made other investments through partnerships and contributions with other investors, and the last of these partnerships was buying Al-Khafji land. During that period, the company's board of directors assigned Mr. Abdullah Al Dhowayan, one of the partners, to prepare a mechanism for investing independently in the area of real estate. This mechanism was based on in depth market study and viable areas of investment ascertained from the previous experiences of others. This report was presented and finalized in cooperation with the company's consultants, a strategic plan was prepared as a part of this report under which the decisions on line of business based on logical analysis from marketing and financial aspects was taken effectively.

The company has bought a large scheme in the heart of the city of Al-Khafji (Jawharat Al-Khafji) for an amount of SR 114 million which has been a property of the company. Abdel Latif Hamad & Partners Co. is responsible for marketing and development of shareholding while the French Bank is the lead finance institution. The company is currently preparing for a mega real estate project in collaboration with several investors and major regional companies as per their specialized field of services.



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3 Overview of Saudi Economy

3.1 Country Overview

The Kingdom of Saudi Arabia (KSA) could be described as a land of vast deserts and little rainfall. Huge reserves of oil and natural gas lie beneath the countrys surface. KSA was a relatively poor nation before the discovery and exploitation of oil, but since the 1950s, income from oil has made the country wealthy. The religion of Islam developed in the 7th century in what is now Saudi Arabia. The KSA was founded in 1932 by King Abdul Aziz bin Saud and has been ruled by his descendants ever since.

Kingdom Geography

KSA is located in the Arabian Peninsula in south-west Asia. Its boundaries are as follows: Kuwait from the northeast, Iraq and Jordan from the north and north-west; and the east is where the Arabian Gulf, Bahrain, Qatar, and the United Arab Emirates; on the south the Sultanate of Oman and the Republic of Yemen; and the west is the Red Sea and the Gulf of Aqaba. The countrys border with the United Arab Emirates is not precisely defined. The capital and largest city is Riyadh.

Occupying about 80% of the Arabian Peninsula, the Kingdom's area is 2,250,000 square kilometers (about 864,900 square miles). Its western coast stretches for 1,800 kilometers, and its eastern coast for 500 kilometers. The Kingdom's terrain ranges from high mountainous areas in the south-western region to wide valleys in Najd. The Kingdom comprises the largest desert in the world, covering an area of 600,000 square kilometers.

The central region consists of an eroded plateau, mostly arid and hot in the summer and cold in the winter. The western region is mountainous, except for the coastal plain bordering the Red Sea. The southern region is also mountainous and receives enough rainfall to support agriculture. Finally, the eastern part of KSA is flat and sandy, bordering on the Arabian Gulf and possessing most of the countrys vast oil resources - perhaps as much as twenty-five percent of the whole world's proven reserves. Geographically, KSA is divided into four (and if the Rub al-Khali, Empty Quarter, is included, five) major regions. The first is the Central region, a high country in the heart of the Kingdom; secondly, there is the Western region, which lies along the Red Sea coast. The Southern region, in the southern Red Sea-Yemen border area, constitutes the third region. Fourthly, there is the Eastern region, the sandy and stormy eastern part of Saudi Arabia, the richest of all the regions in petroleum.



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3.2 Macro Economic and Demographic Analysis

3.2.1 Saudi Economy in Brief KSA is the largest free market economy in the Middle East and North Africa (MENA) region holding 25% share of the total Arab GDP. The kingdoms geographic location provides easy access to export markets in Europe, Asia and Africa. It has a continuously expanding domestic market (annual population growth of about 3 percent), which is adding to a young population with strong buying power.

The investment climate in the Kingdom reflects traditions of liberal, open market private enterprise polices and its new foreign Investment Law allows 100 percent foreign ownership of projects and real estate. The kingdom has an impressive record of political and economic stability and has a modern world-class infrastructure.

There are no restrictions on foreign exchange and repatriation of capital and profits. It has a very stable currency and has no foreign exchange curbs, and companies are allowed 100 percent repatriation of profits.

Over the past three decades the Saudi economy has witnessed a considerable transformation in economic, social and urban aspects of life. The transformation was brought about by extensive government investment within the framework of five-year development plans to lay down the social and physical infrastructure of the country. This includes the construction of bridges, dams, three major international airports, numerous regional airports, up-to-date seaports and marine terminals, an efficient network of roads, electricity, desalination plants, and advanced telecommunication systems.

Over the course of the last ten years, the country has embarked on economic reforms and taken several steps to encourage private and foreign sector investments and privatization of state enterprises. The accession to WTO is the crowning achievement of this continuing effort and enforces the liberalization of the major sectors on the kingdom.

Substantial funds were also spent on education, health and vocational training programs as well as on projects involving the building of schools, colleges, universities, and general and specialized hospitals for the civilian and military sectors. In the industrial sector, huge funds were invested in establishing industrial estates in major cities, including the two advanced industrial towns of Jubail and Yanbu. These were designed to accommodate heavy industries such as the basic petrochemicals projects, the iron and steel plants and the giant oil refineries set-up by the government in partnership with international corporations and the Saudi private sector.

An extensive pipeline network crossing the Kingdoms Eastern, Central, and western regions has been constructed to transfer crude oil and gas to the oil refineries and petrochemicals plants in Jubail and Yanbu as well as to the marine terminals in the two industrial towns for exporting oil and gas products overseas. KSA is pursuing the following two principal economic goals:

Economic diversification through the development of industry, agriculture, mining, and other non-oil sectors to decrease the countrys dependence on oil.



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Encouraging the private sector to play a major role in the kingdoms economic development. The banking system has continued to perform well according to international standards, reflecting its strength and soundness. As for technological development, banks raised the number of their Automated Teller Machines (ATMs), Point of Sales (POS) terminals and ATM cards, reinforcing banking awareness among the public and contributing to the decline in the use of currency in the total money supply. The interest rates on domestic currency deposits have also decreased. The robust growth in the private sector has been accompanied by the number of factors that have enhanced confidence in the national economy and should continue to have a positive impact on private sector growth. Table (3-1) shows the main economic and demographic indicators about the Kingdom:

Table 3-1: Saudi Economic and Demographic Indicators

Year 2000 2001 2002 2003 2004 2005 GDP @ Constant prices (Million USD) 169,238 170,165 170,382 183,432 193,094 205,750 GDP Growth (%) 4.9 0.5 0.1 7.7 5.3 6.6 GDP per Capita (USD) 8,268 8,111 7,928 8,330 8,571 8,903 Exports (Million USD) 77,688 68,155 72,658 93,493 126,334 19,056* Imports (Million USD) 30,278 31,265 32,376 37,015 44,864 59,568 Trade Balance (Million USD) 47,410 36,890 40,282 56,478 81,470 -40,513 Population (Million) 21.5 22.1 22.7 23.3 24 24.6 Consumer Price Inflation (%) n/a -1.1 0.2 0.6 0.3 0.4 Exchange Rate 3.75 3.75 3.75 3.75 3.75 3.75 Sources: Ministry of Economy and Planning Saudi Arabian Monetary Agency (SAMA) Economic Intelligence Unit (EIU) *Oil Exports are not included

3.2.2 Gross Domestic Product (GDP) The overall Saudi economy has been enjoyed a rapid growth during the last three decades due to the diversification of economy away from expanding in oil production to an extent. The GDP has an impressive growth records, it rose from USD 39,583 million in 1970 to USD 138,058 million in 1980, registering a growth rate of 249%. The GDP keeps on its incessant growth to reach USD 169,238 million and USD 205,750 million in 2000 and 2005 respectively.

Figure (3-1) below shows the GDP and its growth rate during (1998-2005):



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-0.7%

4.9%

0.5%0.1%

7.7%

5.3%6.6%

0

50,000

100,000

150,000

200,000

250,000

1998 1999 2000 2001 2002 2003 2004 2005-2%

0%

2%

4%

6%

8%

10%

GDP (Million USD) Growth Rate

Figure 3-1: Saudi GDP and its Growth Rate during (1998-2005)

As noticed clearly in the figure above, Saudi GDP has been grown in a steady trend and no peaks and valleys were noticed. The GDP value reached USD 205 billion in 2005 with a growth rate of 6.6%, as against 5.3% in 2004. The noticeable growth in GDP has been driven by the expansion in oil production and exploration as well as the growth in non-oil private sector, which currently account 43.6% from total GDP (as compared to 33% in 1970).

All economic sub-sectors have recorded remarkable improvement in their performance in 2005 if compared with preceding year. The manufacturing sector includes Petroleum Refining and other manufacturing activates, registered the highest growth rate in 2005 among the other private sub-sectors, which grew by 7.1% if compared with 2004.

The Transportation, storage and communication recorded the highest growth rate among the other public sub-sectors, which grew by 9.6% in 2005 if compared with preceding year. The Electricity, Gas and Water Sector grew by 5.4% if compared with preceding year. The Construction sector registered a growth rate of 5.5% if compared with preceding year. The Wholesale and Retail Trade, Restaurants and Hotels Sector grew by 6.2% against 5% in the preceding year. The Finance, Insurance, Real estate and Business Services Sector registered a growth rate of 6.8% against 4.4% in the preceding year.

GDP per Capita

GDP per capita is one of the major macro economic indicators that reflect the economic prosperity and community wealth. The Purchase Power Parities (PPP) of the community is measured based on the per capita GDP. In KSA, the GDP per capita has been grown in steady manner during the last seven years. The highest value was registered in 2005 which reached USD 8,903 at the constant prices since 1987. Figure (3-2) below shows the values of GDP per capita in USD during (1998-2005).



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8,3398,077

8,268 8,1117,928

8,3308,571

8,903

0

50,000

100,000

150,000

200,000

250,000

1998 1999 2000 2001 2002 2003 2004 20057,200

7,500

7,800

8,100

8,400

8,700

9,000

GDP (Million $) Per Capita GDP

Figure 3-2: GDP per capita during the period (1998-2005)

3.2.3 External Trade Statistics Imports of Goods and Services

The total Saudis imports of good and services reached USD 44.8 billion in 2004 with a growth rate of 21% when compared with 2003, and it is expected that the imports value will hit USD 60 billion in 2005 with a growth rate of 33% against 2004.

Table (3-2) below shows the Saudi imports values during the period (1998-2005):

Table 3-2: Saudi Total Imports during (1998-2005)

Imports Year Value

(Million USD) Growth

Rate Weight

(000 tons) Growth

Rate 1998 30,053 - 22,557 - 1999 28,070 -7% 24,230 7% 2000 30,278 8% 25,099 4% 2001 31,265 3% 24,772 -1% 2002 32,376 4% 24,615 -1% 2003 37,015 14% 28,157 14% 2004 44,864 21% 31,180 11%

2005* 59,568 33% n/a - Source: Department of Statistics, Ministry of Planning Saudi Arabian Monetary Agency (SAMA) * Initial Statistics

Imports breakdown by nature of goods indicates that most of the imported goods are finished products which represent 70% from the total imports in 2004 followed by the semi-finished products and raw materials which they represent 26% and 4% respectively.



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The major importing countries to the Kingdom are: USA, Japan, Germany, China, UK, South Korea, France, Italy, India and Australia. USA imports leads all the imported countries which represent around 15.3% from the total imports value followed by Japan, Germany and China which they represent 9.8%, 8.1% and 6.6% respectively as shown in following pie chart:

Figure 3-3: Top 10 Importing Countries to the Kingdom

Exports of Goods and Services

The total Saudi exports of good and services reached USD 126 billion in 2004 with a growth rate of 35% when compared with 2003, and it is expected that the exports value, excluded oil exports, will hit USD 19 billion in 2005. Table (3-3) below shows the Saudi exports values during the period (1998-2005):

Table 3-3: Saudi Total Imports during (1998-2005)

Imports Year Value

(Million USD) Growth

Rate Weight

(000 tons) Growth

Rate 1998 38,874 0 399,146 0 1999 50,825 31% 367,848 -8% 2000 77,688 53% 383,030 4% 2001 68,155 -12% 390,308 2% 2002 72,658 7% 333,074 -15% 2003 93,493 29% 411,150 23% 2004 126,334 35% 463,364 13%

2005* 19,056 - n/a - Source: Department of Statistics, Ministry of Planning Saudi Arabian Monetary Agency (SAMA) * Oil Exports Excluded

Other Countries, 37.8%

U.S.A, 15.3%Japan, 9.8%

Germany, 8.1%

Australia, 2.9%

India, 3.2%

Italy, 3.4%France 3 5%

China, 6.6%

U.K, 5.7%

S.Korea, 3.8%



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Exports breakdown by nature of goods indicates that most of the exported goods are raw materials which represent 77% from the total exports in 2004, as the crude oil represent most of Saudi exports, followed by finished products and semi-finished products which they represent 14% and 8% respectively.

The major exports markets are: USA, Japan, Germany, South Korea, India, China, Singapore, Holland, Taiwan, Italy, and France. Exports to US market represent around 17.2% from the total exports value followed by Japan, and South Korea which they represent 14.2%, and 8.5% respectively as shown in following pie chart:

Figure 3-4: Top 10 Exports Markets for Kingdom

Foreign Trade Balance

Saudi balance has achieved an impressive performance during the last three decades. Since 1970, the Saudi trade balance keeps on achieving positive records and surpluses and no trade deficits were found. The expansion in oil production and increasing the exports from crude oil and refined Petroleum helps the Kingdom to gain a surplus every year. Figure (3-5) below shows the Saudi trade balance during the period (1998-2004):

020,00040,00060,00080,000

100,000120,000140,000

1998 1999 2000 2001 2002 2003 2004

Exports Imports Balance

Figure 3-5: Saudi Trade Balance during the Period (1998-2004)

USA, 17.2%

Japan, 14.2%

S.Korea, 8.5%

India, 5.8%

China, 4.8%

Other Countries, 32.3%

France, 2.6%

Singapore, 4.7%Holland, 3.9%

Italy, 2.7%

Taiwan, 3.3%



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As noticed in the figure above, the growth in Saudi exports is increasing more rapidly than the growth in Saudi imports, the Compounded Annual Growth Rate (CAGR) for the Saudi exports and imports was18.3% and 5.9% respectively during (1998-2004). Starting from the year 2000, the value of trade surplus has overcome the value of total imports; the highest surplus value was in 2004 as its hit USD 81 billion, the latter trade surplus is driven mainly by the oil production and exports.

Oil prices were strong during 2003, and have increased sharply in 2004. Combined with relatively high Saudi oil output since early 2003, Saudi Arabias oil export revenues were up sharply in 2004 compared to 2003.

3.2.4 Oil Production The Driver of Saudi Economy History of Oil in KSA

In 1923, many foreign investors were invited to invest in the Kingdom's petroleum and mineral resources; yet, their efforts did not produce any positive results. In 1933, the government of Saudi Arabia granted a concession to Standard Oil of California (SOCAL, now Chevron), to explore and produce oil in an area of 495,900 square miles.

Several months after signing the agreement, results of preliminary geological research of oil exploration work showed encouraging signs of oil in Jabal Dhahran area. In 1938, good news began to unravel with the discovery of oil in commercial quantities in Dammam Well No. 7 in an area known as the Arab Formation.

The first Saudi oil shipment was exported from Ras Tanura Port in May 1939. Discoveries followed with the number of fields discovered reaching 90 in 1999, seven of them are gas fields, one condensates field and the rest are oil fields. Eighty-three of these fields are located within the Saudi Aramco's concession area, and the remaining are in the Neutral Zone's partitioned area.

The Kingdom ranks the worlds first in oil reserves, productions and export. Its proven oil reserves by the end of 1998 amounted to approximately 261.1 billion barrels, constituting 26% of the worlds total oil reserves. The Kingdom's oil production reached 8.28 million barrels per day (bpd) in 1998, or 13% of world production, and the volume of its oil exports reached 6.4 million barrels per day, or 16% of world oil exports.

The Saudi Arabian oil is distinct for its diversity. There are five types of crude oil: Arabian heavy, Arabian Medium, Arabian light, Arabian Extra light and Arabian Super light. The crude oil and its products are exported via Ras Tanura port on the Arabian Gulf and Yanbu' Port on the Red Sea.

Oil Production

With one-fourth of the worlds proven oil reserves and some of the lowest production costs, Saudi Arabia is likely to remain the worlds largest net oil exporter for the foreseeable future. Saudi Arabia is the world's leading petroleum producing and exporting nation, accounting for about 13%



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of the world's annual total crude oil production. The Eastern Province has the distinction of possessing the worlds largest reserves of crude oil. These reserves account of approximately 260 billion barrels, which represent 25% of the total global reserves, can last for 100 years at the present level of production.

Saudi Arabia is a net energy exporter, with its total energy production exceeding its consumption by a huge margin. Saudi Arabia currently ranks as the 4th greatest energy producing nation (behind the United States, Russia, and China), accounting for about 5.5% of the world's total annual energy production.

Higher than expected oil prices and positive economic growth rates enabled the government to increase its budget allocations for the construction of new schools, colleges and universities, housing units, hospitals and desalination plants. This has provided a major boost to the real estate industry.

The total production of crude oil reached 3.2 billion barrel in 2004 with a growth rate of 6.1% with an average of 8.9 million b/d. In 2003, the crude oil production grew by 18.6%, as against 10.1% drop in 2002, and the average production was 8.2 million b/d in 2003.

Figure (3-6) below shows the Saudi production of crude oil and the average daily production during the period (1998-2004):

8.37.6

8.1 7.97.1

8.48.9

0500

1,0001,5002,0002,5003,0003,500

1998 1999 2000 2001 2002 2003 20040.0

2.0

4.0

6.0

8.0

10.0

Oil Production (Million b) Average (Million bd)

Figure 3-6: Crude Oil Production and Daily average during the period (1998-2004)

The percentage of local consumption of crude oil, which moved to petroleum refineries, represent on average 24% of the overall oil production while the remaining 76% exported to many regional and international countries as illustrated in the following figure:



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0

500

1,000

1,500

2,000

2,500

3,000

3,500

1998 1999 2000 2001 2002 2003 2004

Oil Production (Million b) Exports (Million b) Local Consumption (Million b)

Figure 3-7: Saudi Oil Production, Exports and local Consumption during the Period (1998-2004)

Oil Prices

Due to the recent increase in oil prices, followed by the Saudi government budget surpluses, the government announced plans for spending part of the revenue on infrastructure, transportation, health care and education and in the long run to invest in multi-billion dollar public and private investment project, such as the economic cities.

KSA was a key player in coordinating the successful late 1990s campaign of OPEC and other oil-producing countries to raise the price of oil to its highest level since the Gulf War by managing production and supply of petroleum. As a result of this action, as well as rising demand from China, India and the USA, the price of oil has tripled from 1999 to 2002.

Figure (3-8) below shows the crude oil prices in real and nominal terms as disclosed by Energy Information Agency:

Figure 3-8: Oil Prices in Real and Nominal terms



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The price of standard crude oil was under USD 25/barrel in September 2003. By August 11, 2005, the price had been above USD 60/barrel for over a week and a half. A record price of USD 78.4 per barrel was reached on July 13, 2006, due to in part to North Korea's missile launches, Middle East Crisis, Iranian nuclear brinkmanship and reports from the U.S department of energy showing a decline in petroleum reserves. While oil prices are considerably higher than a year ago, they are still roughly USD 14 from exceeding the inflation-adjusted peak of the 1980 shock, when prices were over USD 90 a barrel in todays prices. In 2004, Saudi Arabia earned around USD 4,564 in oil export income per person, versus USD 22,589 in 1980. Despite record oil prices, current per capita income in Saudi Arabia is equal to that of 1972, a year before the start of the first boom.

A chief reason for the recent decline in real per capita income is the large increase in populations of OPEC member countries, which have some of the world's highest birth rates. This situation applies not only to Saudi Arabia, but to all OPEC members.

The current market conditions and the near term outlook for oil reflect the interplay of production, stocks and consumption. Over the past two years global economic growth has greatly strengthened: from a rate of 2.6 percent in 1998 to 3.4 percent in 1999 and to an estimated 4.7 percent in 2000. As a result, the growth in global oil consumption increased from 0.6 percent in 1998 to 1.6 percent in 1999, before moderating somewhat this year due to the sharp oil price increase.

There are noticeable seasonal patterns in production and in primary consumption cycles of oil. Peaks for both cycles occur in the fourth quarter of the year, and troughs in the second quarter. Measured stocks of crude oil and products are usually run down near the end of the calendar year when consumers in the northern hemisphere build up their supplies (invisible stocks) of heating oil for the winter season and visible stocks are rebuilt around the middle of the following year.

3.2.5 Population The two growth factors - population and tourism - have a positive impact on other sectors of the economy, especially in the development of restaurants, shopping malls, resorts, recreational centers and theme parks, hotels and business centers.

The total number of population, based on the last population census in 2004, reached 22.7 million inhabitants, 72.9% of the total population are Saudi citizens while the remaining 27.1 % are the foreigners whom are working in the Kingdom.

Figure (3-9) shows the number of population in 2004 and in comparison with the previous population censuses:



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02,000,0004,000,0006,000,0008,000,000

10,000,00012,000,00014,000,00016,000,00018,000,000

1974 1992 2004

Saudi Foreigners

Figure 3-9: Number of Population in Saudi Arabia

The population structure, according to gender, is equal to an extent; the percentage of male is 55% from the total population in 2004, while the female is representing 45% in the same year.

Figure (3-10) shows the number of population, broken down according to gender, in 2004 and in comparison with the previous population censuses:

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

1974 1992 2004

Male Female

Figure 3-10: Number of Population in Saudi Arabia classified according to gender

3.2.6 Real Estate Sector in Saudi Arabia Overview

Real estate plays an important role in the Kingdoms non-oil economy. In 2004, the value of real estate transactions including sales of existing units amounted to SR 900 billion (USD 241 billion). The real estate sector is driven recently by domestic demand fundamentals and not by speculation.



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A strong economy and demographic fundamentals are the core push factors behind the growth in real estate.

By the end of 2010, its expected that the total real estate construction in the Kingdom will reach SR 484 billion (USD 129.4 billion).

In order to meet demand, through 2020 a total of 2.62 million housing units will be built, at an average rate of 163,750 units per annum. Through 2020, the total of new investment in housing will hit SR 1.20 trillion (USD 0.32 trillion).

Real estate demand is sustainable and the current set of favorable circumstances will be strengthening with the likely introduction of mortgage products in the next few years. The housing sector is at the center of the Kingdoms growth in real estate activity.

In terms of value the housing sector comprises 75 percent of all real estate activity in the Kingdom.

SR 75 billion (USD 20 billion) per annum will be required to meet annual housing demand in the Kingdom through 2020.

Real estate growth might be challenged if domestic supply exceeds demand. At the moment there are few indications that this will occur.

Real estate market is undersupplied in affordable low-income housing. The Kingdoms real estate market is at a phase where price appreciation will grow but not

exponentially.

Average housing prices, from 2002 to 2005, in the Kingdom grew by 13.7% per year, land by 16.5 % and commercial (office) space by 15.2%.

Large real estate developers will enjoy a stable revenue stream and will grow as real estate in the Kingdom shifts toward large projects.

The Structure of the Real Estate Market

Since the late 1970s real estate -- raw land, or land developed with commercial or residential buildings-- has widely been perceived as an investment safe-haven in Saudi Arabia. The establishment of the local stock market in 1985 did not dissipate interest in real estate investment throughout the 1980s and 1990s. Since around 2002, real estate investment has been rising as have land prices and rents, predominantly in urban areas.

Land acquisition in Saudi Arabia is a top-to-down process. The government releases large plots of land to a limited pool of investors who either develop the land on their own or sell it to other developers or wholesalers. In turn, wholesalers determine, according to demand and supply conditions, whether to hold on until land prices appreciate or to begin immediately to sell it to consumers. Some opt to develop their own real estate plots into smaller, mainly, residential, projects. The large developers will hold on the land for an average period of 3-4 years, as estimated.



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The government is the distributor of raw land and the private sector is the dominant real estate developer. Individuals and private businesses own most housing and commercial units respectively. Most real estate transactions are conducted through real estate agents, who charge buyers a flat 2.5 percent commission. There are limited direct sales or leasing activities between landlords and tenants and neither is the printed press a popular medium for real estate transactions. Geographically the urban real estate market is divided into three regional centers: Central Region (Riyadh), Eastern Province (Al Khobar and Al-Dammam), and the Western Province (Jeddah, Mecca and Medinah).

The real estate market is divided into three groups according the property type:

Raw land The housing market comprised of apartments, villas, floor in villas (duplex), traditional

homes and housing compounds.

Commercial units, which consists of office buildings, shopping malls, hotels, and industrial facilities including warehouses.

In terms of volume (building permits), the housing market represents over 91 percent of the real estate industry, while our value estimations suggest that this sector comprises 75 percent of all real estate activity.

Recent Developments

Over the past several years, the real estate sector has received much investment attention. After a decade of sluggish growth in the 1990s, a combination of factors has led to the rejuvenation of real estate in the Kingdom, which includes:

High liquidity Preference to maintain capital within the country and region Low interest rates Expected high return from real estate Increase in bank lending In the past land was acquired often for a relatively low price by developers and wholesalers as demand and real estate prices rose so did prices of land purchased by the wholesalers. It is estimated that over the past three years, wholesalers are paying 175 percent more for raw land than prior to 2002.

Another recent trend in the real estate market has been the development of large-scale housing projects in which middle-income groups have been given investment opportunities. The government, along with large developers, has supported this idea through a vehicle in which developers float affordable shares, based on the estimated total project costs, to small investors. This has been especially popular with residential projects in which small investors may take up a



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house within the project. Following irregularities with some such projects, the government temporarily halted all such activities for a three-month period in mid-2005. Meanwhile, many investors have also opted to invest their money in the booming local equities market. In the near future, those investors will regain confidence in these real estate investment partnerships.

Real Estate and the Economy

The real estate and associated sectors, such as construction, have historically been important contributors to the Kingdoms growth. According to government data, service activities related to real estate as well as construction have contributed more than 13 percent toward the countrys real GDP over the past few years.

Since 2002, real estate and the stock market have attracted high interest from investors who move back and forth between the two asset classes. In early 2005, as the local equities market rose sharply investors reduced their exposure in real estate. This in part has helped stabilize real estate prices. The real estate will receive investment reinvigoration in 2006, sustainable for many years to come.

Real estate is an important sector in the economy. Its highly believed that building permits (a measure of real estate activity) will continue to exceed 37,000 per annum through 2010. The real estate, predominantly a private sector activity, employed more than 50,000 people in 2004 compared to nearly 23,000 thousand in 1995. Construction, an associated sector, employed some 550,000 people in 2004 compared to nearly 392,000 people in 1995. There is very little employment effect on the labor market for Saudi workers as construction predominately hires expatriates. The real estate market is expected to grow in the up-coming year and construction activity will enjoy a sustained boom in the Kingdom.

Figure (3-11) below shows the contribution of the real estate and construction sectors to GDP during (1998-2004):

Figure 3-11: Real Estate and Construction Contribution to GDP during the period (1998-2004)



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Real estate and construction are more cyclical in Saudi Arabia than in many other countries because of the economys overall connection to oil prices. When the economy accelerates so does real estate and construction and when it decelerates, both sectors slow in parallel, albeit at a slower rate than the rest of the economy. Over the past several years, construction and real estate combined have tended to grow faster than overall real GDP. In 2004, real estate and construction combined grew by 7.5 percent, while the economy grew at rate of 5.2 percent. In 2002, real GDP grew by 0.74 percent, while construction and real estate grew by 3.1 percent. This resilience in growth could be explained due to the demand driven nature of real estate activities and construction.

Demand-Driven Growth or Speculation

The real estate market is mostly demand-driven, rather than speculative. This is not to say that speculative spurts have not been visible over the past few years, especially on plots of raw land. The rises in housing prices are still mainly driven by demand factors and as a result are not generally volatile. An important indicator of real estate speculation is the ratio of prices to rents, otherwise known as rental yield rates. The price of a house as an investment should reflect the financial benefits of ownership from rental income and compare favorably with other asset classes with similar risks.

The lower the rentals yield the greater the likelihood of speculative overvaluation in a given market. Yields in Riyadh for housing units range between 6.5 percent and for commercial space 8.3 percent. These yields are at the mid to high point of the range for rental yields in several markets, suggesting the market is not in general, overpriced by international standards. Rental contracts favor the landlord, with a minimum duration of one year and rent paid in advance. For many years, raw land speculation in the secondary high-end raw land market areas has been prominent in the Kingdom. This type of speculation is less prevalent in the housing and commercial space market.

Table (3-4) below shows a comparison of rental yield rates in Riyadh and other international capitals cities for both residential and commercial unites:

Table 3-4: Rental Yield Rates comparison in 2005

Rental Yield Rate City Housing Commercial Beijing 8.30% 9.60% Delhi 5.50% 8.50%

Dublin 2.95% 3.60% Hong Kong 3.75% 3.95%

London 5.30% 6.45% Madrid 4.10% 5.20% Riyadh 6.50% 8.30%

Source: Saudi Arabia Investment Funds

Rental contracts favor the landlord, with a minimum duration of one year and rent paid in advance. For many years, raw land speculation in the secondary high-end raw land market areas has been



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prominent in the Kingdom. This type of speculation is less prevalent in the housing and commercial space market.

The single most important factor that makes the Saudi real estate market differ, for example, from Dubai is the lack of expatriate ownership. Since 2000, non-Saudi residents have been entitled to own real estate for their private residence with the permission of the Ministry of Interior. Ownership of real estate by foreign investors to conduct their business activities and house their employees is also permitted. Non-Saudis may not own real estate in Mecca or Madinah.

The Players

The real estate markets growth over the years has attracted a multitude of new entrants. There are approximately 3,500 companies involved in real estate development in the Kingdom. These companies are distributed and operated in overall the Kingdom; around 37% are located in the Central region, 34% in the Western region and 29% in the Eastern region. In terms of market players, there is fragmentation due to the presence of many small real estate developers. We estimate that more than 80 percent of the real estate companies in the Kingdom are small and often unregistered entities.

The rest of the market is divided into 30 big players, who specialize in real estate development, diversified conglomerates with interests in real estate, and medium-size private companies, who also have interests in real estate development. In the housing market, the very small firms possess around a 25 percent market share. The top 30 housing construction companies have a 20 percent market share, followed by the diversified conglomerates at around 30 percent and medium--sized companies at 25 percent as illustrated clearly in the following pie chart:

25%20%

30%25%

Top 30 Conglomerates Small Medium Size

Figure 3-12: Market Share of Real Estate Developers

In the commercial real estate sector the top construction companies along with the diversified conglomerates dominate the market. Due to the capital intensity, small players have little presence in the commercial real estate construction sector.

Unlike government-backed developers, such as Emar and Nakheel in Dubai, the state does not play an important role as a real estate developer in the Kingdom. Compared to the private real estate



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entities, there is little involvement from the Ministry of Public Works and Housing and various other government departments and municipalities in real estate. Small developers dominate the housing market, mainly due to low entry barriers. This is set to change in the coming years, as large developers increasingly build large housing complexes.

Supply

The real estate market is undersupplied in affordable low and middle- income housing. Low-income housing units tend to have less than 150 square meters of floor space, which is less than half the average size of a housing unit in the Kingdom. Still spacious by international standards, these low-income units house large families. There is also a need for middle-income housing at a cost per unit of around SR 400,000 (USD 106,952). Middle-income apartment units, which vary between 180 square meters and 250 square meters, are in short supply. The Kingdom has a good supply of upper middle income and high income housing units, which are larger than 250 square meters, due to most of them being custom built. These up market units are mostly custom-built.

Outlook

Real estate is in a growth phase that will continue through at least 2010. The Saudi real estate market is driven by demand fundamentals that are not set to change in the foreseeable future. The demographic fundamentals, combined with the strong performance of the economy, will sustain the growth in real estate. It is worthy to mention that a supply shortage in affordable low-income housing is a challenge. The market will eventually become more sensitive to quality as real estate development becomes more structured and organized. The introduction of mortgage products in the next few years will add impetus to an already high growth sector.



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4 Why to Invest in the Eastern Province

The Eastern Province serves as the backbone of the Saudi economy, being one of the worlds largest reservoirs of crude oil and gas; which has transformed the structure of the economy of this region since the 1930s. These resources have provided the stimulus for a major breakthrough in non-oil industrial development, specially centered on Jubail (which has a strong petrochemical base) and Dammam (which boasts of two flourishing Industrial Cities consisting of hundreds of downstream units).

The Eastern Province has attracted a large dose of foreign capital and technology due to the top class infrastructure (transportation, communication, power and water), and the availability of abundant raw materials and other favorable factors like well-developed banking and finance facilities. Furthermore, the liberalization of Saudi economic polices which increase the private sector participation has encouraged the growth in the Province. This section summarize the main reasons which attract facilitate the investment in the Eastern Province.

Strong and dynamic Economy The Eastern Province of Saudi Arabia has played a unique role in the economic history of the region. With its vast coastline of 560 kms along the Arabian Gulf, this region has served as a major commercial link between the east and the west for centuries. The Eastern Province rests on an underground sea of black gold, accounting for one-fourth of the world oil reserves. Natural gas reserves too are vast. Oil and the industrial development have given a new role to the Province as a springboard for International trade.

The Province now accounts for an estimated two-thirds of Saudi Arabias total export trade. Crude oil, of course dominates the export trade. Exports of refined products Jubail has merged as one of the leading global sources for petrochemicals. A large number of other non-oil industries have also come up in the Eastern Province. These include iron and steel products, non-ferrous metallic products, engineering goods like air conditioners, tubes and pipes, ductile iron pipes, electrical products and automobile parts, building materials, chemicals, plastic goods, furniture and foodstuffs. The two industrial Cities of Dammam house a large part of these industries and are fully supported by the excellent infrastructural facilities (especially water, electricity, communications and transport) available in the Eastern Province.

Unique and Strategic Location Eastern Province is located in the gateway between the gulf countries and the kingdom and the neighboring countries. Being on a sea and land route, Eastern Province is serving as an arterial road between the gulf countries, India, Far East countries and with the kingdom and other Arab neighboring countries. In this respect the Eastern Province is uniquely fortunate in its geographical location from which it can serve markets around the world.



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Social and Political Stability Saudi Arabia is an Oasis of political and social stability in the region. This has resulted in:

Stable economic policies and regulations; Steady and continuous economic growth; and Stable currency. Saudi system of government, as defined under the basic system and the establishment of the Consultative Council, is not a move towards Western-style democracy, much less an imitation of Western-Style democratic reform. It is an organic development of the consultative basis of the relationship between the leader and the people that is inherent in Islamic tradition.

Modern and Developed Infrastructure Housing and Real Estate: the Eastern Province has now emerged as the nerve center of the Saudi real estate development activities. Hundreds of housing projects are being developed in the region with private initiatives, thus overtaking the other regions.

Air travel: is the preferred method of travel within the Kingdom because of the distances separating the main cities. There are three international airports in the main Saudi cities, Riyadh, Jeddah and Dammam, and 23 domestic and regional airports used for cargo and internal passenger flights. It is worth mentioning that all major airlines in the world offer services in and out of the Kingdom.

Sea Ports: the kingdom of Saudi Arabia is the worlds main oil exporting country. It has the largest and most diversified economy in the Middle East with industrial exports that are internationally oriented. The kingdom therefore, has to have efficient, fully equipped ports that are capable of doing the job as it should be done.

Telecommunications Infrastructure: the kingdom has witnessed rapid advancements in the field of telecommunications. There are 1,000 telephone circuits with direct access to 152 countries. At the end of March 2003, the Saudi telecom company (STC) operated 3.96 million fixed lines and 7.5 million mobile lines.

Electricity: the Saudi Electricity Company (SEC), a Saudi joint stock company, was incorporated by Royal Decree M/16. By merging all the power utilities and the projects of the Electricity Corporation into one entity that began operation at the 5th of April 2000.

Attractive Investment Climate Saudi Arabia welcomes the contribution that foreign investors make to its economy, especially those that promote industry.

No foreign exchange restrictions: The kingdom has experiences free financial systems and shunned foreign exchange restrictions and obstacles to the transfer of funds.

Full ownership for foreign investors: In the new foreign investment law permits foreigners are allowed to own 100% stakes in industrial projects.



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Moderate tax environment: Moderate tax environment and taxes on profits have been reduced to 20%. Free access to most of the economy sectors: The law permits foreigners to invest in all sectors of the economy, except for specific activities contained in a negative list.

Various tariff exemptions: Commodities imported for industrial production are exempt from duties.

Flexibility with investors: Loss making units are permitted to transfer losses to following years and loss making companies are tax-exempt until they improve their financial position.

No double-taxation: Bilateral agreements, which provide relief from double-taxation, are being signed with an increasing number of countries.

Termination of sponsorship system: The sponsorship system for foreigners is scrapped-foreign investors do not need to have a Saudi partner to operate in the country.

Availability of soft loans: The Saudi Industrial Developments Fund (SIDF) provides soft long-term loans to the industrial establishments for up to 50 percent of the total cost. Loans are for 15 year duration with a repayment subjected to future cash flow. Foreign investors are eligible for loans from the SIDF.

Huge utilities in industrial cities: The Eastern Province has five industrial cities; the largest of them is Al Jubail industrial city. Those industrial cities are equipped with all facilities the investors may need. The rent in these cities is USD 2 per square meter annually and the investor enjoys the lowest utility rates.

Exemptions for exports: Export goods are exempt from storage fees for ten days, port fees are reduced by 50% on all exports.

Expanding Market With a steadily increasing population subject to a growth rate of over 3% and a per capita income of around USD 10,000, Saudi Arabia is indeed a big potential market for consumer goods. If the Eastern Province income and population features, alone are considered, separately from the other parts of the kingdom, its per capita income will exceed the level of the most prosperous western economies.

Consumer expenditure consumer expenditure in Saudi households is quite high and, according to an estimate made by the Saudi Commerce, it exceeds USD 75 billion per annum. The average salary of a Saudi is estimated at USD 50,000 per year, with an annual growth rate of 5% to 8%.

Vast Natural Resources and Raw Materials Saudi Arabia has the biggest oil reserves in the world estimated at 25 %. The Kingdom is endowed with other natural resources including a wide range of industrial raw materials and minerals such as bauxite, limestone, gypsum, and phosphate and iron ore. Petrochemicals industry is operated on a large scale in the Kingdom; it uses the hydrocarbons derived from petroleum sources as primary feedstock to make valuable commercial products. Saudi Arabia ranks fourth in the world, after



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Russia, Iran and Qatar, in terms of natural gas reserve, the proven reserves are estimated at 224.7 trillion cubic feet. The Kingdom also has giant steel and cement production plants.

Sectors Investment Opportunities There are several promising economic sectors in the Kingdom with many investment opportunities especially after the governments latest decision targeting more sectors for privatization. Research studies and reports from internal and external resources estimate that these sectors require huge investment during the next 20 years some of which are outlined in the table below:

Table 4-1: Available Sectors Investment Opportunities

Sector Investment (Billion SR) Investment (Billion $) Electricity 430 115 Water 330 88 Telecommunication 220 59 Infrastructure 520 139 Petrochemicals 345 92 Gas 188 50 Agriculture 106 28 Technology & Information 40 11 Railways 30 8 Housing and Service for Riyadh 1,100 294

3,309 885 Source: Saudi Arabian Monetary Agency (SAMA)



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5 Market Analysis and Research Findings

5.1 Introduction

The market analysis main objective is to assess the viability of establishing a shopping mall in AL-Khafji district. Al-Khafji city is located in the southern part of the ex-Neutral Zone and on the far northeastern tip of the Kingdom of Saudi Arabia facing the Arabian Gulf, 300 km Northward Al-Dammam City in the Eastern Province and 130 km Southward Kuwait city. Recently, Al-Khafji district has witnessed radical changes and developments since the effective launching of Al-Khafji Joint Operation (KJO) carried out by Aramco Gulf Operations Company (AGOC) and Arabian Oil Company (AOC) in April 2000. As a result, the Joint Petroleum Production Operations Agreement (JPPOA) was signed between these two parties, where AGOC represents the Saudi Governments share and the AOC represents the Kuwaiti Governments share.

Further, on January 4, 2003, the AOC concession agreement with the Kuwaiti Government expired. The Kuwait Gulf Oil Company (KGOC) took over to run the Kuwaiti share in the undivided one half of the divided zone to mark the beginning of a new era of joint operations between the two national companies. During the next five years, AGOC will start executing many investment development projects as a part of KJOs plan; those projects will focus on developing the overall infrastructure, crude oil fields and urban development.

The urban development projects will include building new schools, hospitals and many residential units. Among these exerted efforts, it is expected that AGCO will build 120 residential units in the coming first year, and additional 50 residential units will be added per annum over the up coming 10 years. These rapidly urban development initiatives are definitely expected to enhance the investment climate at Al-Khafji, increase the number of residents and standards of living, and consequently the need for providing better level of services.

Elite consultants carried out comprehensive market researches to better understand and analyze the shopping mall industry in KSA and to get all the needed information to develop the marketing strategy for the proposed project.

The market researches covered the following areas, where the results of each research will be discussed and presented thoroughly in the coming sections:

Shopping Malls Shopping Outlets Consumers



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Draft Report

5.2 Shopping Malls Market Research

The idea of establishing a shopping mall in the Eastern Province was, to a certain extent, newly born as a result of the conservative country culture. The developments of shopping malls have taken place since the early nineties. The first modern shopping mall (Al-Rashid Mall) was built in 1994 at Al-Khobar city.

The market research conducted by Elite Consultants has covered the main shopping malls operating in the Eastern Province, namely: Al-Rashid Mall, Mall of Dhahran, Al-Shatea Mall and Al-Dammam Marina Mall. In this section, the results of the surveyed malls will be analyzed thoroughly in terms of:

Available facilities; Tenants turnover;

Structure of rental fees; Mix of visitors

Promotional activities; The competitive advantages for each mall; and

Supplementary services; Obstacles encountering shopping malls.

5.2.1 Available Facilities and Services The available facilities and services provided by the shopping malls are si

Documents

Al KhafjiShoppingMall CompleteDraftReport