The regeneration of Mecca continues to defy current trends in real estate development. While developers in the rest of Saudi Arabia and the wider GCC have been deeply affected by the global economic slowdown, and face continued uncertainty about when construction will restart on the many projects that have been placed on hold, Mecca’s development continues apace.

The real estate market in Islam’s holiest city cannot be compared with that of rest of the kingdom or the rest of the Gulf region. Demand for property in Mecca is boosted by religious tourism, particularly the annual Hajj and Umrah pilgrimages.

In 2008, a record number of foreign pilgrims arrived in the kingdom, according to figures from Interior Minister Prince Naif bin Abdulaziz al-Saud, chairman of the Hajj Supreme Committee. In total, 1,729,841 pilgrims visited Saudi Arabia from 178 countries, an increase of 18,026 on the previous year.

According to the Saudi Commission for Tourism, 51 per cent of visitors in 2007 entered the country on religious visas, spending about SR10bn ($2.7bn).

Sector slowdown

But elsewhere in the kingdom, real estate developers have been hit hard by the slowdown. “Saudi Arabia has been crazy these past 12 months,” says Imad Damrah, country director at UK real estate company Colliers International.

“Prices generally have dropped by 15-20 per cent, and in some cases by as much as 30 per cent. The areas affected most are those where there has been major speculation on land. Where there has been no speculation, land values have remained stable.”

Mecca has not been significantly affected by speculative investment and, as a result, construction work has not slowed noticeably. “Mecca is moving ahead and completing its projects,” says Damrah. “We don’t see any delays there and developers don’t see any particular risk in continuing as planned.”

One source at Saudi Oger, the construction contractor working on the SR10bn ($2.7bn) Jabal Omar project, remains bullish about Mecca’s real estate market. “Prices for property close to the Grand Mosque are soaring,” he says. “Mecca is a secure market. With the Hajj and other pilgrimages, there is increasing demand.”

Moreover, interest in Mecca real estate has surged this year, owing to the government’s announcement in July that the long-awaited mortgage law is set to be introduced by the end of the year. “Developers and other real estate companies have been snapping up land left and right as they anticipate there will be huge demand,” says Damrah.

The draft mortgage law, which has been under discussion for more than a decade, was approved by the kingdom’s 150-member Shura Council in July 2008. The lack of mortgage legislation is widely viewed as having undermined Saudi Arabia’s real estate market, with millions of Saudis excluded from home owner-ship because of a lack of financing. 

The current interest in Mecca real estate is the result of the Mecca Development Agency’s approval in 2005 of a masterplan for the expansion of Islam’s holiest city. The 23-year plan aims to accommodate 3 million resident Saudis and expatriates – the current population is 1.3 million – and 8 million pilgrims.

Following this decision, and encouraged by record-high oil prices between 2005 and 2008, which ensured a healthy budget surplus, Saudi Arabia has pursued a series of major expansion projects designed to capitalise on what is some of the world’s most valuable real estate.

The most recent prices from Colliers International show land prices in Mecca are on average $13,000 a square metre, and have reached $47,000 a sq m in the area surrounding the Grand Mosque complex.

In contrast, land values in the capital, Riyadh, average $7,000 a sq m.

A series of landmark projects are under way in Mecca. The most advanced is Saudi Binladin Group’s Abraj al-Bait. Designed by Beirut-based Dar al-Handasah (Shair & Partners), the seven-tower complex is due for completion in 2010.

One of the towers will reach a height of 595 metres, making it the tallest building in the kingdom. Combining all seven towers, the structure will have the largest floor area of any building in the world, covering 1.5 million sq m. The project features a five-star hotel, prayer room, shopping mall and car park. It is designed to accommodate 65,000 residents and up to 4,000 worshippers.

In September 2008, UAE-based private developer Emaar International announced it was offering fully serviced apartments within the tallest tower of the Abraj al-Bait complex, the Mecca Clock Royal Tower. In August 2009, Emaar Middle East announced it had joined forces with Jiwar Real Estate, a subsidiary of Saudi Binladin, to market the Emaar Residences at what is now called the Fairmont Mecca within the Royal Tower.

New projects

Jiwar Real Estate is also responsible for the $5.8bn, 21-tower project called Rawabi Abraj al-Bait. Located close to the Grand Mosque and designed by Dar al-Handasah, the towers will reach 25-65 storeys. Construction is due to be completed in five years.

Even larger in scope is the Jabal Omar project. Developed by the Jabal Omar Development Company, the $2.7bn project will accommodate 100,000 pilgrims and feature 39 towers of 20-48 storeys in height. It will include prayer facilities for 200,000 worshippers, an open prayer space for 120,000 people, and up to 35,000 residences.

Although Mecca represents a huge opportunity for developers, access to capital to fund such projects can still have an impact on their progress. MEED reported in April that Jabal Omar had cancelled its deal with Saudi financial institution Jadwa Investment to raise $3.3bn to finance the development. 

In a statement to the Saudi Stock Exchange (Tadawul), the firm reported: “Jabal Omar Development Company announces it has terminated the contract with Jadwa Investment for having not been able to secure financing within the deadlines they have promised.”

The deal had been signed in July 2008 for the bank to act as arranger for the financing of the scheme, on which construction is being carried out by Saudi Oger and Saudi Binladin. In May, it was announced that Saudi Islamic bank Al-Rahji will arrange financing for Jabal Omar.

Away from the Haram area, other, equally bold developments have been identified to bolster Mecca’s regeneration plans.

The Tareeq al-Mawazee project is a 1 million sq m urban regeneration project to develop a critical 3-kilometre-long, four-lane road to enhance connectivity and reduce traffic congestion in Mecca. It will also feature mixed-use real estate developments consisting of residential, commercial, retail and hospitality components, which will improve facilities for residents and pilgrims.

It is expected to be completed in 2018 and will be jointly developed by the local Dallah al-Baraka Group and Saudi Binladin.

In October 2008, MEED reported that Riyadh-based Dallah al-Baraka planned to raise $5.6bn for the scheme by selling shares in a new project company. It is currently awaiting approval from the Mecca authorities to proceed with the scheme, which it expects to receive by the end of this year. The project is earmarked for completion in 2018.

“Saudi Arabia has been crazy these past 12 months. Prices have dropped by as much as 30 per cent”

Imad Damrah, country director, Colliers

Among the other key projects planned for the city is the Al-Shamiyah redevelopment. The $13.5bn project is a 1.5 sq km urban regeneration scheme running from the Grand Mosque to beyond the second ring road to the north of the city, and from Holy Mosque street in the east to Jabal al-Qaaba road in the west.

Developed by a consortium led by the local Al-Oula Group, Al-Shamiyah is the one remaining area in Mecca’s central district that has not been subject to redevelopment efforts by the public or private sectors. It is due to be completed in 10 years’ time and will feature a series of hotels, along with residential and commercial buildings.

While access to financing has played its part in disrupting Mecca’s progress in 2009, a more tangible and equally disruptive force has been affecting the holy city.

“At the moment it is hard to get the most immediate story out of Mecca because of the swine flu,” says Damrah. “The situation is changing almost daily and it is not clear who is allowed in at present.”

Because of the threat of swine flu and the risk to 2 million pilgrims if Hajj goes ahead as planned in mid November, there is a possibility that the Mecca authorities will delay this year’s Hajj until the threat of the disease has reduced. Such a decision would hit hotel bookings for 2009 significantly.

But it does not change the long-term appeal of Mecca to real estate developers. With $13.5bn worth of major real estate projects under development, the commercial attractions are clear.

This is backed up by a June 2009 report, Mena House View, from US real estate consultant Jones Lang LaSalle, which points to the strength of the Saudi market in general.

The report claims the kingdom will be the first market in the Middle East and North Africa to recover from the current downturn, and one of the strongest-performing real estate markets in the region over the next 12-24 months.

“Saudi Arabia’s real estate market offers investors and developers significant opportunities,” says Abdullah Faadhel, business development manager at Jones Lang LaSalle. “Stronger fundamentals and sentiment offer more secure prospects in the medium term.”