Rule change to raise cost of city building in Saudi Arabia

28 March 2008
Economic city developers face having to increase the number and height of structures.

The cost of developing Saudi Arabia’s six economic cities could spiral if building regulations that are still being finalised are rolled out next month.

Under proposals being considered by the Saudi Arabian General Investment Authority (Sagia), which regulates the development of the cities, fresh standards, known as minimum build obligations, will be issued to all developers responsible for the kingdom’s economic cities.

The building rules, which could be introduced in mid-April, will require developers to construct a minimum number of buildings within the city, and ensure that they reach a minimum height.

News of the regulations has only now emerged, but is likely to have an immediate impact on developers’ plans.

The cities are currently expected to cost up to $86.6bn to develop. However, this figure is likely to rise if the developers have to build more, taller buildings to increase the population density of the cities.

The cost of providing infrastructure, including transportation and utilities, could lead to the budget rising.

“We have been given outlines of a regulatory regime that is completely new to us,” says a source at one company involved in developing the city being built near Medina. “It was never the basis on which the concession at Knowledge Economic City was granted.

“We need to understand the full implications of this regulatory regime. From a commercial perspective we need to understand the cost impact it is going to have on the project, plus any timing and delay implications.”

A source at Sagia says the regulations are essential if the kingdom is to meet the needs of a booming young population. The country’s population is close to 25 million, of which 70 per cent are under the age of 30 and almost 35 per cent are under 15 years old.

“The regulations have nothing to do with build quality,” says the Sagia source. “Saudi Arabia is growing rapidly. Soon it will run out of space if it only builds three-floor apartment buildings. So you need higher buildings to serve more people.

“The whole objective is not to make money but to house growing demand. We need more residential and commercial units.”

A source close to the development of Prince Abdulaziz bin Mosaed Economic City at Hail, however, questions the feasibility of the regulations and suggests it will have an adverse impact on the infrastructure of the city.

“Sagia should regulate the minimum land area you should develop, which makes more practical sense,” says the source.

“For example, stipulate the percentage of land that must be built up in a 100-square-kilometre area. If you begin to demand a minimum number of buildings, you are going to have problems with water, electricity and transportation.”

The latest regulations come after significant progress has already been made on some projects, in particular King Abdullah Economic City (KAEC).

“Development of King Abdullah Economic City was up and running way before regulations came out, so I can understand that they would like to streamline the regulations for the other new cities in order to have better control,” says another industry source. “But this is not necessarily the answer.”

However, one developer says although the regulations are likely to have an impact on the master-plans of some of the cities, the cost increases will not prevent them going ahead. “The developers will have an issue if the minimum number of buildings do not comply, and I think the regulations are going to put people off,” says the source. “But when you are talking $2bn for the first phase, the increased cost for some extra buildings is not so much.”

Since December 2005, Sagia has launched six economic cities around the kingdom in a bid to diversify the country’s economy.

The largest is Emaar’s $27bn King Abdullah Economic City near Jeddah. The other cities being developed are Rakisa Holding Com-pany’s Prince Abdulaziz bin Mosaed Economic City, Knowledge Economic City at Medina, Jizan Economic City at Jizan, Tabuk Economic City, and Ras al-Zour Resource City.

Each city is being developed to focus on various industrial sectors. King Abdullah Economic City is to be a residential and commercial development centred around an industrial port, with an expected population of 75,000 and a projected investment of $26.6bn.

Prince Adbulaziz bin Mosaed Economic City is being developed as a regional transport and logistics hub, with an investment of $8bn and a planned population of 80,000, while Knowledge Economic City will be focused on technology, medical research, IT and life sciences, catering for up to 150,000 residents, with an investment of $7.7bn.

The economic cities represent a significant departure from the traditional industrial city model as seen at Jubail in the Eastern Province, or Yanbu on the Red Sea.

Instead of being state-owned and operated, all six cities are being privately financed, developed and managed.

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