Saudi $10 Billion Financial District Is Missing One Thing: Banks
Saudi Arabia’s $10 billion financial hub in Riyadh will have gleaming towers connected by sky bridges, cutting-edge climate technology and a monorail that can circle the whole area in 11 minutes. What it doesn’t have yet are banks.
Not a single financial institution has agreed to take space in the 73 buildings the state is constructing at the King Abdullah Financial District, according to Waleed Aleisa, chief executive officer and project manager of the district at developer Al Ra’idah. The one lender on the 1.6 million square-meter (17.2 million square-foot) site north of the city center is Samba Financial Group, which bought a plot of land and is building its own tower.
“Saudi banks want to own their own buildings and want to pay as little as possible,” Aliesa said in an interview. “They don’t appreciate the brand as much as we see in the West, where banks will pay a premium to be in financial hubs.”
As Saudi Arabia prepares for a post-oil future by boosting other industries, its plan to strengthen Riyadh’s position as a financial center is plagued with delays, cost overruns and a failure to understand the needs of local banks, according to Aliesa. Attracting financial clients now will be challenging given that the work, about 70 percent finished, has largely ground to a halt and the developer is considering replacing the main contractor.
“There will be demand without a doubt, but it is still uncertain as to when the construction will be concluded,” Ramzi Darwish, a consultant with Cluttons LLC, said in an interview. “Once completed, there may be some challenges in filling all of the space because of the huge amount of offices being built.”
The government is looking at ways to lure banks with incentives that could include tax breaks lasting a decade or more as well as separate regulation that makes it easier to hire and issue work visas, Aliesa said. Al Ra’idah, which is developing the district for the Saudi Public Pension Agency, will look for another developer to take over from Saudi Bin Laden Group — which has about half of the project’s contracts by value — if the builder can’t restart construction within about two months, he said Tuesday.
“What has been impacting the project progress is the project owner’s non-fulfillment of agreed contractual terms, especially those related to timely payments of our entitlements,” Saudi Bin Laden Group said by e-mail. “Our contractual position is robust and supported with the necessary evidence and documents.”
A walk through the construction site on the central King Fahd Road reveals dozens of idle cranes perched atop buildings that are completed on the outside but still lack interiors. An unfinished concrete strip that will support the monorail weaves among the empty towers faced with glass and geometric patterns.
Still, filling up the space will be a matter of creating momentum by bringing in the first few lenders, the Aleisa said. PriceWaterhouseCoopers LLP has agreed to lease 4,400 square meters of space and a unit of the central bank will take 8,700 meters, he said.
“If we get seven to eight banks to move to KAFD, then it’s pretty much guaranteed that the rest will move there too,” he said. “You want one success story and everybody else will start jumping in.”
KAFD, as it is known, was envisaged as a modern financial hub that would bring banks, financial-services firms, auditors and lawyers as well as the kingdom’s stock exchange and capital-market authority into one area. Five buildings at the district’s core, including the district’s tallest at 76 floors, will be surrounded by dozens of offices, apartments, hotels, conference centers and entertainment venues. On the ground, walkways below street level branch out to connect buildings and provide space that’s 8 degrees Celsius cooler than street level.
The entire development has been built with environmental sustainability in mind, Aleisa said. Solar cells are placed on roofs and integrated into the facades and the skywalks between buildings will reduce the need for cars. Intelligent lighting will help to reduce energy consumption, he said.
The financial district may be designated a so-called free zone similar to the Dubai International Financial Centre, meaning it would have an independent regulatory framework. More than 1,300 active companies with 18,521 employees operate in the Dubai center, according to DIFC’s website.
Tracing the project’s history, Aleisa identifies a number of decisions that pushed back its completion and raised the cost. KAFD was initially to be built in phases like the Dubai hub, with the developer providing infrastructure such as roads, telecommunications, water and sewage and private developers building on plots in accordance with a master plan.
Change of Plan
That all changed in 2009 “on orders from the government” and the project was to be built in one stage with Saudi Bin Laden, the kingdom’s biggest construction company, getting 50 percent of the building contracts, Aleisa said. That’s not the easiest way to do things, he said.
“You build the infrastructure first,” he said. “If you don’t, then you have a problem with the construction, with coordination between contractors. It definitely creates a much tougher job.”
And tougher it got. The statement announcing the plan said construction would begin in 2007 and finish three years later. The initial estimate of about 28 billion riyals ($6.9 billion) has already been spent, and approximately 10 billion riyals more will be needed, the CEO said.
Aleisa said the hold up is more the product of unrealistic expectations to start with than construction problems. The tallest tower, which will host the financial regulator, was to be built in two years, and about 55 buildings were supposed to be designed and finished within 36 months, he said. He’s pushing for completion in 2017, though the monorail won’t be finished until 2019.
“Nobody. Nobody in the world could do that,” he said. “The original contract delivery expectations were unreasonable.”
Aleisa said work has largely stopped on the project. Saudi Bin Laden Group will have to work out its issues and come back or the contract will be cancelled and the job will be given to several other companies to complete, he said. Such a change would be difficult because many construction companies avoid partly completed work, he said.
“We will contact companies already on site and then we will contact companies such Al Habtoor Leighton, those that submitted proposals for us in the past,” he said. Al Habtoor Leighton is 45 percent owned by Australia’s Cimic Group Ltd., formerly Leighton Contractors.
The Public Pension Agency, which is semi-independent from the government, “is paying contractors as work progresses and has no payment problems,” Aleisa said.