A look toward tomorrow: Authorities and residents make improvements to the city

The second-largest city in Saudi Arabia, Jeddah, dates back to within 20 years of the Prophet Muhammad’s life. The city’s seaport is now the largest in the Kingdom and is complemented by a busy international airport. And while Jeddah is known to many as the country’s commercial capital, it is also the principal gateway for a growing number of Muslims who come from around the world to make the pilgrimage to Makkah.

Investment

The city bears evidence of several decades of rapid, poorly managed expansion: unplanned settlements have proliferated, infrastructure is limited, roads are congested and the environment is polluted. Yet these challenges are catalysing unprecedented levels of investment from both the public and private sectors in an effort to restore Jeddah to its former glory.

Plans to revitalise Jeddah’s landscape have long been in the pipeline, but many are now being brought to fruition – helped along by the government’s increased social-spending programmes. “The pace of real estate development in Jeddah is definitely picking up. In a few years, this will be a completely different city,” Greg Mackowiak, vice-president of development at the Jeddah Development and Urban Regeneration Company (JDURC), told OBG. The firm was formed as a subsidiary of the municipality in 2006 to catalyse development and encourage private sector investment in the city.

Regeneration

Among the more prominent of the projects is the rejuvenation of Jeddah’s corniche, the first stage of which was completed and opened in December 2012. Spearheading the work is JDURC, which hopes that the addition of new parks and leisure facilities, coupled with reduced congestion, will create investment opportunities in the hospitality and retail sectors. Much work remains to be done: the first stage has covered 58,000 sq metres, but the second and third will stretch over a combined area of 269,000 sq metres. Prospective investors could decide to wait until the whole project nears completion.

The Central Development is another large-scale regeneration project that should inject new life into a city centre that has suffered decades of neglect. A growing number of vehicles on the roads and heightened traffic through the Jeddah Islamic Port have left it congested and polluted. If this development is finished on schedule, the central area will have had a complete facelift by around 2030. “At the centre will be the ‘Heart of Jeddah’ project. It will have one of the world’s most prominent water features, and next to it the central transport hub for the planned city metro system, in addition to a modern interpretation of a traditional Arabic souk (market), a convention centre and other supporting hospitality and commercial buildings,” Mackowiak said. The work is being performed through a public-private partnership (PPP) involving the City Centre Development Company, which is owned by a consortium of Saudi and international firms.

Less eye-catching but no less significant are the resources put into regeneration projects in run-down residential areas. Despite the challenges involved in regenerating a densely populated area, work is going ahead on several major projects, including Qasr Al Khozam and Ruwais. Such work is being spearheaded by the JDURC, although often via PPPs (see analysis).

Given the scale of the regeneration and new developments currently under way, it is not surprising that some projects are progressing faster than others and that plans have in some cases have had to change. For example, plans to build a new diplomatic quarter to the south of the city have been postponed until a more attractive location can be selected, and the planned reclamation of Salman Bay has given way to a low-cost housing project in the vicinity. “Many parts of our master plan have been optimised to ensure the best use of Jeddah’s land,” said Mackowiak.

Environmental Action

Despite increased government commitment to tackling the environmental problems that have accompanied Jeddah’s rapid expansion over the last decades, much work is still to be done. A particular focus is being placed on the disposal and treatment of both solid and liquid waste, with the Jeddah municipality, the National Water Company and other authorities looking for increased investment from the private sector (see analysis).

As Jeddah continues to suffer from both marine and terrestrial pollution, there has been greater discussion on the need for sustainable urban development. In fact, the city earned a special mention in the Kingdom’s 2011 communication to the UN’s Framework Convention on Climate Change for its green building initiatives, such as a forestation programme stretching over 2.5m sq metres, a national park and a safari park. The open spaces included in new developments, such as at Wadi Al Aslaa, will serve to enhance ecological protection.

When developing the corniche and the waterfront, authorities have been paying greater attention to the risks posed to the Red Sea’s marine ecosystems. “Our initial plans for the reclamation of Salman Bay had to be modified. We wanted to make sure that we did not repeat the mistakes made by coastal developments in other parts of the GCC,” Mackowiak said. Efforts have also been made to curb pollution: the municipality told OBG in late 2012 that the direct dumping of sewage in the sea was stopped around two years ago, and that some rehabilitation projects have now been initiated.

Environmental protection is beginning in earnest. Although the Environmental Master Plan envisaged by the Jeddah Strategic Plan 2009 has yet to be released, and the city is receiving help in this respect from the UN Development Programme. On the regulatory side, sources report that despite strong environmental laws, implementation is weak. On the up side, however, public awareness of Jeddah’s environmental challenges seems to be increasing. In late 2011, for example, around 1000 of the city’s students celebrated National Day by cleaning up Jeddah’s beaches.

Water

Alongside efforts to reduce pollution in the water system (see analysis), the government is also working on the monitoring of groundwater pollution caused by sewage discharges and industrial effluent. In September 2012, the Ministry of Water and Electricity launched Jeddah’s first water-testing laboratory, which aims to carry out periodical sampling and analysis to ensure that chemical and bacterial levels are kept in line with global best practices.

No less important is water supply and storage. Water demand continues to outpace supply, although dramatic improvements have been made in the last few years. A 2011 report by the National Water Company stated that it increased water supply from 550,000 cu metres in 2008 to 1.1m cu metres in 2011, but it added that the proportion of households receiving a steady supply of water in the northern and eastern parts of the city still stood at only 60-70%. Observers agree that it is not only necessary to boost water supply, but also to reduce demand; conservation-awareness initiatives may only be of limited help when the cost of potable water is too low to encourage more frugal usage.

The unexpectedly severe flooding of 2009 and 2011 galvanised efforts to improve drainage infrastructure and storage capacity in the region. “Jeddah’s three main rainwater drainage channels have been expanded,” Abdulgader Amir, vice-mayor for strategic planning at the municipality, told OBG. “But ideally we would find a way to put this drained water, which currently flows straight into the sea, to better use.” As for storage, included among the $2.4bn of water and sanitation projects that are scheduled for delivery until 2015 is a storage point near Buraiman – the former site of sewage and garbage landfills – with a capacity of 1.5m cu metres of water, as well as four other points with an extra 560,000 cu metres of space.

Housing

As Jeddah strives to modernise and upgrade itself, it is also urgently seeking new housing capacity. The city’s rapid development in the past decades has resulted in a sprawling and disorganised urban environment marked by land-grabbing and a significant number of unplanned settlements, according to the Jeddah Strategic Plan 2009. Indeed, part of the reason for the regeneration projects is to optimise residential space. The partial replacement of the city’s abundant low-density housing with apartment blocks is one example of this upgrade process.

At the same time, an expanding population creates an extra incentive for new housing developments, most of which are taking place on the outskirts of the city. Through the JDURC, the municipality is carrying out two major developments – at Wadi Al Aslaa in the east and Salman Bay in the north – while a third project in the south is currently in the planning stage. Additionally, a few developments are being carried out via PPPs, and the JDURC is looking to enable the greater use of the PPP model in the years ahead. A considerable number of private developments are also emerging. While these investors have traditionally found it difficult to cater to demand among the lower-income purchasers, some are now managing to bridge the affordability gap (in one case, through a PPP). At the same time, there is still considerable demand in the high- and upper-middle-income sectors (see analysis).

Economic City

New upmarket residential capacity will be a feature of what is the most prominent and costly development in the Jeddah region: an economic city to be developed 100 km north of Jeddah city in a location that overlooks the Red Sea and Obhur Creek. The King Abdullah Economic City (KAEC) could see as much as $100bn in investment, and, as such, may be the most costly real estate development in the world. Four major industrial investments were announced in the first three quarters of 2012 alone, including the likes of candy maker Mars Saudi Arabia and Al Marai.

In the short to medium terms, the surge of activity in KAEC could serve to draw investor interest away from the city of Jeddah, whose shortfalls in infrastructure could be considered competitive disadvantages. Some observe that the flurry of construction activity in KAEC is dampening demand in Jeddah’s real estate sector. “Although development at KAEC is behind schedule, it has undoubtedly received a lot of interest from residential developers and industrial clients,” Khalil Al Arab, manager of retail and corporate solutions at Jones Lang LaSalle (JLL), an international real estate services firm, told OBG. “And the closer the port comes to completion, the more interest there will be,” he added, saying that he expected work to speed up in the year ahead.

But in the longer term, a thriving economy in KAEC is likely to have a positive impact on residents of Jeddah. The city aims to create demand for around 1m jobs, many of which are likely to go to residents of the city to the south. Following completion of the Al Haramain high-speed rail project, movement between Jeddah and KAEC will be greatly enhanced. Workers based in the city will be able to commute to what could serve as a massive commercial and industrial suburb.

Tourism

Jeddah is a popular destination for local and regional visitors. “We continue to see strong interest from domestic tourists who are looking to spend their holidays in Jeddah’s more relaxed environment and, to a certain extent, from others in the Gulf,” Al Arab said. Although there is some base demand, seasonal spikes see a surge in numbers. “In religious holidays, the streets are absolutely packed,” Loay Nazer, the chairman of the Jeddah Marketing Board, told OBG. In the holy month of Ramadan, when other Gulf tourist destinations typically see a lull in demand, Jeddah is heaving.

While the city is still a far cry from a regional tourism centre such as Dubai, latest statistics suggest that Jeddah’s popularity is growing. Occupancy rates in its hotels jumped to 79% in the year up to April 2012, from a range of 67-69% in the years 2008 to 2011. Profits grew by around 31% in July 2012, year-on-year, albeit partly spurred by the demand from Ramadan. JLL describes the trend as “one of the best performing markets in the Middle East in 2011”, and said Jeddah can hope to attract new international hotel brands. There have been no major entries since 2009, but the upmarket Rocco Forte and Elaf Galleria are both due to open on Tahlia Street in 2013, to be followed in 2014 by the Dusit Thani in the North Corniche area. “The strongest demand in Jeddah is for the four-star hotel range,” Al Arab said.

As new hotels arrive on the scene, Jeddah is also looking to boost visitor numbers with a range of new festivals. In addition to the long-standing Jeddah Gheir festival, the Jeddah Marketing Board introduced the Shopping Festival in 2012, and in 2013 it hopes to hold a festival for each of the two holidays, another during the Haj period and one in celebration of National Day. “Our residents would often go to places like Dubai during the festivals, but we believe these new attractions will help capture the local market,” Nazer told OBG.

Despite these encouraging signs, some believe more could be done to capitalise on the city’s potential. “Tourism is still not high enough on the public agenda,” said Nazer, adding that a number of different tourism offices, each with their own ideas and plans, should be brought under one umbrella. Congestion and limited transportation options also weigh on the market, although large-scale developments are hoping to find a solution to these problems.

Transport

By contrast, massive government spending on transport infrastructure will surely be a boon for Jeddah’s real estate and economy in general. Perhaps the most prominent ongoing project is the Al Haramain high-speed rail, which is due to start carrying passengers in early 2014 between Medina and Makkah. While the $9.3bn project is primarily aimed at a growing number of Muslim pilgrims, it will also be of value to regional tourists and businesspeople, given that it passes through two economic cities and the airport.

Initial studies have also been completed for Jeddah’s metro and bus networks, which authorities say is soon to be tendered. These two rail projects, combined with the ongoing renovation of the city’s roads, are expected to provide relief to serious traffic congestion (see analysis). Such work is in urgent demand, especially given that 47% of the country’s population is under the age of 20, meaning that a large number of extra drivers are likely to soon be behind the wheel.

Transportation upgrades are looking outwards as well as in: specifically, to an expansion of the King Abdulaziz International Airport (KAIA) and also of the Jeddah Islamic Port (JIP). Serving millions of pilgrims every year, KAIA is currently running over capacity. The situation should improve somewhat with the completion of the first phase of expansion due in 2014, after which the airport is expected to accommodate around 30m passengers per year. Completion dates for the second two phases are not yet known, but by around 2035 the airport expects to see as many as 80m passengers passing through its terminals each year. Local press reported in September 2012 that the project was 27% complete and progressing as scheduled.

As for JIP, capacity was increased 45% in December 2009, with the opening of the new Red Sea Gateway Terminal, which was officially launched in early 2012. Yet in spite of the increase, the Saudi Ports Authority announced in mid-2012 that the large and growing number of imported containers remain beyond its capacity. The current Jeddah Strategic Plan does not envisage any further expansion to the port at the moment, but the proposed Landbridge rail project – linking Riyadh and Jeddah via freight – could provide relief to land congestion, albeit in the medium term.

Land

Observers unanimously agree that land speculation continues to be perhaps the most significant barrier to new urban developments in Jeddah. “In Saudi Arabia there is no policy that forces landowners to develop land until they wish to do so. They are entirely at liberty to leave plots of urban land undeveloped – an inefficient system that results in unnecessary infrastructural spending as development is forced further afield,” Waleed Abdulaal, CEO of JDURC, told OBG.

Despite the fact that the city is in urgent need of new parking facilities, large tracts of privately owned land sit vacant, even in the very heart of the city. Major new transport projects have in some cases been forced to adjust their routes in order to bypass land that its owner refuses to relinquish. Some have advocated changes to the law, such as introducing an escrow instrument that would only permit full ownership of the property on the condition that it is developed.

Continuing housing shortages also result in land grabbing and illegal construction in both the city of Jeddah and its surroundings – a key issue highlighted in the Jeddah Strategic Plan 2009. While this may prove a hindrance to the city’s development projects, the government has taken steps to address the problem. In September 2012, for example, the Land Recovery Committee handed 110 km sq of illegally acquired land back to the JDURC. Included in this was land that forms part of a large development in Wadi Al Aslaa, where a new 130-sq-km community is being constructed.

Outlook

Much of the changes to Jeddah’s urban landscape are considered long overdue, but over the past couple of years the speed of development has grown dramatically thanks to an increase in public funding and government initiatives. Real estate and construction will likely remain major beneficiaries of this spending in the years ahead, notably in housing projects and new transportation infrastructure.

Ultimately, the city is gearing itself to attract further private investment in a range of economic activities; tourism and retail in particular look well positioned. This is partly due to the demographic realities of a growing local population and an increasing number of visiting pilgrims, and partly to large regeneration projects such as those in the corniche and city centre. These could transform the city into a regional coastal resort hotspot. As for the region’s industrial sector, the government hopes that major transportation upgrades will help the region to better compete internationally.

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The Report: Saudi Arabia 2013

Jeddah chapter from The Report: Saudi Arabia 2013

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