Stakeholders and Commercial Viability versus Sustainability: The Al Qasr Project - Case Study Example

Stakeholders and Commercial Viability versus Sustainability: The Al Qasr Project 0 Introduction The future holds a very bright prospect for the AlQasr Project in Riyadh, Saudi Arabia. Its construction started in the mid 2000, it boasts of an integrated residential and commercial sector that caters to all income levels albeit it primarily caters to the middle income. It has residential units consisting of apartments and villas, a huge, state-of-the-art mall and administrative offices. Its developer, the Dar Al-Arkan is one of the most stable and successful developers in the Kingdom. In addition, the Government is about to pass and implement the first mortgage law of the country – a much awaited law not only by potential buyers, developers but by the banking and financial sector itself. At present, obtaining a house through a housing loan is not a popular solution in Saudi Arabia because interest rates are too high and the banks themselves are not keen on extending them considering the absence of specific laws that will protect them in cases of defaults. That will change very soon with the passage of the mortgage law. But what makes the Al Qasr Project more than a bright prospect is the fact there is a sure market of housing in the Kingdom, particularly in Riyadh, because of the rising population, mostly young, and the present housing shortfall. Nevertheless, all stakeholders play vital roles in ensuring that the Al Qasr Project will both be commercially viable and also sustainable. 2.0 The Al Qasr Project 2.1 Background The Al Qasr Project is a mixed-use development complex located in the Al-Suwaidi or Alsweidi suburbs, in Riyadh, Saudi Arabia and is owned and developed by the Dar Al Arkan Real Estate Development Company (About Al Qasr 2010). The Project, whose construction began in 2005, have completed most of its infrastructure and superstructure, which include pavements, lanes, lighting and treeing, irrigation and sewage networks, and telephone and security lines. Other services schemes such as gardens, parks, commercial centres, and governmental administrative building to serve the area and its future inhabitants are also in the pipeline. The Project applies the suburban centre concept, where residential and commercial units are integrated in one area creating a self-contained centre, under the framework of the comprehensive development philosophy, which entails the accommodation of the medium income group (Al Qasr 2010). Standing on an area of 816,000 sqm, more or less, the Al Qasr Project consists of 3,303 units of residential villas, apartments, commercial and low-rise office buildings and is expected to accommodate a total of 13,000 tenants. The total building area is 139,459 sqm and each building has 17 apartments with the ground floor serving as the building’s parking lot. A typical apartment has an area of 190 m2 and consists of three bedrooms, a living room, a kitchen, a dining room, a maiden room and four bathrooms. All apartments have ready facilities for satellite cables, air conditioners with windows that overlooked over roads or the entertainment park. All buildings have elevators and one doorkeeper room (Al Qasr Development Project 2010). 2.2 The Stakeholders and the Al Qasr Project 2.2.1 The Government Saudi Arabia is set to pass and implement a Sharia-compliant mortgage law, which is expected to raise housing demand by 50%. The reason for the long delay of the law is disagreements about evictions and foreclosure provisions. Saudi laws must abide by the strict implementation of Islamic law closely watched over by religious authorities. Lending, for instance, for the purpose of gaining interest is strictly not allowed, forcing financing agreements to resort to shared ownership or installment payments (Fattah 2010). The Saudi government has been helping home buyers through the Real Estate Development Fund, which had provided SR123.2 billion of capital, at no interest, to build more than 560,000 housing units from 1974 to 2004, with Riyadh receiving 30% of its housing loans. However, the government cannot keep up with the housing demand and records in 2002 showed that only 1 out of 4.7 applications was approved and the credit application backlog could take decades to process. In 2005, the REDF received additional funding in the amount of SR 9 billion, but this did not make a big dent in the increasing housing demand (Bourland 2006). The Al Qasr Project is important to the Government because it offers the solution of partly easing the housing problem. The success of this mixed-use development is therefore significant to the Government considering that it concerns the issue of shelter, which is one of its basic social responsibilities. One of the things that it can do to ensure its success is to pass the much awaited mortgage law as soon as possible. The mortgage law is pivotal to the success of the Al Qasr Project as that the middle-income class is expected to turn to mortgages to obtain housing. 2.2.2 The Developer The Project’s developer, the Dar Alarkan was established in 1994 by six well-known business families in Saudi Arabia, all of whom had prior extensive experience in real estate development. The Company based itself in Riyadh and had initially specialised in the development of master-planned ready-made residential communities and offered lots, apartments and villas to clients. Initially, it established itself as a limited liability company and had a capital base of US$37 million but, in 2004 it converted to a partnership limited by shares increasing its capital to US$1.44 billion. In 2005 it switched to joint-stock company. Two years later, it was listed on the Saudi Stock Exchange and in 2008 issued 180 million bonus shares to its current shareholders. The success of Dar Al-Arkan is underpinned by the current shortfall of residential units and a corresponding demand for it especially from the middle income group. This demand is specially heightened by the present high growth rate of the population, which is expected to sustain, if not increase, the high demand for housing units in the kingdom (Introduction 2010). It goes without saying that Dar Al-Arkan is the first beneficiary of the success of the Project considering that it is its developer. The success of the Project will not only make it richer but it will secure its position in Saudi Arabia as a foremost developer. On the other hand, the failure of this project will threaten its reputation in the construction business and perhaps start a downward spiral of its fortune. Thus, it must ensure that the Project is worth the money of the potential buyers and that it markets the Project effectively to attract buyers and lessees. Since the bulk of its target market is the middle class, it must conduct a thorough study of the market and find out what appeals most to this sector. Commercial viability is not enough; there must be also sustainability, which can be achieved if the housing and commercial project is also environmentally sound and meets the ethical and social demands of various stakeholders. 2.2.3 Banks There are reportedly 18 commercial banks operating in Saudi Arabia, according to the Saudi Arabian Monetary Agency. As of 2008 figures, the total amount lent by these banks in retail was $48.86 billion and of the retail amount loaned, housing loans are comparatively small at 1% of its GDP (Oxford Business Group 85). At present, most Saudi citizens wanting a home either buy in cash or obtain loans, interest-free, from the Real Estate Development Fund, but the latter cannot keep up with the housing loan demands (Fattah 2010; Jones 2008; Odiabat 2010). In addition, strict Islamic laws, which eschew conventional loans, discouraged banks from lending because conflicts entail legal battles under an untested legal system (Fattah 2010). Home ownership in Saudi Arabia is comparatively small due to the lack of mortgage law that allows financial institutions to impose high interest rates for home loans. Of the 35% who owns their homes, only 2% of that obtained their homes through home loans and the rest bought on cash. The Kingdom, however, is hoping to pass its long-awaited Sharia-compliant mortgage law within the year, which is expected to regulate all sectors of the home finance market (Fattah 2010; Jones 2008). The mortgage law is additional security for banks since recourse to assets is not available forcing them to rely entirely on an applicant’s income (Fattah 2010). The present high demand for housing is expected to increase by the passing of the mortgage law and banks need to come up with plans to meet the expected tide of demand. Banks have credit limits for housing loans and alternatives must be found to raise their capacity for mortgage loans athough the banking sector is not really expected to meet the anticipated demand for housing loans, according to Michael Gassner of the Islamic Banking Group of Bank Aljazira, who believes banks will run out of mortgage funds in two to three years after the implementation of the mortgage law. One alternative for banks is to resort to asset-backed securities, known in the Islamic world as sukuk, to create liquidity, although sukuk is not expected to be immediately available (Fattah 2010; Jones 2008; Odiabat 2010). Banks will play a vital role in the Project’s success because potential home buyers will turn to it. It will play as the intermediary between buyers and the developer. Since it will be the first time that a mortgage law will be at play in housing transactions, this will be the test case of the effectiveness of the law. 2.2.4 Users At present, Riyadh has an estimated population of 4.5 million and is seen as one of the fastest growing in the world. Its population is forecasted to reach more than 11.1 million by 2020. This anticipated rise in population is expected to create a shortfall in housing units especially in Riyadh (see Table 1). In the entire Kingdom, housing units estimated to number to 4 million need to be built before 2020 in order to meet the demand and Riyadh has presently a housing unit shortfall of about 1 million (Oxford Business Group 2008 pp. 126-127). The Saudi population is made up of the young sector with 70% made up of people less than 30 years of age and 45% under 15 years old (Bourland 2006). Table 1 Estimated Housing Demand in Riyadh (source: Oxford Business Group p. 127) In addition, the significant numbers of middle-income earning class as well as expatriates indicate a very good market for housing units. The Ministry of Economy and Planning reported that the monthly average earnings for nationals in 2002 were SR 7, 403 (about US$ 1,974) and SR 10,360 (about US$ 2762). Such incomes are often supplemented by other sources such as secondary employment. In addition, expatriates have been swarming to Saudi and their presence was estimated in 6.14 million in 2006 up from a 4.63 million number in 1992. Although the trend is towards Saudization, this will be offset by the expansion in non-oil private sector, which is expected to bring in more expatriates into the country. According to the same Ministry, the estimated average income for expatriates is SR 2354 in 2000 (around US $627). These low-level income earners are expected to seek accommodation outside employment compounds and into apartments (Bourland 2006). The users are the direct beneficiaries of a successful Al Qasr Project. As indicated, the shortfall in the Saudi Arabia housing is extremely precipitous and the expected continuous rise in housing demand is risky to the present Saudi residents in need of housing. In economics, the greater the demand the higher the price of that particular commercial article will go. It would therefore, be wise to take immediate advantage of the mortgage law and bank facilitated loans once the law is in place, but any kind of haste is not worth if all caution is thrown to the wind. Potential buyers must ensure that the Al-Qasr housing units are affordable and the mortgage prices are within their means. In addition, the units’ value should be worth their price. For example, potential buyers must look into the durability of the materials used, the basic services being offered, the accessibility of the place from their workplaces, its environmental friendliness and security. 2.4 Conclusion Commercial viability and sustainability are two of the factors that can ensure the success of a project. To test a product’s commercial viability it is important to ask in considering the development of a project: Does the product have a market? Who are its competitors? Is the product’s price affordable by its target market and is it reasonable? Are there foreseeable structural changes and what are its effects to the product, if any? Are there other similar players in the market who are facing difficulties? Are there obstacles to the complete operation of the product once it is completed? (Yescombe 140) On the other hand, sustainability, a much newer concept, requires that a project not only minimises the possibility of risks but also that it maximises business opportunities and in the present time, this implies meeting the stakeholders social, ethical and environmental expectations (Willard 129). In conceiving the Al Qasr Project, it is presumed that the developers have taken into consideration the factors of commercial viability and may have looked into sustainability. The concern for commercial viability is normal and expected considering that businesses thrive only if they earn profits. Corporations are largely profit-driven but lately, the idea of corporate social responsibility (or CSR) has been gaining popularity. Sustainability as a business goal, however, has gained practicality considering the ill effects of climate change, the high costs of energy resources and non-renewable materials that it has now become a fundamental part of business rather than a tactical strategy. However, both commercially viability and sustainability need not be at odds with each other. Both can be attained without one crossing the other out. In the project at hand, the Al Qasr has evidently commercial viability considering the present shortfall in housing in the region and the fact that the middle income group, statistically speaking, has the capacity to pay. There are competitors but the demand is more than the competing developers together could offer which looks good for the Al Qasr Project. In addition, it offers a very attractive concept in modern housing where residential units are integrated with commercial spaces, administrative offices, parks and other amenities making the entire area self-contained. Moreover, it comes at a time when the mortgage law is certain to pass and be implemented in the Kingdom making obtaining housing for the target market easier and affordable. Whether the Project has sustainability depends entirely on how the developer conceived the project and the details that it put into its planning and conception. Such details relative to the materials used for the project are not available, except of course that parks form part and parcel of the project. It would have also been great if the developer had opted instead for solar paneling to partially or fully power the units. References: About Al Qasr. http://www.alqasser.com/en/flash.html. Al Qasr. Dar Al-Arkan. http://www.alarkan.com/?lang=en#/11/61. Al Qasr Development Project Residential Complex of Buildings. TOEC. http://www.toec-int.com/en/project/53. ‘Al Qasr Project’ Asia Real Estate Finder. http://www.asiarealestatefinder.com/PropertyDetail/pid/80. Bourland, B. (2006). Saudi Arabia Needs to Build 2.62 Million Housing Units by 2020. http://www.zawya.com/story.cfm/sidZAWYA20060507142126. ‘Introduction’ Dar Al-Arkan. http://www.alarkan.com/?lang=en#/8/39. Fattah, Z. (2010). ‘Saudi Mortgage Law Could Spark $32 Billion of Lending a Year’ Bloomberg Businessweek. http://www.businessweek.com/news/2010-10-18/saudi-mortgage-law-could-spark-32-billion-of-lending-a-year.html. Jones, R. (2008). ‘Can Saudi Banks Afford the Mortgage Law?’ AmeInfo.com. http://www.ameinfo.com/164225.html. Odiabat, H. (2010). ‘Saudi Arabias First Mortgage Law could Boost Housing Demand by 50%.’ AmeInfo. http://www.ameinfo.com/229185.html. Oxford Business Group (2008). The Report: Saudi Arabia 2008. Oxford Business Group. Oxford Business Group (2009). The Report: Saudi Arabia 2009. Oxford Business Group. Willard, B. (2005). The Next Sustainability Wave: Building Boardroom Buy-In. New Society Publishers. Yescombe, E.R. (2002). Principles of Project Finance. Academic Press. Read More