The Most Deleverage Society on Earth

Saudi Arabia and the Gulf countries SWF’s have been major investors( $1.1T) in CRE in the US and UK for years. In fact, the Prince of Saudi Mohammed bin Salman pledged 20 billion dollars to Blackstone to invest in US infrastructure in 2018. Saudi economy is a transitional economy is growing at 2.4% clip and is rank the 9th in power rankings with an average salary of $54,300 in 2019. Some of the investments in global real estate were completed by the very men who were strung up in the Ritz Carlton Hotel. The US President supported the move, which collected $107 Billion in capital flow that was reported to have been taken from the Saudi treasury and invested abroad. But on the Khashoggi incident the West took the moral high ground, they could not afford another Iraq-Yemen or North Korea, this led to the Davos abandonment conference. The actions exemplify some of the many frictions that can affect foreign direct investment around internal policies values and principles. However, in the process of Saudization (madiquat), it is best to remember the three stages of knowledge zeal, moderation, and thoroughness.

Saudization is a process to create a country that benefits the common Saudi population. In essence home bias populist movement supported by its rulers. The goal is to raise Saudi Arabia’s social capital ranking from 26 to 10th in the world. MBS’s Saudi 2030 vision seeks to diversify the economy away from oil dependency.

The 2030 Vision include mega development projects derive from the sale of a 5% stake of Aramco that will provide $2 trillion to the vision. There is also revenue enhancers the 2.5% white sands tax for land bankers that hold 10,0000 meters or more, to stimulate development for 400,000 residents. King Salman has announced a very successful 5% Vat tax and has stated that he is forgiving expats $3B in fees to stimulate business and growth. For cross border capital flow Saudi Arabian Investment Regulation has issued a Royal decree No M/1 in 2000 however there were exemptions such as retail/wholesale businesses.In 2018 the government opened the retail and wholesale sectors to 100% foreign ownership and has launched a large privatization programme. Furthermore, The Saudi Capital Market Authority announced measures to ease restrictions on foreign investment in January 2018 and as such, foreign establishments will need to have USD 500 million worth of assets under management instead of USD 1 billion in order to qualify as an investor in the stock market (Tadawud).

The focus for the Kingdom is to remove friction from both the human psychic and capital integration process. As exemplified by the United Arab Emirates with a 78% immigrant population which was rank as the second best place in the world to live in 2018. For example, Qatar a nation who has successfully diversified 70% of its economy away from energy dependency. It appears that Saudi leaders are pausing capital outflow to CRE to refocus on home bias development a necessary step for diversification away from oil dependency and towards global integration.

The authorities welcome FDI due to its ability to transfer technology, employ and train the national workforce, foster economic development and enhance local raw materials. The country’s controlled inflation and relatively stable exchange rate, openness to foreign capital makes it a very attractive investment market for US JV development companies. Saudi is rank 93 out 160 countries for business openess and well ahead of other MENA countries including UAE, Lebanon, and Qatar. But most of all Saudi and Gulf countries populations do not practice leverage(Riba), therefore they hold the highest commercial real estate value on earth for foreign investment capital.

The United Arab Emirates, the United States, France, Singapore, Japan, Kuwait and Malaysia were the main investors in Saudi Arabia in 2017. The investments are mainly oriented towards the chemical industry, real estate, tourism, fossil fuels, automobiles and machinery.The stock of FDI was down in prior years (2009-2015)FDI rose slightly (+ 0.3%) and reached USD 232 billion in 2017, by far the highest number among Arab countries.Concerning investment opportunity into Saudi, there appear to be inflows of billions in 2018 from both China, Russia, for CRE and infrastructure projects. Foreign Direct Investment(FDI) in Saudi was up %110 percent year over year. China and Saudi have already signed a 65B dollar economic cooperation agreement. Crown Prince Mohammed bin Salman is seeking $425 billion for infrastructure that includes mining and defense manufacturing and investors are responding by buying equities. Equity funds investing in Saudi Arabia saw net inflows of $110 million between the start of the 2018 and March 7, according to EPFR Global, a financial market data provider. That’s equivalent to 7% of their net assets, representing much stronger growth than other global emerging market funds. Often stock market inflows correlate to strong commercial real estate investment cycles. Saudi have begun to remove the hurdles from the business origination process, bankruptcy laws, travel visa and improving transparency. In 2019 the dynamic performance of the banking sector is driving the growth of the non-oil sector in the Kingdom.

The Saudi’s plan to build the city of Neom a $500B development of leisure and technology that will be 6 times the size of London. “Saudi’s are spending on an annual basis $20B on tourism outside of Saudi, we want to bring some of that back,” said Al Rumayyan head PIF. It has big plans for growth and portfolio diversification. It is aiming to increase its assets from $224 billion to $400 billion by 2020 and raise the share of foreign investments in its portfolio from 10% to 50% by 2030. PIF is setting up offices in London– New York to expand its reach and to diversify its portfolio. To get some idea of the size of the Saudi development projects- the US interstate highway system cost $456B and is the most expensive development project in the World, it took 12 years to build. The 4th largest development in the world is the $86B King Abdullah Economic city development in Jeddah and hundreds of entertainment venues throughout the country. These are massive projects and by utilizing the investment principles based on economies of scale to assume value creation. When considering the principles of economies of scale one looks at the globalized allocation of capital, labor, technology, and materials to assume valuation in the market. Even after considering the considering the lack of transparency of the legal system which needs to be addressed especially with the home team bias(madiquat).

Jeddah Saudi Arabia Development Completed-2011

It appears that the majority of mega capital flow for development will go to China, India, and labor from Pakistan which most sources say this is where the crown prince is headed in 2019. Global investors in Saudi are looking to infrastructure, healthcare facilities, airports, luxury retail, and hotels. In the real estate market, the target city is Riyadh and the asset type is apartments up 36% percent year over year. Jeddah is also amongst targeted cities for long term global investors in Saudi. Jeddah is one of the top ports for China’s Belt and Road initiative this will increase employment in the market.

For portfolio managers, the number of listed REITs has double in Saudi over the last 2 years with a market capitalization 2B dollars. Portfolio Managers should target GCC fund and Banks and real estate developers. Also, ETF investments that focus on emerging markets that are weighted for GCC region.Saudi Arabian stocks are about to join major emerging-markets benchmarks, Riyadh stocks have been rallying in anticipation of their inclusion in the gauges, compiled by FTSE Russell and MSCI Inc., in several tranches starting in 2019.

The largest commercial real estate purchase in Saudi for 2018 was by PIF for a $533M lot of land in Neom. Outside China, there is nowhere on earth where such large sums of money are being spent on infrastructure in such a short space of time” February 2019 King Salman begins massive phase in Riyadh a total of 1,281 development projects in the Saudi capital and surrounding towns will cost about SAR82 billion ($22 billion). The multi-billion dollar project aims to enhance crucial infrastructure, such as transportation housing, amenities and improve the environment in an area 315,000 meters.

The program includes: 15 housing projects in Riyadh and its governorates, in line with the objectives of Vision 2030 to increase house ownership among citizens; the establishment of the largest Islamic museum in the capital; a huge environmental project for the lakes south of the capital covering an area of 315,000 square metres; sports cities; seven medical cities; 16 educational projects; quality entertainment facilities; the expansion of airports; and the development and upgrading of the road network.

Investing in Saudi Arabia is investing in US dollar stability. Most people forget the diminishing Saudi oil reserve is tied to their security and the petrodollar which provides the over leveraged standard of living for all Americans. If the portfolio manager considers the fundamentals, demographics, market trends, projects economies of scale, the potential for capital appreciation, risk diversification, value creation, and financial integration. Even after considering the lack of transparency of the legal system and the challenge of informational asymmetries. This makes Saudi Arabia one of the most unique investment opportunities in Asia 2019-2027.The Saudi economy has real GDP with capital reserves and is one most deleveraged(debt free) societies on earth and offers the greatest opportunity for CRE value creation. Saudi is a member of the G-20 and is the 19th largest economy, a member of WTO, great demographics, home of the Grand Mosque, superior industrial infrastructure,25 million travelers yearly and has one of the worlds most stable banking system for inflows and outflows of capital.