FOCUS ON SAUDI ARABIA
Saudi Arabia´s Investment sector
Collaboration for better investment and finance
Saudi Arabia is increasingly expanding its financial sector, as it looks to work with Japan to make high-value investments in both of their countries and further afield.
SAUDI ARABIA: SECTOR ANALYSIS
Collaboration for better investment and finance
Saudi Arabia has been the main destination in the Middle East for Japanese investment for many years, with billions of dollars owing east to west, traditionally in the areas of oil and gas, energy, infrastruc- ture and utilities.
More than two thirds of Japan's entire regional investment is centered on the kingdom and that gure looks set to grow under the new, long-term strategic development partnership. As part of this agreement, the countries intend to work together to make high-value investments in Saudi Arabia, Japan and in other countries.
The showpiece joint project to date is probably Petro Rabigh, a joint venture between Saudi Aramco and Sumitomo Chemical that manufactures petro- chemicals and is valued at more than $10 billion — making Sumitomo's 50 percent stake the largest foreign investment of all time in the kingdom.
The partnership is already investing a further $9 billion to expand its re nery, which will allow it to produce aromatics and ethylene. And there are plans for a state-of-the-art conversion facility, next to the existing plant, which is expected to attract at least $1 billion of private sector investment.
The increasing collaboration between the two countries is extending to their stock exchanges — Saudi Arabia's Tadawul and Japan Exchange Group (JPX), which includes the Tokyo Stock Exchange (TSE), Osaka Exchange, Japan Exchange Regulation, and Japan Securities Clearing Corporation.
In a memorandum of understanding (MOU) signed earlier this year, designed to strengthen the bilateral relationship between the exchanges and deepen collaboration on matters of mutual inter- est and bene t, the two agreed to "share knowledge and expertise, open the door to people develop- ment and explore future opportunities related to capital market development," according to Khalid A. Al Hussan, CEO of Tadawul.
The new MOU surely boosts the chances of Japan's government and nance chiefs succeeding in their desire for the TSE to win the forthcoming international battle for the coveted listing of the world's largest oil producer — Saudi Aramco — that is expected to be worth up to $100 billion.
More than two thirds of Japan's entire regional investment is centered on the kingdom and that gure looks set to grow under the new, long-term strategic development partnership. As part of this agreement, the countries intend to work together to make high-value investments in Saudi Arabia, Japan and in other countries.
The showpiece joint project to date is probably Petro Rabigh, a joint venture between Saudi Aramco and Sumitomo Chemical that manufactures petro- chemicals and is valued at more than $10 billion — making Sumitomo's 50 percent stake the largest foreign investment of all time in the kingdom.
The partnership is already investing a further $9 billion to expand its re nery, which will allow it to produce aromatics and ethylene. And there are plans for a state-of-the-art conversion facility, next to the existing plant, which is expected to attract at least $1 billion of private sector investment.
The increasing collaboration between the two countries is extending to their stock exchanges — Saudi Arabia's Tadawul and Japan Exchange Group (JPX), which includes the Tokyo Stock Exchange (TSE), Osaka Exchange, Japan Exchange Regulation, and Japan Securities Clearing Corporation.
In a memorandum of understanding (MOU) signed earlier this year, designed to strengthen the bilateral relationship between the exchanges and deepen collaboration on matters of mutual inter- est and bene t, the two agreed to "share knowledge and expertise, open the door to people develop- ment and explore future opportunities related to capital market development," according to Khalid A. Al Hussan, CEO of Tadawul.
The new MOU surely boosts the chances of Japan's government and nance chiefs succeeding in their desire for the TSE to win the forthcoming international battle for the coveted listing of the world's largest oil producer — Saudi Aramco — that is expected to be worth up to $100 billion.
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The MOU with JPX will enable the sharing of knowledge and expertise, open the door to people development and explore future capital market development opportunities.
The state-owned oil giant is expected to spark a frenzy when investors are finally given the chance to own a slice of it. Aramco and TSE are considering the launch of a joint group to study its listing. The MOU will also set the kingdom on its way to building, what its Saudi Vision 2030 plan calls, "an advanced capital market that is open to the world." Something it is going to need, as the kingdom's trend towards less state control is set to trigger a wave of initial public offerings in sectors such as energy, utilities and healthcare. Saudi Arabia's Minister of Finance, Mohammed Al-Jadaan, is very upbeat about the exciting oppor- tunities privatization will bring to the kingdom — and it is his of ce that is spearheading a drive to introduce a wide-ranging economic reform plan to steward the world's largest crude exporter through an era of low oil prices and diversify its revenue sources. "There will be a long list of privatizations," Al-Jadaan confirms. "These include energy companies (including gas and renewable), electricity and water utilities, healthcare, medical providers, sports clubs, mining firms and real estate companies.
"For example, we are moving forward with the Saudi Vision 2030 target to achieve 9.5GW production from renewables by the year 2023. Considering Japan's accelerating renewable energy boom, we see an unprecedented opportunity for Japanese firms with the technical and nancial capabilities to execute projects of this scale, and to put forward a business case for the rst round of investments."
As to why Saudi Arabia has decided now is the time to adopt a new approach to socioeconomic development, the ex-chairman of Saudi Capital Market Authority (CMA) explains that, "with a population increase of 50 percent since 2000, of whom a third are aged under 19, oil revenues cannot support our population in the medium and longer terms.
"Following Vision 2030 and the National Transformation Program 2020 will mean we can sustain the public finances without using a riyal of oil revenues to 2030. We will do this by growing and diversifying the economy through the private sector, to become a world-leading country with more and better jobs for future generations."
"For example, we are moving forward with the Saudi Vision 2030 target to achieve 9.5GW production from renewables by the year 2023. Considering Japan's accelerating renewable energy boom, we see an unprecedented opportunity for Japanese firms with the technical and nancial capabilities to execute projects of this scale, and to put forward a business case for the rst round of investments."
As to why Saudi Arabia has decided now is the time to adopt a new approach to socioeconomic development, the ex-chairman of Saudi Capital Market Authority (CMA) explains that, "with a population increase of 50 percent since 2000, of whom a third are aged under 19, oil revenues cannot support our population in the medium and longer terms.
"Following Vision 2030 and the National Transformation Program 2020 will mean we can sustain the public finances without using a riyal of oil revenues to 2030. We will do this by growing and diversifying the economy through the private sector, to become a world-leading country with more and better jobs for future generations."
Support available every step of the way
Helping Japanese companies take advantage of this plethora of investment opportunities in the kingdom, is the Japan External Trade Organization (JETRO), a government-related entity that promotes trade and investment around the world.
"Through the forthcoming privatization of major enterprises in key sectors of the economy, the Saudi government will improve levels of ef ciency and competitiveness and act as a conduit for substantial new investment," says Takashi Mitsuka, Managing Director of JETRO Riyadh.
Helping Japanese companies take advantage of this plethora of investment opportunities in the kingdom, is the Japan External Trade Organization (JETRO), a government-related entity that promotes trade and investment around the world.
"Through the forthcoming privatization of major enterprises in key sectors of the economy, the Saudi government will improve levels of ef ciency and competitiveness and act as a conduit for substantial new investment," says Takashi Mitsuka, Managing Director of JETRO Riyadh.
Al Ra'idah Investment Company's state-of-the-art Riyadh Digital City development.
His organization gets busier by the day. While it used to be focused on bringing investment from Japan to Saudi Arabia, it is now also increasingly occupied with businesses from the kingdom looking to invest in Japan.
"We are helping them find good investment opportunities, as Japan has up to four million com- panies commercially registered. We can help Saudi companies nd their way in the wide Japanese commercial space," he explains. As an example, he says JETRO has "a close relationship with Aramco Asia Japan, as well as Abdul Latif Jameel Japan from the private sector. They have their own subsidiary in Tokyo, so we talk to them often to promote their strengths and cooperation."
With a capitalization of at least $560 billion, the Tadawul exchange is set for an upgrade from frontier to emerging markets status by 2018, notes Mitsuka, who adds that "such a positive development is sure to encourage more asset managers to allocate funds to Saudi Arabia."
"We are helping them find good investment opportunities, as Japan has up to four million com- panies commercially registered. We can help Saudi companies nd their way in the wide Japanese commercial space," he explains. As an example, he says JETRO has "a close relationship with Aramco Asia Japan, as well as Abdul Latif Jameel Japan from the private sector. They have their own subsidiary in Tokyo, so we talk to them often to promote their strengths and cooperation."
With a capitalization of at least $560 billion, the Tadawul exchange is set for an upgrade from frontier to emerging markets status by 2018, notes Mitsuka, who adds that "such a positive development is sure to encourage more asset managers to allocate funds to Saudi Arabia."
Setting the standards for others to follow
Tadawul's capitalization is almost as large as that of the other ve Gulf states combined and forecasts are for $30-50 billion of overseas money to penetrate the market over the next three to ve years.
Boasting average daily liquidity of over $2.3 billion, it is already the seventh largest exchange in the world and grants direct access to overseas investors with more than $5 billion in assets under management.
With retail investors currently dominating trading volume, the regulator hopes overseas institutions will foster predictability and make the bourse more attractive for domestic companies to list and expand.
Al Hussan is delighted with the recent MOU with JPX, which he sees as being an enabler for the strengthening of relations between the two exchanges, to support the development of both cap- ital markets. "It will enhance cooperation between our markets and add a new dimension to our collaborations. And it will include joint marketing and promotion, as well as nancial education," he states.
The CEO is keen to underline that Tadawul is already adopting common international practices to meet the expectations of global institutional investors. These include the implementation of a new settlement cycle, which will align the exchange with standard global clearing and settlement practices.
He also highlights the fact that the CMA has recently approved a set of rules allowing the formation of real estate investment traded funds (REITs) financial instruments that allow all types of investors to obtain investment exposure to the real estate market — on the Tadawul exchange.
"This is achieved through collective ownership of constructed developed real estate," he explains. "REITs consist of units, where each unit represents ownership in the underlying real estate and they are traded just like equities during trading hours. "Saudi Arabian REITs can invest locally, regionally and globally, when the total asset value outside the kingdom does not exceed 25 percent of the fund's total asset value."
Al Hussan is certain that, "The transition Tadawul is making will position it among the leading emerg- ing markets, through enabling it to join MSCI, FTSE and S&P international indices — encouraging international institutional investors to increase their cash flows and investments with confidence."
Tadawul's capitalization is almost as large as that of the other ve Gulf states combined and forecasts are for $30-50 billion of overseas money to penetrate the market over the next three to ve years.
Boasting average daily liquidity of over $2.3 billion, it is already the seventh largest exchange in the world and grants direct access to overseas investors with more than $5 billion in assets under management.
With retail investors currently dominating trading volume, the regulator hopes overseas institutions will foster predictability and make the bourse more attractive for domestic companies to list and expand.
Al Hussan is delighted with the recent MOU with JPX, which he sees as being an enabler for the strengthening of relations between the two exchanges, to support the development of both cap- ital markets. "It will enhance cooperation between our markets and add a new dimension to our collaborations. And it will include joint marketing and promotion, as well as nancial education," he states.
The CEO is keen to underline that Tadawul is already adopting common international practices to meet the expectations of global institutional investors. These include the implementation of a new settlement cycle, which will align the exchange with standard global clearing and settlement practices.
He also highlights the fact that the CMA has recently approved a set of rules allowing the formation of real estate investment traded funds (REITs) financial instruments that allow all types of investors to obtain investment exposure to the real estate market — on the Tadawul exchange.
"This is achieved through collective ownership of constructed developed real estate," he explains. "REITs consist of units, where each unit represents ownership in the underlying real estate and they are traded just like equities during trading hours. "Saudi Arabian REITs can invest locally, regionally and globally, when the total asset value outside the kingdom does not exceed 25 percent of the fund's total asset value."
Al Hussan is certain that, "The transition Tadawul is making will position it among the leading emerg- ing markets, through enabling it to join MSCI, FTSE and S&P international indices — encouraging international institutional investors to increase their cash flows and investments with confidence."
INITIATIVES
Visionary projects with innovative ICT
Real-estate mega projects are on their way, led by Saudi Vision 2030, REITs, new legislation and the investment arm of the Saudi Public Pension Agency. Each type of visual aid has pros and cons that must be evaluated to ensure it will be beneficial to the overall presentation. Before incorporating visual aids into speeches, the speaker should understand that if used incorrectly, the visual will not be an aid, but a distraction.
As part of Saudi Vision 2030, the country intends to invest signi cant funds into developing its real estate. One of the main bodies in charge of ensur- ing this happens will be Al Ra'idah Investment Company, the real estate investment arm of the Saudi Public Pension Agency.
The agency is entrusted with establishing, devel- oping and managing many of the most important real estate projects in the kingdom, and the credibility and scale of these present a unique oppor- tunity for any Japanese enterprises that might be eyeing the Saudi property market.
At the moment, its portfolio is worth about $16 billion and it is currently overseeing three ambi- tious mega projects, all of which are intended to leave a global footprint, that offer a multitude of opportunities to businesses — as suppliers of materials and services, potential tenants or investors.
The agency is entrusted with establishing, devel- oping and managing many of the most important real estate projects in the kingdom, and the credibility and scale of these present a unique oppor- tunity for any Japanese enterprises that might be eyeing the Saudi property market.
At the moment, its portfolio is worth about $16 billion and it is currently overseeing three ambi- tious mega projects, all of which are intended to leave a global footprint, that offer a multitude of opportunities to businesses — as suppliers of materials and services, potential tenants or investors.
Innovative digital city sets benchmark
Perhaps best suited to Japanese companies is the state-of-the-art Riyadh Digital City. This showcase development features a high-end and high-tech approach to architecture and master-planning, and it is located at a prominent site in central Riyadh. It boasts "the latest information and communication technology (ICT) infrastructure in a secure mixed-use environment, and addresses the technical and lifestyle requirements of sophisticated business leaders wishing to operate from the capital," according to Ali M. Al Assaf, the agency's CEO, who believes Riyadh Digital City is perfectly positioned to serve as a catalyst for Japan's role in helping to develop the Saudi Arabian economy. The blueprint comprises large numbers of residential villas of various sizes, commercial and retail units, restaurants, community buildings, and land- scaped avenues and plazas.
The huge project promotes the integration of digital media, ICT and data transfer throughout the site, with the aim of improving sustainability and promoting a more holistic lifestyle for its inhabitants. Residents of all ages will be connected to their homes, of ce and leisure facilities via high-speed communication networks and advanced transport systems, as well as by more traditional physical community links.
Al Assaf is con dent that the new development will be the right place to set up a modern business, explaining that "Japanese firms who invest to buy space in the digital city can benefit from a next-generation network offering internet protocols, where all the technological services are passed through uni ed networks and highly accurate, smart sys- tems that are run and controlled in high-ranked- level information centers."
Perhaps best suited to Japanese companies is the state-of-the-art Riyadh Digital City. This showcase development features a high-end and high-tech approach to architecture and master-planning, and it is located at a prominent site in central Riyadh. It boasts "the latest information and communication technology (ICT) infrastructure in a secure mixed-use environment, and addresses the technical and lifestyle requirements of sophisticated business leaders wishing to operate from the capital," according to Ali M. Al Assaf, the agency's CEO, who believes Riyadh Digital City is perfectly positioned to serve as a catalyst for Japan's role in helping to develop the Saudi Arabian economy. The blueprint comprises large numbers of residential villas of various sizes, commercial and retail units, restaurants, community buildings, and land- scaped avenues and plazas.
The huge project promotes the integration of digital media, ICT and data transfer throughout the site, with the aim of improving sustainability and promoting a more holistic lifestyle for its inhabitants. Residents of all ages will be connected to their homes, of ce and leisure facilities via high-speed communication networks and advanced transport systems, as well as by more traditional physical community links.
Al Assaf is con dent that the new development will be the right place to set up a modern business, explaining that "Japanese firms who invest to buy space in the digital city can benefit from a next-generation network offering internet protocols, where all the technological services are passed through uni ed networks and highly accurate, smart sys- tems that are run and controlled in high-ranked- level information centers."
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Riyadh Digital City boasts the latest ICT infrastructure in a secure mixed-use environment. Technology and innovation are among the pillars of the Japanese economy.
Al Ra'idah Investment Company is seeking Japanese investors and vendors to integrate technologies and capital into the project, in order to ensure the impressive development sets the bench-mark for a bustling digital hub, which blends exceptional quality of life with the latest technologies.
"Technology and innovation are among the pillars of the Japanese economy," says Al Assaf. Commenting on the closeness of the two coun- tries, he notes that "Japanese tech companies have been supporting the growth of the Saudi public and private sectors since the mid-1970's, through long-term partnerships and joint ventures in the fields of technology, petrochemicals, infrastructure and automotive industries." The agency's other two mega projects are the development of the 1.6-million square meter King Abdullah Financial District and the 2.5-million square meter Obhur Al Janoubia residential project in the north of Jeddah.
"Technology and innovation are among the pillars of the Japanese economy," says Al Assaf. Commenting on the closeness of the two coun- tries, he notes that "Japanese tech companies have been supporting the growth of the Saudi public and private sectors since the mid-1970's, through long-term partnerships and joint ventures in the fields of technology, petrochemicals, infrastructure and automotive industries." The agency's other two mega projects are the development of the 1.6-million square meter King Abdullah Financial District and the 2.5-million square meter Obhur Al Janoubia residential project in the north of Jeddah.
Now is the time to invest
Japanese investors are already showing an interest in Saudi Arabian real estate. For example, Mizuho Bank recently signed an agreement with the kingdom's National Housing Company that will provide help for Japanese entities wanting to invest in urban development projects in Saudi Arabia.
As well as opportunities in the agency's agship projects, Al Assaf also sees plenty of openings for companies from Japan and beyond in the agency's other activities. "Besides the mega projects under development, Al Ra'idah Investment Company manages income-generating assets with a gross development value in excess of $2.6 billion, which present a low-risk entry point for Japanese real estate investment trusts (REITs)," he states.
With Japanese REITs increasingly investing over- seas, due to negative interest rates and expensive real estate in Japan itself, Al Assaf believes that the time is right for these funds to look at Saudi Arabia.
"The scale of the construction sector in Saudi Arabia matches the size of its G-20 peers, but the real estate industry has lagged way behind its peers when it comes to the regulatory environment.
"However, a lot has been achieved over the past two years, with the implementation of new capital market structure offerings for REITs, a new mortgage law and off-plan sales regulations, along with several other pieces of legislation. Now is an oppor- tune moment for international investors to access the market," he insists.
He adds that the agency is "particularly inter- ested in collaborating with specialized REITs that would bring added value to our existing operations on the strategic and managerial fronts."
"In addition to our current portfolio," Al Assaf points out, "Al Ra'idah Investment Company is actively seeking strategic partnerships with world- class developers and specialized consultants in the elds of infrastructure, development and invest- ment management, as it positions itself to launch new projects that tackle some of the opportunities presented under Saudi Vision 2030."
Japanese investors are already showing an interest in Saudi Arabian real estate. For example, Mizuho Bank recently signed an agreement with the kingdom's National Housing Company that will provide help for Japanese entities wanting to invest in urban development projects in Saudi Arabia.
As well as opportunities in the agency's agship projects, Al Assaf also sees plenty of openings for companies from Japan and beyond in the agency's other activities. "Besides the mega projects under development, Al Ra'idah Investment Company manages income-generating assets with a gross development value in excess of $2.6 billion, which present a low-risk entry point for Japanese real estate investment trusts (REITs)," he states.
With Japanese REITs increasingly investing over- seas, due to negative interest rates and expensive real estate in Japan itself, Al Assaf believes that the time is right for these funds to look at Saudi Arabia.
"The scale of the construction sector in Saudi Arabia matches the size of its G-20 peers, but the real estate industry has lagged way behind its peers when it comes to the regulatory environment.
"However, a lot has been achieved over the past two years, with the implementation of new capital market structure offerings for REITs, a new mortgage law and off-plan sales regulations, along with several other pieces of legislation. Now is an oppor- tune moment for international investors to access the market," he insists.
He adds that the agency is "particularly inter- ested in collaborating with specialized REITs that would bring added value to our existing operations on the strategic and managerial fronts."
"In addition to our current portfolio," Al Assaf points out, "Al Ra'idah Investment Company is actively seeking strategic partnerships with world- class developers and specialized consultants in the elds of infrastructure, development and invest- ment management, as it positions itself to launch new projects that tackle some of the opportunities presented under Saudi Vision 2030."
Advancing technology
Al Ra'idah Investment Company wants to be at the forefront of real estate technology and engineering. For this reason, Al Assaf would like to incorporate more Japanese advanced technologies into projects and he speci cally highlights "those relating to sus- tainability, such as solar and other alternative ener- gies, power saving, cooling and water technologies."
Another area of focus for the agency and most local developers, he says, is the utilization of mod- ern methods of construction, as the industry is gearing itself up to solve the kingdom's housing crisis, which is one of the goals of Saudi Vision 2030. Al Assaf is proud to be playing such an important role in Saudi Arabia's development plans at all lev- els. "I am fortunate to be in a position to serve the best interest of the bene ciaries of the Saudi Public Pension Agency and safeguard the interest of future generations," he explains. He is convinced that government and businesses are about to unleash the potential of the kingdom in various productive industries, including tourism, nancial services, logistics, trade and industry. "It gives me a great sense of pride to witness this socioeconomic transformation that puts Saudi Arabia at the forefront of modernization, while preserving the conservative values of Islam upon which the kingdom has been established."
Al Ra'idah Investment Company wants to be at the forefront of real estate technology and engineering. For this reason, Al Assaf would like to incorporate more Japanese advanced technologies into projects and he speci cally highlights "those relating to sus- tainability, such as solar and other alternative ener- gies, power saving, cooling and water technologies."
Another area of focus for the agency and most local developers, he says, is the utilization of mod- ern methods of construction, as the industry is gearing itself up to solve the kingdom's housing crisis, which is one of the goals of Saudi Vision 2030. Al Assaf is proud to be playing such an important role in Saudi Arabia's development plans at all lev- els. "I am fortunate to be in a position to serve the best interest of the bene ciaries of the Saudi Public Pension Agency and safeguard the interest of future generations," he explains. He is convinced that government and businesses are about to unleash the potential of the kingdom in various productive industries, including tourism, nancial services, logistics, trade and industry. "It gives me a great sense of pride to witness this socioeconomic transformation that puts Saudi Arabia at the forefront of modernization, while preserving the conservative values of Islam upon which the kingdom has been established."
