The GCC countries are in the midst of a series of massive real estate megaprojects. As of early 2020, there are close to 30 real estate megaprojects in the region, and the amount of investment, region-wide, is close to $1 trillion.
These innovative projects aim to provide new sources of economic growth. These are transforming the face of the GCC, adding to these countries’ appeal as tourist destinations, making them more livable for their residents, and promising more environmentally sustainable communities.
The GCC’s real estate megaprojects take two fundamentally different forms. Some are greenfield projects for completely new communities, including Al Harir City in Kuwait, Lusail City in Qatar, Riyadh City in Abu Dhabi, and the Red Sea project and Neom in Saudi Arabia—the latter being particularly remarkable for its scale.
Others are regeneration projects focused on reviving and restoring existing assets and communities, such as Muharraq in Bahrain, and the downtowns of Jeddah and Riyadh in Saudi Arabia.
Yet regardless of form, the starting point for any such megaproject is a solid institutional setup that will guide project development. The institutional setup is the proper role of the different entities, public and private, that will be involved in the project, the responsibilities they will have in managing it, and the nature of the interactions between them.
Too often, the project sponsors make the error of either delaying decisions about the institutional setup until a later stage or choosing models that are incompatible with the overall purpose of the development.
Instead, the project sponsors should think about the institutional setup from the outset, along with the fundamental concept behind the development, because this defines the relationships between stakeholders and underlines the project’s organisation models. This process is crucial and takes time to get right.
The challenge is rooted in the sheer numbers of stakeholders. Take the many regeneration projects that have cropped up in the GCC in recent years, including plans to revitalise parts of cities.
Besides the master developer—the entity that has the initial vision—there are property developers building individual structures, asset managers collecting rents and other payments, infrastructure developers shoring up essential services like water and sewage, city services providers issuing permits, and regulators making sure that everything gets built to specification.
There are also the investors who fund the project at different stages. Add them all together, and most projects have dozens of stakeholders, often with conflicting interests.
Role of the developer
The key question is how many roles the master developer should play. This question can be answered by looking at five factors—who owns the project, how ambitious its vision or timeline is, the quality of the existing ecosystem, any specific purpose associated with the project, and the identity of the project’s investors and partners.
With the largest and most ambitious projects, it often makes sense for the master developer to play multiple roles. The master developer can also be the property developer, regulator and infrastructure service provider. The streamlined decision-making that results from consolidating roles in this way can minimise snags and keep projects moving.
There are GCC projects that exemplify this. In these projects, government or quasi-government entities have often moved beyond their master developer roles to add a regulatory role—which has in some cases made the private sector feel more comfortable about participating because it mitigated the risk.
However, there are also situations in which it makes sense for the master developer to restrict its activities to developing the concept, and let other entities run other parts of the project. This is often the approach in mature economies, where well-functioning ecosystems make it unnecessary for the master developer to play a major role outside of setting the vision.
A narrower role for the master developer is also often best if a project is going to make extensive use of private-sector funding. This is one situation in which it may not work for the master developer to double as the regulator as it can create the perception of a conflict of interest.
Institutional setups nevertheless have some flexibilty to them as the initial setup does not have to be permanent. It is perfectly reasonable for the institutional structure to change as the mandate of a megaproject grows and the number of entities increases. Usually the change is away from a single organisation running all parts of the project to a set of organisations running it.
The best approach for a megaproject is to consider the institutional setup early and to align it with other aspects of the project. The institutional setup, and the delivery entity structure, are vital because they are intimately tied to the master plan, development approach, and funding. Getting the institutional setup right from the beginning will make all the difference to projects in which billions of dollars are at stake.
About the piece
This article is based on a report, Managing the $1 trillion wave of GCC real estate megaprojects: The institutional setup, by Strategy&, which can be accessed here
The authors are Karim Abdallah and Ramy Sfeir, partners, Charly Nakhoul, principal, and Fady Halim, manager, at Strategy& Middle East, part of the PwC network
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