As one Evergrande falls, another rises in the Saudi desert


Everything about Neom – the futuristic city being developed by Saudi Crown Prince Mohammed bin Salman near the Red Sea coast – seems fantastic.

From flying elevators to 100-mile skyscrapers to a floating zero-carbon port, it seems it owes more to Coruscant and Wakanda than to any urban forms outside of sci-fi.

Even Neom’s finances are superlative. The first phase of the project by 2030 will cost 1.2 trillion riyals ($320 billion), with half of that amount provided by the Public Investment Fund, Saudi Arabia’s sovereign wealth fund, Crown Prince Mohammed bin Salman told reporters in Saudi Arabia this week Jeddah. He expects that by 2030 around 1.5 million people will live in the horizontal twin skyscrapers called The Line.

Believe it or not, these numbers are not as implausible as they seem. Take China Evergrande Group, the big Chinese developer embroiled in vague restructuring plans after ratings firms declared it a defaulter last year. Neom’s promise of eventually becoming home to 10 million people seems more modest than Evergrande’s boast that it is home to 12 million people. Evergrande’s cash outflow, net of divestitures, has totaled 605 billion yuan ($89 billion) since 2010, about 28% of Neom’s budget. Given that China’s income level and construction costs have been about 40% of Saudi Arabia’s over the past decade, this suggests a generous but by no means crazy budget.

Of course, if you were to choose a model for Saudi Arabia’s future, it probably wouldn’t be a distressed developer from a Chinese real estate sector that S&P Global Ratings believes is headed overall for bankruptcy.

However, the biggest problem with Neom isn’t so much its cost and scope. Instead, it’s the way the will to power is written into its DNA, as Vivian Nerim explored in a recent Bloomberg BusinessWeek article.

For all Evergrande’s problems, it has always been a fairly efficient user of capital. One reason it’s been plagued by mortgage strikes lately is because it’s relied on pre-sales, getting virtually interest-free loans from its customers for the full value of properties before they’re built – something that’s becoming a problem when the construction work is progressing in a longer break. China’s fastest developers could complete a project from conception to money back in 12 months. At least in its early years, Evergrande’s numbers suggested it was consistently grossing more than its cost of capital.

The fundamentals of the business model are also fundamentally solid. Around 200 million people have moved to China’s cities over the past decade, while nominal gross domestic product per capita has doubled. This is a compelling story of organic city growth. Indeed, much of Evergrande’s decline can be attributed to how it tried to buck organic trends for political reasons. Beijing wants rural migrants to move to smaller, so-called “Tier 3” cities, rather than its crowded, dynamic metropolises on the east coast. The land bank of Evergrande has increasingly focused on such lower quality sites. This attempt to reverse the gravitational pull of the country’s economic powerhouses has probably always ended in tears.

However, if a real estate developer focused on Chinese Tier 3 cities can turn into a disaster, how should one evaluate the prospects of a brand new city in a desert far removed from both oil fields and the unique pilgrimage destinations of Mecca and Medina ? Neom’s vision of zero-carbon living in the 21st century is alluring – but if it comes to fruition, the economic prospects of the nation, which is using billions of oil dollars to build, are bleak indeed. A world where Neom’s urban life innovations work is a world where Saudi Arabia’s main exports are redundant. If Neom is intended more as a rebranding exercise for a country determined to sell every last drop of its crude, there are far cheaper ways to recalibrate your public image.

The lesson Saudi Arabia should learn from Evergrande is that infrastructure and real estate development works best when it follows the people, rather than trying to lead them. The kingdom will benefit much more from the humdrum metro networks being built in Riyadh, Mecca, Medina and Jeddah and its long-delayed cross-country railway corridor than from another aborted construction project on the shores of the Red Sea that is looming it is joined by its predecessor, the King Abdullah Economic City. Similarly, actually fulfilling its plans to develop its vast and underutilized solar and wind resources would provide cheaper electricity locally while freeing up petroleum for export.

Mohammed bin Salman has his hands full fixing his country’s sprawling, congested cities for a population of about 36 million that is expected to grow by a third by 2050. That task is hard enough given signs that oil demand may be falling, even as Saudi Arabia’s supply potential appears to have been exhausted. That would be a far better use of the kingdom’s cash flows than a grand madness in the desert. For all Evergrande’s failings, it has never attempted to build its castles in the air.

More from the Bloomberg Opinion:

• Saudi Arabia announces that oil production is nearing the ceiling: Javier Blas

• The Saudi mega-project is big on hubris and not very practical: Bobby Ghosh

• How Saudi Arabia can thrive in a post-oil world: David Fickling

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering energy and commodities. He previously worked for Bloomberg News, the Wall Street Journal and the Financial Times.

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