Analysis

Last Word: Getting your land to work for you

Rather than sitting back and waiting for offers from investors, landowners should be proactive and strategic in extracting value from their land, says Strategy&’s Ramy Sfeir

Ramy Sfeir is a partner at Strategy& Middle East

In the GCC, owning large pieces of land has traditionally been a means of safeguarding wealth for both governments and the private sector. However, this land often lies dormant and unexploited. Growing economic pressure calls for a new approach in order to unlock the land’s true value.

For governments, that value resides in generating income and plugging budget deficits, as well as in the potential to develop land to better meet the needs of citizens. In Saudi Arabia, for example, the government is consolidating all its strategic land holdings to be used in major government-led development projects. For private sector owners, the goal is the same: to commercially exploit and develop dormant land. However, these players will do so due to the need to avoid idle land taxes, to hedge against slower growth of their core businesses, and to diversify their portfolios.

The region has been hit by lower oil prices and political uncertainty has also risen, so we are now in a situation where we need to generate value through all means available, which includes these dormant land banks. Here are five approaches to extracting value from land, all of which offer a range of potential returns and corresponding levels of risk.

  • Mortgaging property or selling and then leasing back: This is the fastest means of releasing capital, with limited requirements and transferring all risk of the property to the buyer. However, this often eliminates the opportunity to create long-term value.
  • Leasing the property under a long-term arrangement: This approach is often used, particularly for hotels and malls. This generates recurring income for the duration of the lease, requires limited capabilities and funding, and preserves long-term usage rights for the owner. However, its success depends on the investor, which could be a risk of its own.
  • Selling property outright: Historically, this has been the preferred strategy of large institutional landowners, as it requires little capability or funding. However, its popularity has led to limited real estate investment and development activity in the region, and is one of the key reasons for the housing shortage in Saudi Arabia. This approach may also limit future chances to create value.
  • Contributing land to a development project with a partner: Here, the landowner partners with an investor and contributes the land as equity in return for partial ownership of the project, while the investor puts in the capital. When the property starts generating income, the landowner and investor split proceeds based on ownership. The disadvantage is that the approach does not guarantee returns and can introduce significant risk due to the owner’s lack of control over the developer.
  • Contributing land and equity to a development project: The final option, and the most complex, asks that the landowner shifts from a passive investor to an active developer. In addition to the land, the owner also contributes equity in return for a larger share of the development proceeds. Although this offers the highest potential returns, it also presents the greatest risk, as it requires heavy capital and the widest range of capabilities.

Unlocking value from dormant land is not easy; there are four key success factors that landowners should consider. They should firstly be proactive and think strategically; they should seek the right deal and partner; they should structure the agreement to align with their incentives and retain control; and finally, they should consider all viable financing mechanisms and vehicles.

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