_What is next for Saudi Arabia in light of the deployment of the Belt and Road Initiative

For centuries, the legendary Silk Road from the ancient Chinese capital of Xi’An provided a two-way link with bustling trading centres as far away as Rome and Malacca. Despite intermittent stoppages of this vibrant trade route, fast forward to the 21st century, China has become the world’s largest exporter, with goods and services totaling US$2.2 trillion in 2016.

The Belt and Road Initiative (BRI) was launched by China in 2013, with an aim to revive the great Silk Road as well as provide a new platform for multilateral cooperation to create new trade routes, economic links and business networks. Six economic corridors have been identified from China to Central and South Asia, the Middle East and Europe (the Silk Road Economic Belt) and, along with a maritime route, from Southeast Asia, Oceania to the Middle East, Africa, and Europe (the 21st Century Maritime Silk Road).

Spanning across 69 countries and encompassing around 60% of the world’s population and 40% of global GDP, the blueprint is also a collection of interlinking trade deals and infrastructure projects, set to be mutually beneficial to BRI countries and China. As one of BRI’s goals is to further stimulate Chinese economic growth, expanding demand overseas will be crucial as the project will open new markets for Chinese goods and services, shoring up the country’s economy against any potential slowdown in domestic demand as well as the potential rise of protectionism in other countries.

A significant number of participating BRI countries are undergoing rapid modernisation and urbanisation leading to soaring demand for roads, railways, ports, airports, pipelines, and technology infrastructure. In addition to infrastructure investment, the increased connectivity of some of the less developed markets will lead to increased commercial opportunities, helping integrate these nations with the wider, global economy.

Funding for this vast initiative is coming via a number of routes, including multilateral sources such as the China-led Asia Infrastructure Investment Bank (AIIB), the Silk Road Fund, in addition to allocations from the large state-owned banks. Ratings agency Fitch has estimated there to be US$900 billion of infrastructure project finance pledged to the initiative.

Middle Eastern countries, particularly the Gulf Cooperation Council (GCC) countries, over recent decades have had strong trade links to China, particularly as one of the main providers of commodities and natural resources to China, along with its critical access to Africa and Europe. 

The GCC member nations are eager to transform their economies to reduce over-dependence on oil and gas. This provides fresh prospects for Chinese investors, especially in the real estate, high-tech and energy sectors. 

Saudi Arabia has historically maintained strategic economic ties with China as a top destination market for Saudi’s crude oil, while the kingdom has been among China’s largest trading partners in the Middle East. In March 2017, a bilateral economic relationship strengthened significantly when Saudi Arabia’s King Salman visited China, which led to the signing of investment cooperation deals worth US$65 billion including schemes to develop refineries and petrochemicals plants.

Various regulatory efforts aiming at stimulating the kingdom’s property market and help ease the shortage of housing have come underway. Key measures include the introduction of a 2.5% tax on undeveloped land plots, the development of a home building programme and the implementation of a regulatory framework for the listing of REITs; among others. These initiatives are in line with the strategic reforms defined in the Saudi Vision 2030 and the National Transformation Plan aiming at diversifying the Saudi economy away from oil while encouraging private sector participation in this process.

In light of these strategic reforms, the kingdom is showing interest in partnering with international real estate development firms. This appears to be a good opportunity for Chinese developers looking to gain exposure to the Saudi real estate market, which in turn provides a strong platform for the success of the BRI.

We have recently seen an increased appetite from Chinese investors in Saudi Arabia’s real estate sector as witnessed by various agreements for cooperation in the field of housing. The signing of a MoU between the Saudi Ministry of Housing and the Government of Ningxia Region in China to develop Al-Asfar outskirts in Al-Ahsa Province and build 100,000 housing units is a good example.

Saudi Arabia’s GDP growth has been slowing down over the past two years as a result of the decline in oil prices. The strategic reforms are expected to produce positive returns even in the medium-term with GDP forecast to grow 1.3% in 2018 and with non-oil growth projected to pick up to roughly 3%. Going forward, we should start seeing a more favourable real estate market sentiment as the sector starts bearing the fruits of current initiatives.

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