Dubai: Put all that unused land to better use. If anything, governments in the Gulf should take this up as a priority.
“We are now in a situation where we need to generate value through all means available, which includes these dormant land banks,” said Ramy Sfeir, Partner at Strategy& Middle East, and leader of the family, investments, and real estate and the deals platforms at the consultancy.
In Saudi Arabia, the government is consolidating all its strategic land holdings to be used in major government-led development projects.
Even private land owners — especially those in Saudi Arabia — need to be thinking along the same lines. Doing so would help them circumvent the need to pay “idle land taxes, hedge against slower growth of their core businesses and to diversify their portfolios”, the report by Strategy& notes.
The consultancy outlines five approaches those with extensive land holdings or real estate assets could do:
* 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. This however often eliminates the opportunity to create long-term value.
* Leasing the property under a long-term arrangement: 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 required few capabilities and funding. However, its popularity led to a limited real estate investment and development activity in the region, and is one of the key reasons behind the housing shortage in Saudi Arabia. This approach might also limit any future chances of creating 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 it 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 requires the landowner to 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 it offers the highest potential returns, it also presents the greatest risk, as it requires heavy capital.
