GCC landowners need fresh approach to unlock value, says Strategy&

25 January 2018 Consultancy-me.com 5 min. read

Consulting firm Strategy& has encouraged the government and private sectors of the GCC to take a more proactive approach in unlocking the value of unused land in the region, much of it having been held undeveloped for decades despite mounting financial pressures.

As lower oil prices and geopolitical instability continue to hurt the bottom line of the public and private institutions of the GCC (which counts as its members the UAE, Saudi Arabia, Oman, Kuwait, Bahrain and Qatar), global strategy consulting firm Strategy& has declared that now is the time for a new approach when it comes to the region’s underexploited land resources.

These often vast, undeveloped, tracts of land have been steadily increasing in value. Until now, that was all that was necessary. However, as large local holdings have in the past been commonly seen by governments and organisations as a means of safeguarding wealth, or, respectively, as collateral to fuel the core activities of the private sector and as a reserve for small-scale civic infrastructure projects by the government, the current economic climate calls for a greater return from the properties as an untapped source of liquid capital.

Strategy&, which is part of the PwC network and has offices in Abu Dhabi, Beirut, Doha, Dubai and Riyadh, among others, contends that while some GCC land owners have begun to pursue these commercial opportunities, most of the activity to date has been applied as an ad hoc solution. They believe that the owners still need to alter their strategy and perspective. “Long gone are the days when governments and private-sector entities could apply a buy-and hold mindset to purchasing land,” Strategy& Middle East principal Bruno Wehbe says, “Rather than sitting back and waiting for offers from investors, landowners are encouraged to be far more proactive and strategic in seeking their partners”.

Land bank strategy derives from the landowners objectives and the drivers of value creation

The consulting firm forwards five principle approaches to better realise the true value of presently unused land, but also warns of the risks and complexity in each regard, and further notes that some approaches may be more suitable than others depending on the landowner’s individual circumstances and objectives. The five primary methods are; mortgaging property or selling it and subsequently leasing it back; leasing the property under a long-term, build-operate-transfer agreements; selling the property; converting it into a development project with a partner, and; contributing land and equity to a development project, and potentially operating the project.

In a breakdown of each of options available, the report describes mortgaging and releasing the property as likely to be the least attractive for the majority of owners in that it eliminates any future potential. It is, however, the quickest means to release dormant capital, requires limited capabilities, and transfers risk to the buyer. Similarly, selling outright will deliver quick cash (at an internal rate of return from 2% to 15%) but strip the seller of an asset. However, this has traditionally been the preferred approach – “buy opportunistically, hold as long as possible, and sell as needed”

There are five methods for creating value from land banks

As for the high-risk, high return end of the spectrum, the ‘land contribution’ and ‘land and equity contribution’ options could deliver an internal rate of return (IRR) of 8-12% or 15+% respectively, but also carry the highest risks and offer no guarantee of return. The former, however, has the advantage of few initial cash requirements, with the land in effect a form of equity in return for a stake in the project, while the latter requires both existing capital and the widest range of capabilities – although comes with greater operational input and oversight.

Regardless of the preferred approach, Strategy& Middle East partner Karim Abdallah says; “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 for them, they should structure the agreement to align with their incentives and retain control, and finally, they should consider all viable financing mechanisms and vehicles.”

Unlocking the value of unused land is just one potential measure being recommended for organisations in the Middle East as various industries seek to adapt to a changing economic landscape. A recent report from strategy firm The Boston Consulting Group recommended consolidation as a key for the petrochemical sector in the region, while consulting leaders from A.T. Kearney have discussed the effect of innovation on the international oil & gas industry