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Will property privatisation improve FM in Saudi?

Property market privatisation will benefit FM companies looking to enter Saudi Arabia, experts tell fmME

Public domain: Some of Saudi Arabia’s largest projects have typically been driven by public spending.
Public domain: Some of Saudi Arabia’s largest projects have typically been driven by public spending.

Last month, it was revealed that Saudi Arabian authorities are mulling the installation of surveillance cameras across 95,000 mosques in the kingdom. An operations room with direct links to the mosques will also be established with the Ministry of Islamic Affairs, an official said.

Tawfeeq Al Sudairi, deputy minister for Islamic affairs in the kingdom, added: “The project is still in the experimental stage and we have reached agreements with specialised companies to cover all mosques with surveillance cameras. There is complete coordination between us and the security agencies regarding the matter, and as soon as the experiments are over, we will start covering the mosques with cameras.

“We will start with the most important mosques as part of the long-term project,” Al Sudairi told Saudi daily Okaz.

That Saudi authorities are working with industry specialists to upgrade their tech savviness is hardly surprising as the country prepares to enter an era of privatised business operations. Saudi’s Vision 2030 plan, unveiled by Deputy Crown Prince Mohammad bin Salman in April, looks to increase private sector contribution to the economy to 60% from its current 45%.

As the kingdom looks to attract foreign investors towards its infrastructure development plans, the results of these programmes will also shape the Saudi FM sector’s evolution in the years to come.

At the heart of this economic transformation sits the same public sector that Saudi Vision 2030 will decentralise over the next 16 years, making contemporary market conditions ideal for FM firms to succeed in the kingdom.

Some of Saudi’s largest construction projects are currently driven by government spending. The kingdom’s Ministry of Finance, in a December 2015 statement, said its expenditure for the 2015 fiscal year included “around $11.7bn (SAR44bn)” for the expansion of the Makkah Grand Mosque and the Prophet’s Mosque in Madina. This figure did not include projects that fall under the state’s housing, transport, and infrastructure programmes, estimated to have received $5.8bn (SAR22bn) during the year.

Richard Naylor, chief executive for DTZ’s Saudi operations, says this reliance on state spending has affected the kingdom’s FM market amid ongoing fluctuations in global oil prices.

“Historically speaking, the majority of new development within Saudi Arabia has been through government or semi-government funding, such as education, aviation, healthcare, and public infrastructure projects,” Naylor tells fmME.

“With such a reliance on public sector funds, a significant level of impact on development has been seen through the reduction in oil prices, which has resulted in a number of new schemes being placed on hold and a delay in the number of high-profile projects being completed and handed over to FM operators.”

While Saudi’s private sector developers are ahead of their government counterparts in terms of FM and IFM service adoption, Naylor says this equation could change in the years to come.

“With the recent funding restrictions placed on government spending, even public sector organisations are being actively encouraged to embrace the private sector and to consider alternative approaches to funding, developing, and operating new and existing facilities.”

Barry Clarke, general manager for Macro International’s Qatar and Saudi operations, says the kingdom’s privatisation plans will improve the prospects for facility and asset management (FAM) firms in the country.

“Property privatisation should [transform] long-term maintenance plans to focus on quality and value as opposed to cost,” he tells fmME.

“With privatisation, owners will consider the life cycle cost of the building, instead of knocking it down and rebuilding [on that land]. There needs to be a driver for quality to attract large international businesses, and this might be the required driver.”

For FM operators, the scope to grow in Saudi will also expand as the country looks to privatise assets and developments that currently receive state spending. The largest of these is likely to be the 160ha King Abdullah Financial District (KAFD), the ownership of which could be transferred to the Public Investment Fund from Public Pension Agency (PPA) as part of Prince Salman’s 2030 plans, according to Reuters.

Ramzi Darwish, consultant for international corporate client services at Cluttons, says that such master developments hold significant opportunities for FM companies in the kingdom, especially those that participate in activities to educate local clients about the benefits of FM services.

“In terms of KAFD, for example, you need a professional FM company to look after its components,” he tells fmME.

“Properties or assets owned by multiple investors will have a positive impact on FM business in Saudi. Some of these investors would likely come from a different background and with a different mentality, which they might use to influence other investors involved in the project. This can change the [perception of] value added by appointing an FM company.

“Following the announcement of the white land tax, we forecast that there will be a lot of partnerships between land owners to develop residential and commercial properties, so [projects] could increase significantly in the next few years. To maintain these properties, their developers – be they government or semi-government – might start considering the appointment of FM companies to look after the assets.”

Naylor says the uptake of IFM services is already growing within the kingdom’s high-rise sector.

“To date, the nearest we have seen to residential master developments in Saudi are the gated compounds targeted at the expat community, such as the likes of King Abdullah University of Science and Technology (KAUST) and King Abdullah Economic City (KAEC). These feature large residential developments similar to those that you would find in, say, the UAE,” he continues.

“FM serves all market sectors, but it’s true to say there has been a slow uptake in applying FM to residential developments in Saudi Arabia. However, we are starting to see a move towards IFM for vertical communities, with several tower developers approaching us for a solution.”

Beginner basics

Demand for FM services in Saudi Arabia is likely to boom in tandem with the modernisation of real estate and construction practices in the country. Contemporary FM standards in Saudi follow the region-wide trend that adopts international and localised best practices – a scenario that Naylor says may sometimes lead to operational challenges.

“As a property services provider, the lack of standardisation in regulations can prove very frustrating, with client RFPs [request for proposals] sometimes requesting American standards, some quoting British standards, and others not requesting any set standards at all,” he explains.

“This makes bidding quite a challenge and not a level playing field, as bidders are often pitching to provide very different levels of service. Not looking too far afield, our neighbours in the UAE have implemented a number of standards and regulations, such as their approach to community management and Owners Associations. Regulations in such areas offer significant benefits to end users, owners and tenants, and service providers alike.

“Another challenge around regulation is the enforcement. We often see well written RFP documents which refer to some set of regulations. However, we then find that the development or services provided don’t actually meet [those] regulations,” Naylor adds.

Standardisation in Saudi’s FM sector will depend on the mitigation of two notable factors that have hindered the uptake of such services in the country, Darwish explains.

“Firstly, developers or property owners in the kingdom wouldn’t normally consider getting an FM company on board, because for them it’s an additional cost,” he says.

“Secondly, it’s about the mentality in Saudi Arabia. The approach of property owners is to do work themselves rather than getting someone to do work on their behalf. For example, I’ve seen many office buildings in Saudi where FM works are being done by one person who looks after maintenance and anything related to maintaining the building and scoping out issues.

“The first step for FM companies in Saudi would be to educate the market about what FM entails, because for a lot of local owners, FM means just maintenance operations, such as taking care of air-conditioning and electricity. That’s why they get one person to look after the building and to deal with any issues about plumbing and ventilation, for instance. The first step must be education,” Darwish adds.

Looking ahead

Building codes, property standards, and real estate regulations are an ever-changing component of the ecosystem within which FM companies – consultancies and service providers alike – operate. Privatisation – and the international investments it could reap – look set to spur the evolution of these factors in Saudi’s FM sector, Macro’s Clarke says.

“[Saudi] has ambitions to be a world leader. Its FM market seems to be going from being delivery-oriented to using performance measures. Saudisation should be on the agenda for FM companies by creating employment for nationals and making sure FM is seen as a career path,” he continues.

“The country’s National Transformation Plan aims to create more private sector jobs, and this will hopefully be beneficial for the FM sector. More women working will also have an impact on the quality agenda.

“All of these changes will undoubtedly support the need for technology applications to be deployed and utilised, which is another exciting opportunity,” Clarke adds.

Even as privatisation opens new doors to Saudi’s economy, companies looking to enter the country’s services segment must not forget the local flavour that distinguishes and defines how business is done in the kingdom, DTZ’s Naylor explains.

“Although Saudi Arabia is geographically close to the UAE, the FM market is significantly different, a point which is often underestimated by many new companies arriving in the kingdom,” he says.

“Overall, the FM supply chain is predominantly occupied by traditional and locally owned O&M companies that still have aspirations to deliver everything themselves, and often struggle with the overall concept of working in partnership with an integrated service provider.

“Generally speaking, these suppliers are still very risk-averse and are more comfortable working within an input-based arrangement rather than a performance-based agreement, the measurement of which will be through SLAs and KPIs.

“Over time, we have been very fortunate to have developed a good level of understanding with a number of tier-one specialist supply chain partners, but this has taken some time and a great deal of hard work. For instance, material supply can be a challenge, predominantly due to the delays associated with much of them being imported.

“That said, through the application of sound IFM practices such as inventory and stock control and minimum and maximum stock levels, materials can be ordered in time to avoid a delay in remedial works,” Naylor adds.

Experts agree FM operators and related service providers must focus on the kingdom’s largest client – the government – if they are to grow in the country.

“The target client for FM businesses should be master developers, such as the PPA, for instance, or semi-government entities,” Darwish concludes.

“If an FM company is awarded 10% of the buildings in KAFD, for instance, then that’s an achievement for the firm. The best way to be able to start doing work in Saudi is to emphasise to land owners and developers that FM will eventually reduce their cost on a property, and that they will eventually save costs on factors such as utilities and depreciation, which in the long term would make a huge difference.

“With the plans announced under Vision 2030, Saudi Arabia will change for the better, and this will eventually impact all kinds of businesses in the country, including its property market.”

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