[caption id="attachment_29645" align="alignright" width="200"] Bruno Wehbe, Principal with strategy& Middle East (Formerly Booz & Company), part of the PwC network[/caption]
Land owners in the Middle East need a new approach to manage their holdings. Whether governments or private owners, they need to reap value rather than holding onto land as long as possible. This is an unfamiliar strategy for many owners, which they will need to implement systematically to generate the maximum possible value.
In the past, land was a means of building and safeguarding wealth in the region. Public and private-sector entities acquired land and held it, often undeveloped, for decades. That was successful in the past, but is not suitable for today’s uncertain economic, fiscal and geopolitical climate. Lower oil prices, reduced government budgets, increased instability, a slowdown in land appreciation, and new taxes on dormant land for private owners all require land-owners to start generating value from the land they own. In Saudi Arabia a “white land tax” charges owners 2.5% of the land’s value unless they develop it within 12 months.
Already some governments, family businesses and conglomerates are looking at their dormant land holdings as a source of capital to balance budgets, support core businesses, and diversify income and risk. The government in Saudi Arabia is consolidating its strategic land holdings in advance of major investment and development initiatives. Municipalities and other government agencies are also creating land investment divisions and planning projects, either on their own or through public-private partnerships. Transportation authorities and agencies in Riyadh and Doha are seeking to extract value from land around new metro lines.
Land owners in other parts of the world are further along in their use of land to create value. In the U.K., for example, the government created a unit in 2010 to capitalize on idle or underused land and property across civil service facilities—selling it, leasing it, or developing it for better use. The initiative has raised £1.4 billion (around $2 billion) by selling surplus property, while reducing the operating costs of the government’s portfolio by £625 million (around $930 million) a year between 2010 and 2014.
There are five approaches that land-owners can use to generate value from their holdings: 1) mortgage the property; 2) sell the property outright; 3) lease the property to a developer while retaining the rights to future usage; 4) partner with a developer by contributing land; and 5) contribute land and equity to a development project.
These options can generate returns of 2% to 15% or more. Yet with increasing gains comes increasing risk—and a potential requirement for more hands-on involvement. For example, mortgaging a property is potentially the fastest approach, and requires little in the way of additional investment, but yields limited value. Implementing a full development project, by contrast, can take years and require more capital from the owner, along with specific capabilities in areas such as project management and operations once the development is complete, but this approach also yields the highest returns and value.
However, land owners who want to unlock value from their holdings must be proactive and strategic because there are so many variables at play. So far, many have used an ad-hoc approach, waiting for offers from investors and then evaluating them one at a time. Instead, they should look at their entire portfolio, choose a subset of high-potential holdings (in most cases, the value is concentrated in a few large plots), determine the highest and best use of that land, and identify the right approach to create value, factoring in local market conditions.
Moreover, owners should take their time. Many land owners are racing to sell holdings to avoid tax payments or because they think real estate investment activity is slowing across the region. This gives investors and developers the upper hand in negotiations.
Finally, land owners need to identify the right partner—particularly for leasing and development deals, in which partnerships can last decades—and examine the full set of options regarding financing and exit strategies.
There is no one optimal strategy for all situations. Instead, the best deal varies for each land owner depending on their underlying goals. By adopting a comprehensive and pro-active approach, public and private-sector land owners can make sure they are negotiating the best possible value for their holdings.