Developer profile: Tales from the Blue City
Al Madina A’Zarqa, one of Oman’s largest developments, is part of the Sultanate’s plans to diversify its oil-centric economy. This project has already fallen behind schedule. Richard Russell, its newly appointed chief executive, speaks to Chris Wright about getting back on track.
"Pretty darned exciting": the master plan and details for a new city, Al Madina A’Zarqa
In the Gulf, it’s never quite enough to build a tower or even a complex. If you really want to make a splash, you’ve got to build a city. We tend to associate these vast ideas with the United Arab Emirates and Saudi Arabia but something equally staggering in scale is taking place in Oman, on a natural peninsula about an hour up the coast from Muscat. This is Al Madina A’Zarqa (literally, the Blue City), taking shape on 16 kilometres of shoreline by the Gulf of Oman. When completed, this will be a 32 square kilometre city, home to 200,000 people. Some are envisaging it as a future Omani commercial capital.
It’s all part of His Majesty Sultan Qaboos bin Said’s mission to diversify Oman from its dependency on revenue from fossil fuels. This is the Vision 2020 project, and at its heart is a drive towards tourism, although Al Madina A’Zarqa is ultimately intended to be much more than a tourist resort. It will have civic and education clusters, as well as a utilities belt on the south of the city, and seeks to grow on the back of six economic drivers: tourism, entertainment, education, medicine and healthcare, sports and wellness, and trade.
Richard Russell is the chief executive of Blue City Company 1, the special purpose company delivering phase one of the project – described as the town within the city, dominated by high-end residential properties and the tourism sections. An 18-year veteran of Gulf real estate, he has previously been involved in several of the more dramatic property developments in the region, among them Saadiyat Island in Abu Dhabi, the Palm Jumeirah, and Qatar’s Pearl Development.
One of the first things he highlights about Oman is its unique character relative to the rest of the region. "It’s different," he says. "The natural beauty: we have mountains here. It has an untapped tourist market that is in its infancy while some others have dramatically increased over the last few years."
It’s true that Oman has a lot going for it in terms of landscape. Residents of the Middle East refer to it and Jordan as the two most beautiful countries in the region, and one doesn’t have to drive far from Muscat to be in the middle of the beautiful Al Hajar mountains, which have no equivalent anywhere else in the Middle East.
"Oman has a lot to offer," Russell says. "It’s at the beginning of its cycle and the government is taking some measured approaches to development, not the free-for-all I see in other places."
It’s also friendly to foreign involvement, although when asked about recent changes to freehold rights for foreigners, Russell says Oman has actually long been a leader in this regard. "The job of getting the message out can certainly be improved, but Oman has been way ahead of its neighbours as far as getting the legislation in place for real estate development," he says. "It’s extremely transparent, its freehold laws and inheritance laws are very straightforward. In fact for inheritance, you essentially adopt the laws of your own country, which is pretty amazing."
Although Russell’s mandate on phase one will be on the tourism side – a national priority given the paucity of hotel accommodation in Oman – he is quick to highlight Blue City’s broader aspirations. "It also brings in other opportunities in healthcare, trade, commerce... it’s destined to be the commercial capital." He hopes it will have a strong educational element too. "A very significant proportion of the population in this country is below the age of 20. An educated population is a very valuable resource for the country. They are now exported to other Gulf states, but they could be brought back to improve their home country. So clearly the development has big educational components: for example universities, vocational schools."
It will start with the tourism side. Russell says the first phase is on track for completion by December 2012. It is under construction now, but in what Russell calls the horizontal work – the infrastructure – with the vertical work to start in early 2009. And for the other phases? "We are looking at that right now. You can’t build one piece of a puzzle without knowing what the overall puzzle is."
Blue City is owned by Al Sawadi Investment and Tourism Company (ASIT), which is described in official literature as having the endorsement of the Government of Oman. The developers are keen to present it as a government-supported project rather than a government project, and in fact, ASIT’s ownership is complicated and disputed: it is owned by a group called Ocean Developments, which is 30% owned by an Omani company called Cyclone, whose shareholders are understood to include a member of Oman’s royal family. But Cyclone is in dispute with a Bahrain-based company, AAJ Holdings, about who owns the rest; the dispute is now in court. A ruling in March said AAJ held the remaining 70%, but this decision is believed to be under appeal. AAJ itself has said publicly it feels as if it has been pushed out of the project by the minority shareholder, Cyclone, a private company, about which little is known.
Separately, there is a design and construction company called AECO Development, a joint venture between Turkey’s ENKA Construction and Industry and Greece’s Elliniki Technodomiki TEB, while other involved groups include the ubiquitous Foster + Partners as master planner and architectural consultant, and WS Atkins as environmental consultants.
Even with state backing (such as it is), a project of this scale has required external funding, and here things have occasionally got a bit more complicated. A $925 million bond was raised in November 2006 through Bear Stearns to help financing of the first phase. Bear Stearns did not survive to see so much as a villa get built but that bank’s collapse has not really been an issue for Blue City because the funding had all been raised well before it was absorbed by JPMorgan.
What was an issue, though, was when Fitch Ratings put $526 million of the debt on ratings watch negative in July after it fell behind revenue targets. Fitch said at the time: "If sales performance does not improve significantly over the coming months and quarters, the borrower may eventually struggle to continue funding the construction costs of the project."
This, in turn, was a function of a redesign of the masterplan, which delayed everything else – including construction and, consequently, sales. "There was a business decision taken with the consent of the trustees to redo the masterplan," Russell explains, saying the old one was quite inefficient. In his telling, the issue with the debt is that its documentation became inconsistent with actual sales because of the time taken to revamp the masterplan, and that that’s the only problem.
"That delayed the process to start sales by about nine months," says Russell. "So unfortunately the sales test data in the actual documentation were never changed to follow suit. That’s what we’re working with Fitch on now, trying to align every page. The actual sales criteria have not changed but there was a disconnect."
Russell’s own appointment in June, with former chief executive professor Fari Akhlaghi stepping to the sidelines as adviser to the board of directors, was designed to put the project back on track after the delays; the issues with Fitch and the debt would have been pretty much the first things in his in-tray. He inherited a target of $101 million of home sales revenue by August 7, with an actual figure of just $31 million sold. But, asked if the revenue and debt issues are resolvable, he says: "Yes, definitely". He is also sure everything can be delivered on time in 2012.
Alongside all of these local complications there is the impact of the credit crunch to contend with. "We have actually seen an increase in our sales," Russell says. "Oman has a measured approach to growth and development so there wasn’t this huge explosion you’ve seen in the rest of the region. On our side, the construction finance is already in place with the bond issue. And the decline in material costs is to our favour: cement and steel are down 50%."
He says buyers have been a mixed bag, including Omanis, Europeans and regional people. And he argues that overpricing elsewhere in the region is helping his development. "Pricing is so much lower than in our neighbours," he says. "We saw it even before the bubble, people moving across the border, people preferring to live in Muscat and work in the UAE on weekdays."
Russell inherited a big job at Blue City, both in terms of the size of the city-in-the-making and the financial and ownership complexities around him. He doesn’t seem alarmed. "We have a diamond in the rough to work with," he says. "It’s pretty darned exciting."