As one Evergrande falls, another rises in the Saudi desert

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Everything about Neom – the futuristic city developed near the shores of the Red Sea by Saudi Crown Prince Mohammed bin Salman – sounds fantastic.

From flying elevators to 100-mile-long skyscrapers to a carbon-free floating port, it seems to owe more to Coruscant and Wakanda than any urban form outside of sci-fi.

Even Neom’s finances are superlative. The first phase of the project until 2030 will cost 1.2 trillion riyals ($320 billion), half of which will be provided by the Public Investment Fund, Saudi Arabia’s sovereign wealth fund, Crown Prince Mohammed said bin Salman to reporters in Jeddah this week. By 2030, he expects around 1.5 million people to live in the twin horizontal skyscrapers, called The Line.

Believe it or not, these numbers are not as implausible as they seem. Take China Evergrande Group, the vast Chinese developer that became mired in vague restructuring plans after ratings agencies called it defaulter last year. Neom’s promise of eventually becoming home to 10 million people seems, if anything, modest next to Evergrande’s boast that it’s home to 12 million. Evergrande’s investment fund outflow, net of divestments, has been 605 billion yuan ($89 billion) since 2010, or about 28% of Neom’s budget. Given that China’s income levels and construction costs have been around 40% of Saudi Arabia’s over the past decade, this suggests a rather generous budget, but far from insane.

Of course, if you had to pick a role model for Saudi Arabia’s future, it probably wouldn’t be a struggling developer of a Chinese real estate sector that S&P Global Ratings says could be headed as a whole for the future. insolvency.

Yet the biggest problem with Neom is not so much its cost and its scale. Instead, it’s how the grandiosity of the will to power is baked into its very DNA, as Vivian Nereim explored in a recent Bloomberg BusinessWeek article.

Despite all of Evergrande’s troubles, he was always a fairly efficient user of capital. One of the reasons he has been hit by mortgage strikes recently is because he was dependent on pre-sales, in effect getting interest-free loans from his clients for the full value of properties before they were built – which becomes a problem when construction works are taking place. on an extended break. The fastest developers in China could complete a project in 12 months, from concept to return of money. At least in its early years, Evergrande’s numbers suggested it was consistently earning more than its cost of capital.

The foundations of its business model were essentially solid. Some 200 million people have moved into Chinese cities over the past decade, while nominal gross domestic product per capita has doubled. It’s a fascinating story of organic urban growth. Indeed, much of Evergrande’s downfall can be attributed to the way she attempted to counter organic tendencies for political reasons. Beijing wants to see rural migrants move to smaller, so-called “Tier 3” cities in preference to its crowded and bustling east coast metropolises. Evergrande’s land reserve became increasingly concentrated in these lesser quality locations. This attempt to reverse the gravitational pull of the country’s centers of economic power was always likely to end in tears.

If a real estate developer focused on China’s Tier 3 cities can turn into a disaster, how do you assess the prospects of a brand new city in a desert far removed from both the oil fields and the unique pilgrimage destinations of Mecca and Medina? ? Neom’s vision of a carbon-free life for the 21st century is alluring – but if realized, the economic prospects for the nation that uses billions of oil dollars to build it are truly bleak. A world in which Neom’s innovations in urban living are a world in which Saudi Arabia’s main exports are superfluous. While Neom is intended more as a rebranding exercise for a country determined to sell every last drop of its rough, there are much cheaper ways to recalibrate your public image.

The lesson Saudi Arabia should take from Evergrande is that infrastructure and real estate development works best when they follow people, rather than trying to lead them. The kingdom will benefit much more from the monotonous metro networks being built in Riyadh, Mecca, Medina and Jeddah, and its long-delayed cross-border rail corridor, than from another aborted construction project on the shores of the Red Sea to join its predecessor. , the economic city of King Abdullah. Likewise, the effective realization of its plans to exploit its vast and barely used solar and wind resources would provide cheaper energy locally while freeing up oil for export.

Mohammed bin Salman has his work cut out to fix his country’s sprawling, congested cities for a population of some 36 million that is set to grow by a third by 2050. That task is difficult enough amid the signs that oil demand could decline, even as Saudi Arabia’s supply potential appears to be plateauing. It would be a much better use of the kingdom’s cash than a vast madness in the desert. Despite all of Evergrande’s mistakes, he never tried to build his castles in the air.

More from Bloomberg Opinion:

• Saudi Arabia reveals that oil production is near its ceiling: Javier Blas

• Saudi megaproject is big on hubris and impractical: Bobby Ghosh

• How Saudi Arabia can thrive in a post-oil world: David Fickling

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering energy and commodities. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times.

More stories like this are available at bloomberg.com/opinion

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