Real Estate and Construction Law investing in Saudi Arabia

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1 Real Estate and Construction Law Update: Guidelines for foreigners investing in Saudi Arabia Henry Cort Partner, Saudi Projects and Project Finance Trowers & Hamlins LLP 13 May 2009

2 Introduction Investment legal framework Commercial and companies laws Real estate investment laws law No. 73 Structures return of the EPCC, use of PPP Environmental awareness

3 Investment Legal Framework The principal source of law in Saudi Arabia is Islamic law (Shari ah). Saudi law will permit in most cases incorporation of international standards and principles in arrangements where there is public sector participation. This is of course against a background of Shari ah principles, p which are paramount and which are applied with discretion by the courts. Secular authorities can supplement Shari ah and Saudi Government regularly issues regulations and decrees within framework of the Basic Law. Basic Law of Saudi Arabia of 1992 sets the framework for Government, and provides for powers and authorities of the executive, administrative and judicial authorities of Saudi under the Kings ultimate authority.

4 Investment Legal Framework (2) In 2000 the Saudi Arabian General Investment Authority (SAGIA) was formed. SAGIA s aim is to create a pro-business environment, exchange best practice ideas between public and private sectors, and act as intermediary and one stop shop between foreign investors and the Government. All foreign investments in real estate (as an investor) must be licensed by SAGIA there are clear procedures for licensing. Consortia or JVs with non-gcc shareholders will require a SAGIA License. SAGIA now responds within 30 days, more commonly 14 days.

5 Investment Legal Framework (3) Foreign investors licensed by SAGIA are subject to Saudi taxation laws in respect of their investment. In 2000 the Foreign Investment Law (FIL) was passed to regulate foreign investment. The FIL permits foreign investment in all sectors of economy except those on the negative list e.g. oil exploration drilling and production, real estate brokerage, real estate investment in Makkah and Medina. The FIL grants foreign investors the ability to retain 100% ownership of many types of projects. The FIL entitles foreign investors in many sectors to apply for low interest The FIL entitles foreign investors in many sectors to apply for low interest loans from the Saudi Industrial Development Fund (SIDF). SAGIA and the FIL are intended to stimulate foreign investment to Saudi Arabia.

6 Investment Legal Framework (4) In practice, the Ministry of Commerce and Industry views real estate management as closely aligned with real estate brokerage, and as such assumes that real estate management companies must be 100% Saudi owned. There remains some uncertainty t as to whether a GCC company may currently act in the Kingdom as a real estate brokerage. Additional considerations apply to hotels. In particular, note the need for each of the hotel owner and the hotel operator to hold a separate license from the Saudi Commission for Tourism & Antiquities.

7 Commercial and companies laws The Commercial Companies Law (CCL) sets a basic framework for regulation of commercial activities. There exists an extensive body of Saudi regulations, which address specific areas such as company formation, foreign investment, capital markets, arbitration, commercial registration, companies laws, agency & distribution, labour, environmental, and tax. The CCL sets the regulatory framework for formation and governance of business entities, main ones being Limited Liability Companies (LLCs) and Joint Stock Companies (JSCs). LLCs need between two and 50 shareholders. Some concern about shareholder liability in insolvency. Mandatory pre-emption issues on share transfers. JSCs require a minimum of five shareholders, no maximum, shareholders liability for debts of company generally limited in proportion to their shareholding, restriction on transfer of shares for first two years. Ability to issue bonds and ability to issue preference shares and partly-paid paid shares.

8 Real estate investment laws The Law regulating the Non-Saudi Ownership of Investments and Real Estate entitles holders of SAGIA Licences to own the property necessary for their licensed businesses / investment projects. In theory the requirements of such law do not apply to GCC investors (practical registration issues of GCC owned interests in land can arise). If an investment project is related to a property development, the total cost of the non- Saudi owned investment project must be at least SAR 30m and the investment must be made within five years of the purchase of the land. The 20 April 2009 decision of the Council of Ministers (Decision) will limit the scope of the Negative List on GCC investors. The Decision i is not yet published but is envisaged from press reports to allow GCC investors to engage in the following further real estate business: Invest in real estate investments located in Makkah and Madinah. Real estate brokerage

9 Real estate investment laws (2) GCC individual persons may own a piece of land of up to 3,000 square meters for the purpose of a family residence for such person. The Real Estate Development Guarantee Law (No. 73, and guidelines): Developers will be required to be registered and licensed by the relevant authority (the Saudi Real Estate Development Committee). This will affect all real estate developments. Each developer must open a Guarantee Account for each development into which off-plan purchaser instalments and any development debt financing must be paid. An additional registration is needed for each development. Registration of sold units. Points of uncertainty: fees (6%?), release of profit, extent of control over marketing. Further law on Guarantee Account payments due at the end of 2009 (details not yet public).

10 Real estate investment laws (4) A real estate mortgage law has been is expected to be introduced very shortly. The new mortgage law is expected to increase private ownership of property in the Kingdom by allowing registerable mortgages without the need for notarisation of the mortgage deed by a local notary. There also exists a Real Estate Development Fund aimed at assisting Saudi nationals win purchasing real estate, aimed at lower income Saudis.

11 Rules and regulations Overview The Kingdom its developing and clarifying its rules and regulations regarding foreign investment to attract foreign investors in relation to infrastructure projects. The Kingdom has suffered much less than many developed states as a result of the credit crunch, in part due to the Government s USD 162 billion budget and continued emphasis on infrastructure development. A high domestic demand for infrastructure, particularly housing, in part due to the young and quickly growing population, provides reassurance in the long term as to the uptake and/or usage of infrastructure projects.

12 Structures Common project structures used in KSA: Project financed tendered projects, i.e. Water and Electricity Company (WEC) tendered Independent water and power projects (IWPPs), using either formally established or information joint ventures between Saudi and non-saudi companies EPC Contracts Standard form contracts e.g. FIDIC Medium term O&M (eg water concessions) Other available structures: PPP

13 Structures (2) Some government projects have recently moved away from project financed structures u towards internally funded EPC structures u i.e. Ras Azzour IWPP. EPC Contractors have had difficulties pricing lump sum turn key contracts due to volatility in the price of materials. This is less of a problem now. The lack of pricing certainty (in particular for long term debt), the delay in obtaining information from the tenderers and the increasing frequency of delays in construction projects supports a rethink of the structures used for infrastructure projects. Newer contracting ti structures, t such as partnering and alliance contracting, ti provide an alternative structure that can mitigate the problems from which recent projects have been suffering.

14 Environmental awareness Global green building standards The Leadership in Energy and Environmental Design (LEED) Green Building Rating System, developed in 1998, is popular in the Kingdom. SAGIA has stated that it aims to position the Economic Cities as global environmental leaders by using LEED to minimize negative environmental impacts and promote energy efficiency and sustainable development. The Economic Cities have an estimated combined project cost of almost US$70 billion. King Abdullah International Airport in Jeddah is a LEED development. BRE Environmental Assessment Method (BREEAM) was established in 1990 as a tool to measure the sustainability of new non-domestic buildings in the UK. BRE have launched a version of BREEAM for the Gulf (BREEAM Gulf) at the end of 2008/beginning of 2009, specifically designed for use in the Kingdom (and elsewhere in the Gulf).

15 Environmental awareness (2) Strong KSA environmental regime. General Environmental Regulations (Regulations) g in 2001, detailed implementation regulations in Implementation by the Presidency of Meteorology and the Environment (PME). Use of Environmental Impact Studies. The Regulations require contingency plans for environmental input. The Regulations impose design and operational litigations.

16 Environmental awareness (3) We have seen the Equator Principles, along with the World Bank Environmental Standards, adopted in loan documents used for infrastructure projects in the Kingdom. Domestic and international lenders drive the use of international standards such as the Equator principles and World Bank Environmental Standards.

17 thank you

18 Contact details Henry J Cort Partner Trowers & Hamlins PO Box BurJuman Business Tower Dubai t f hcort@trowers.com