SUMMARY OF RISK FACTORS
D- Risks Related to the Offer Shares
4. THE COMPANY
4.8 Overview of the Company’s Principal Activities
4.8.2 Business Model .1 Overview
The central elements of the Company’s business model are (i) the creation of integrated lifestyle master plan communities, with a focus on affordable and mid-market segments as well as luxury; (ii) partnering with governments and/or key local business partners; and (iii) the project development process and off-plan sales. The Company’s integrated lifestyle master plan communities combine residential and commercial units with retail, hospitality and leisure attractions. The Company’s residential units comprise apartments and villas servicing the mid and luxury markets in addition to villas targeting the affordable market range. The Company seeks to enter into partnerships or strategic alliances with local partners, who provide the Company with development rights to plots of desirable land at attractive prices. These partners are typically government entities (such as the MoMRAH and other private partners).
The following chart sets out key information in respect of the Company’s historical and current projects:
Project name Location Project
value (SAR
‘000,000) No. of units No. of
types Built-up
Area (SQM) Project start date
Project completion
date I. Completed projects
Retal square Al-Khobar 94 96 2 17,500 2013 2015
Ewan Al Nawras Dammam 114.6 78 4 37,200 2013 2015
Sakanat Al Nada Dammam 36.6 28 1 14,100 2013 2014
Sakanat Al Safa Dammam 52 56 3 16,400 2014 2015
Al Dawahi Dammam 167.5 133 3 60,519 2014 2016
Ewan Al Qayrawan Dammam 290 164 5 65,000 2014 2016
Retal Residence Al-Khobar 380 416 7 81,000 2015 2018
Block 144 Dammam 23.1 15 3 11,700 2015 2016
The Grand Dammam 50.5 126 8 37,500 2015 2017
AOU Dammam 22 N/A (7 Floors) 1 6,500 2016 2017
Project name Location Project value (SAR
‘000,000) No. of units No. of
types Built-up
Area (SQM) Project start date
Project completion
date
The Valley Al Ahsa 39.5
(approx.) 36 show
rooms N.A. 7,430 2016 2017
Ewan Al Maali Al-Khobar 174.6 76 3 41,765 2016 2018
Ewan Al Nahda Dammam 60.5 37 2 17,520 2017 2019
Nesaj Town 1 Dammam 370 674 4 20,2962 2018 2020
Retal Business Center Al-Khobar 23.5 N/A (7 floors) 1 5,392 2019 2020
II. Ongoing projects
Nesaj Town Al-Khobar Al-Khobar 196 170 5 56,687 2020 2022
Coya Al-Khobar 102 104 4 26,515 2022 2024
Nesaj Town 2 Dammam 1,034 1,653 3 506,982 2020 2022
Ayala Al-Nakheel Al-Khobar 184 59 3 36,315 2020 2022
Nesaj Town - Riyadh 1 Riyadh 457.6 690 5 233,968 2021 2022
Marasi Al-Khobar Dammam 360 200 3 80,304 2022 2024
Tharwa Town Dammam 688 411 2 158,294 2022 2024
III. Upcoming Projects
Retal Rise Al-Khobar 313.9 286 1 66,450 2021 2024
Retal Blue Al-Khobar 1,552.3 364 6 95,000 2022 2025
Ewan Sidra Riyadh 193.9 103 4 33,475 2021 2023
Nesaj Town 2 – AlNarjes Riyadh 371,8 455 3 147,875 2021 2023
Nesaj Town – Safwa Al-Qatif 443.8 371 2 136,234 2022 2025
Ayala Al-Malqa Riyadh 415.4 71 2 41,540 2021 2024
Nesaj Town Al-Ahsa Al-Ahsa 1,056.2 969 3 340,000 2022 2024
Retal Business Center Riyadh 619.4 78 13 81,244 2022 2023
The Place Al-Ahsa 63.4 15 2 2022 2023
Source: the Company
4.8.2.2 Project Development Model and Construction
In recent years, the Company has transitioned from an ‘on plan’ to ‘off-plan’ project development model. Under the Company’s ‘off plan’ model, sales are agreed before construction which enables the Company to mitigate market risk and significantly improve profitability. In particular, the purchase funds from the Company’s customers are held in escrow and withdrawals made on the basis of a percentage of the project completed (as certified appropriately).
All new design and construction projects undertaken by the Company follow a rigorous standard development process. The process is designed to ensure consistent oversight so that all development projects are executed in line with the Company’s overall strategy and represent economically sound investments.
The Company’s project development process is comprised of five stages, which are followed for the development of all new residential and commercial projects. Each of the five stages of the development process are subject to formal governance measures to ensure that appropriate internal approvals are obtained before the next stage is undertaken.
The average total delivery time for a project under this process is between 2 and 3 years.
The expertise of the Company’s business and project development functions is employed at each step of the Company’s five-stage process set out below.
4.8.2.2.1 Stage 1: Project Selection and Assessment
Potential projects are identified by the Business Development Department and these are generally sourced from; (i) land acquired and owned by the Company; (ii) development opportunities with the MoMRAH; and/or (iii) development opportunities with third parties. Development opportunities with the MoMRAH are presented via tenders in which the Company competes with other developers to be selected as the project developer.
Once a potential project has been identified (including through invitations to tender from the MoMRAH) an internal preliminary assessment is carried out by the Business Development Department to determine whether the project is feasible. A project is generally considered feasible if it meets the following criteria:
■ expected return on investment exceeds acceptable levels;
■ location and scale of project is suitable to attract target customer demographic;
■ valid legal title to the land is held, either by the Company or the project owner;
■ appropriate development related permits and approvals can be obtained; and
■ the project will enhance the surrounding community.
To determine whether the above criteria are met, the preliminary assessment involves due diligence which addresses legal matters concerning the land and zoning and certain financial considerations such as indicative construction and development costs. A high level market analysis is also carried out which focuses on the current and projected population demographics, current and potential competing developments, surrounding infrastructure and any environmental or community factors which may impact the development site. The assessment is also supplemented by market intelligence from the Company’s Sales and Marketing Department, which provides valuable insight into current trends in customer demand for different types of residential units, features and layouts.
The preliminary assessment culminates in the development of a project design brief and a business plan. The business plan focuses on assessing the new development opportunity and presents a development brief which takes into account market research to scope out competitors, technical and legal due diligence, a KPI study as well as a risk analysis in relation to the business and land itself.
The project design brief and business plan are then presented to the Board for review and approval. If Board approval is received, then the Company is mandated to proceed to Stage 2 where a detailed feasibility study and project design brief are completed. In the case of a tender opportunity with the MoMRAH, the Company proceeds with the tender and submits the project design brief and business plan as part of its tender proposal.
4.8.2.2.2 Stage 2: Project Creation and Planning
During the second stage following project selection and assessment, detailed feasibility and market studies are prepared to assist in defining the project’s concept and parameters.
The aim of the more detailed feasibility study at Stage 2 is to determine the concept of the project and key success criteria. The project proposal is defined and the feasibility study is developed into a business and financial plan with more detailed criteria. These criteria include technical, legal and financial due diligence, a master development schedule and a marketing and sales strategy which defines the target market and the project’s concept. The criteria are developed and analyzed together with benchmarking and sensitivities. This creates a clear understanding of the financial, resourcing and risk implications of the proposed project.
The purpose of the market study at this stage is to assess potential demand for the development whilst taking into account the supply of comparable residential property and the impact of competitors in the market. The market study is used to formulate the price of the residential units based on a very detailed study of supply, demand and market prices. Typically the detailed feasibility study and market study are conducted by third party consultants who are instructed by the Company’s Business Development Department.
During this phase, the Company also conducts project partner due diligence following which it short-lists the consultants that the Company will engage for the design, marketing and sales associated with the project. A ‘request for design’ is then sent to short-listed design consultants following which a design consultant is selected and engaged.
The Business Development Department then works with the design consultant to develop high-level sketch options in accordance with the approved concept which are then further developed into detailed concept designs. The Company also appoints a Supervising Consultant who is responsible for submitting monthly progress reports to WAFI to verify when the construction milestones set by the Company’s Off-Plan Sales License has been achieved.
At the conclusion of the second phase, the results of the feasibility study and market studies together with the design concept are combined into the business plan which is approved by the Board. Based on this approval, the Company is mandated to complete final designs and launch its marketing campaign for off-plan sales.
4.8.2.2.3 Stage 3: Detailed Design, Marketing and Sales
The third stage begins with the Development Department assigning a Development Manager to oversee the design aspects of the project. The Design Team shortlists a third party design consultant and then the Design Committee and Supply Chain Department decide to which design consultant to award the project. The third party design consultant prepares detailed construction and interior designs which are submitted to the Design Committee for approval. The Development Manager then distributes the design package to the Sales and Marketing and Supply Chain Departments. The detailed designs enable the Sales and Marketing Department to develop floor plans, interior fit-out options and 3-D renders, which enable customers to visualise the units.
Following completion of the detailed design, the Supply Chain Department prepares a design package which details the scope of work to be carried out to execute the project. It also includes details of the budget estimates for the proposed project. The business plan for the project is then updated to include the design package and detailed designs and is submitted to the Design Committee for approval.
In parallel with the detailed design process, a marketing and sales plan for the project is developed which is tailored to the relevant target market. The marketing and sales plan generally includes the launch plan and a marketing strategy informed by key insights from the Sales and Marketing and Development Departments. Guidance on pricing is given by the Committee for Marketing and Sales based on certain assumptions, which include the achievement of project KPIs and targeted net profit margins. The Company also uses the market research conducted during stage 2 of the Project Development Model to scope prices set by competitors and checks market prices in other locations to see if the Company’s proposed price for units is in line with current market standards. Marketing plans include a mix of communication channels, with a strategic focus on digital and social media and other web-based platforms.
Following the completion of the detailed plans, the Company applies to the relevant Municipality to obtain the Building Permit which is required to authorize the construction of the project in accordance with the architectural plans submitted to the Municipality. Generally, Building Permits are required in respect of each unit which is constructed on its own land title. However, given that the individual titles for units cannot be issued until construction of the unit is complete, the Company applies to the MoMRAH for an exemption which enables the Municipality to issue a Building Permit based on the single land title for the whole development. The Building Permit is generally obtained within 3 to 4 weeks from the point at which the Municipality has received all documents required for the purposes of the application.
Following the issue of the Building Permit, the Company applies for the ‘Off-Plan Sales License’ for the project from WAFI which enables the Company to launch sales before construction of the units commences. To obtain the ‘Off Plan Sales License’, the Company must submit a building license, title deeds, design packages, the sales price of the units, the Supervising Consultant contract, the public accountant auditor contract, an escrow account and the Company’s legal documents.
Once the Building Permit is obtained, the Company launches its marketing strategy. The Company’s marketing strategy combines impact campaigns, including engaging launch events, insight driven online and social media marketing and a best-in-class sales experience. In addition to the communication initiatives supporting the Company’s advertising, branding and promotional events for the Company’s projects, the Company also has display model units to give customers a sense of how the project will look and feel.
Based on the recent success of off-plan sales for Nesaj Town Riyadh where 100%. of units were sold within 4 days of launch, the Company currently sets relatively short time frames for its marketing campaign and completion of off- plan sales. Please see Section 4.8.5 (“Customers and Terms of Sales”) for a discussion on the terms of sales applicable to customers.
On the launch date, prospective customers are served either on a first-come-first-served basis or based on pre- registration. The Company has a highly effective sales force, consisting of a team of 17 sales professionals as of 30 September 2021G, which helps to convert leads into sales.
4.8.2.2.4 Stage 4: Construction and Development
Once the Company has achieved off-plan sales for the targeted proportion of the project, the construction and development phase immediately commences with tenders or invitations for potential contractors to submit proposals for each phase of development and construction of the project.
Potential contractors are chosen based on their track record, their ability to complete the project and their relevant experience. Submitted bids are evaluated, with particular attention paid to the skill set and expertise (e.g., in design, cost consulting or construction) that the Company requires for the proposed project and the pricing proposal. A tender report detailing the results of the process is prepared and submitted by the Development Department to the Supply Chain Department who shortlists contractors based on the nature and size of the project and experiences with the contractor in the past. The Supply Chain Department evaluates the tenders and approves the award of contracts.
Once approval is received, the contract is awarded to the relevant contractor. Depending on the scale of the project more than one contractor maybe appointed. These are often appointed as sub-contractors by BCC, in cases where BCC has been appointed as the main contractor which is typically the case for projects owned by the MoMRAH.
The Supply Chain Department is responsible for ensuring that consistency, transparency and integrity of the tender processes and procedures are maintained even when dealing with the Company’s subsidiaries. Strict guidelines are followed and all tendering parties must first sign a non-disclosure agreement prior to receiving project information and tender documents. Tenders are closely controlled and all participating parties are afforded the same opportunity to provide compliant bids. All necessary management approvals are sought where relevant during the tender process.
The Company believes that it is able to attract quality contractors at competitive prices since the Company has become a partner of choice thanks to its growing portfolio of completed and ongoing, large-scale projects.
The terms of the construction contracts require that construction is undertaken by the contractor in accordance with the detailed designs which have been approved in Stage 3. The costs, time and associated construction risks are closely monitored throughout this phase by the Project Manager alongside the Company’s in-house Business Development Department with a view to achieving handover on time and within scope and budget. The Project Manager is responsible for managing the construction and third party consultancy services procured in relation to the construction, as well as all other works relating to a project, and may accept or reject such works accordingly. Any adverse construction or project results such as a cost overruns are referred to the Board.
During the period of construction the Company provides construction progress updates to the relevant Municipality.
Upon completion of construction of 70% of units, the Municipality conducts an inspection of the project and “as built plans” to verify that the project has been constructed in accordance with the building plans, which were approved at the time the Building Permit was issued. Following the inspection, the Municipality issues the Building Completion Certificate which is required for all except residential projects.
Once the Building Completion Certificate has been issued, the Company’s Government Relations Consultant liaises with the Municipality in relation to the sorting of the title deeds and, following approvals from relevant departments, the Municipality provides segregated title deeds to its sales and legal department for review. The Government Relations Consultant then applies for connection of the water and electricity meters by providing relevant documentation including identification documents relating to the customer. Subject to authorization from the legal department of the Municipality, the legal title to the unit is transferred to the owner.
The Customer Care Department then prepares the handover guidelines for customers and documents to be provided at handover. The Company typically provides customers with a 10-year structure warranty and offers one year of maintenance services for their residential units. The Company also typically provides warranties from 1 to 10 years over items such as electrical equipment, heaters and water tanks depending on the relevant item’s supplier.
4.8.2.2.5 Stage 5: Handover and Exit
During Stage 5, the Project Management Department is responsible for commissioning the project to ensure that the handover guidelines are followed and the unit is delivered to the client. This process includes an inspection by the Development Department, represented by the client representative engineers, which is undertaken to ensure that construction and interior fit-out works meet the Company’s quality standards and match the preferences chosen by the customer.
The Project Manager coordinates with the consultant to prepare a log of handover requirements such as the necessary documentation, approvals and permits. The consultant then manages and coordinates the inspection, testing and commissioning by Company personnel, other consultants, contractors and statutory authorities. The consultant prepares and submits a Testing and Commissioning Plan for approval by the Company which the Company then circulates to relevant internal and external stakeholders on the project for review and comments. The consultant monitors the preparation, completion, recording and delivery of test reports and certificates, ensuring they are accurately recorded and closed out. The closing out of individual assets and overall projects cannot occur until all certifications have been issued under the contract and after the expiration of the defects liability period.
The Project Management Department ensures that a Handover Plan is prepared and updated accordingly for each infrastructure project. All contract specific requirements with regards to completion, handover, inspection and certification must be reviewed by the Project Management Department and Development Department. The Project Management Department is responsible for approving all takeover certificates or other completion certificates before issuance. The Development and Customer Care Departments drive all handover procedures and works outside of customer contracts and the approval of both contractual and non-contractual works must be provided by the Project Management Department.
Post-contract works (such as end user fit out) are managed by the Project Management Department. A final list is agreed upon jointly by the inspection of Customer Care and Development Departments and the Project Management Department. The Development Department prepares a schedule of rules for the Customer Care Department to follow on site visits. This ensures that site visits are conducted at an agreed time to ensure safety. The Customer Care Department coordinates with the Development and Project Management Departments to ensure capturing of snags highlighted during the “Tenant/Purchaser Viewing”. Upon receipt of the snags and comments, the Development Department assesses and issues change orders to the Project Management Department if applicable. The key internal stakeholders are informed of the progress of the project close out through regular progress update reports and meetings as required. The Project Management Department liaises with relevant internal stakeholders including Facilities Management, Legal, Sales and Marketing and Finance Departments in order to ensure compliance with the Company’s handover requirements.
Typically, handover of units to customers commences ahead of completion of construction of the entire project such that customers move into specific zones within the project whilst construction is ongoing in other zones.
There may be a need for the Company to hire a facility management company, such as Tadbeir, to provide facility management services in certain projects such as residential compounds and office buildings.