Baccarat:Insight - As one Evergrande falls, another rises in the Saudi desert

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Cause of collapse: A woman leaves the China Evergrande Centre in Hong Kong. Much of Evergrande’s downfall can be attributed to the way that it tried to buck organic trends for political reasons. — AFP

EVERYTHING about Neom – the futuristic city being developed near the shores of the Red Sea by Saudi Crown Prince Mohammed bin Salman – seems fantastical.

From flying elevators to 100-mile long skyscrapers to a floating, zero-carbon port, it seems to owe more to Coruscant and Wakanda than to any urban forms outside of science fiction.

Even Neom’s financials are superlative. The first phase of the project until 2030 will cost 1.2 trillion riyals (US$320bil or RM1.4 trillion), with half of that amount provided by the Public Investment Fund, Saudi Arabia’s sovereign wealth fund, Crown Prince Mohammed bin Salman told reporters in Jeddah last week.

By 2030, he expects some 1.5 million people to be living in the twin horizontal skyscrapers, called The Line.

Believe it or not, those numbers aren’t as implausible as they seem.

Take China Evergrande Group, the vast Chinese developer that’s mired in vague restructuring plans after ratings companies labeled it a defaulter last year.

Neom’s promise to eventually become home to 10 million people seems, if anything, modest next to Evergrande’s boast that it’s housed 12 million.

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Evergrande’s investment cash outflow, net of divestments, has been 605 billion yuan (US$89bil or RM396.2bil) since 2010, about 28% of Neom’s budget.

Given China’s income levels and construction costs have been about 40% of Saudi Arabia’s over the past decade, that suggests a budget that’s on the generous side, but far from insane.

Neom’s vast-sounding construction budget isn’t so excessive when you consider it in relation to Evergrande.

Of course, if you were to choose a model for Saudi Arabia’s future it would probably not be a distressed developer from a Chinese property sector that S&P Global Ratings thinks may be headed as a whole toward insolvency.

Still, the biggest problem with Neom isn’t so much its cost and scale. Instead, it’s the way a will-to-power grandiosity is written into its very DNA, as Vivian Nereim explored in a recent Bloomberg BusinessWeek article.

For all Evergrande’s problems, it was always a pretty efficient user of capital. One reason it’s been hit with mortgage strikes of late is that it depended on pre-sales, in effect getting interest-free loans from its customers for the full value of properties before they’re built – something that becomes a problem when construction work goes into extended hiatus.

China’s fastest developers could turn round a project in 12 months from conception to return of cash. At least in its early years, Evergrande’s numbers suggested it was consistently returning more than its cost of capital.