Charting the philosophy guiding the Red Sea development in Saudi with CEO John Pagano

Sustainability will not undo the damage of the past, so regeneration is a fundamental aspect in developing Saudi Arabia’s Red Sea project, the CEO of Red Sea Global (RSG) John Pagano told Al Arabiya English.

Speaking on the sidelines of the Future Investment Initiative (FII) in Riyadh, Pagano said: “We’re the custodians of a very precious environment. And our goal and obligation are to ensure we don’t mess it up.”

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The development is slated to have 8,000 rooms across 50 hotels and 1,000 residential properties. It comprises more than 90 islands across a 28,000 square kilometer area, of which 22 islands will be developed for travelers.

Pagano said he had to forgo commercial success in the interest of protecting an important habitat for critically endangered turtles. The coastal region is home to green and hawksbill turtles, which are being tracked and habitats conserved.

“We found a beautiful island that was perfect for a resort destination. However, we discovered during our intensive baseline surveys that it was a favored nesting ground for the critically endangered hawksbill sea turtle,” Pagano said.

“I had to choose to forgo commercial success in the interest of protecting a critical habitat for a critically endangered species. So, we didn’t develop that island and reminded ourselves that the turtle was there first.”

Nine islands have been designated as special conservation zones.

To ensure that the site is protected and regenerative, Pagano said they had to establish an ecological ceiling – the limits of a safe operating space in which people can co-exist with the Earth’s ecosystem.

‘No lasting adverse effects’

A marine spatial planning simulation helped set the ceiling, bolstered by technology, Internet of Things (IoT) , machine learning, and artificial intelligence to monitor the environmental conditions in real-time, Pagano said.

The development has also deployed buoys with sensors to measure the clarity and quality of the water during the construction phase. “If we get a spike in any of those metrics beyond where we want to be, we stop construction and figure out what’s causing that disturbance. We want to ensure we don’t create any lasting [adverse] effects,” Pagano said.

These efforts to conserve the natural surroundings extended to logistics in and around the development. From setting up the largest off-grid electric vehicle charging network and planting 50 million mangroves by 2030 to the world’s first zero-carbon 5G network, the development will also be fully powered by renewable energy.

RSG has targets of increasing the net conservation value to 30 percent.

“We’ve mapped out and surveyed the entire ecosystem. We publish those reports, and we measure our success or otherwise against those reports on a fully transparent basis. We want to be clear that here’s where we started: How am I doing towards my 30 percent increase.”

Additionally, the Saudi wealth fund PIF-owned RSG controls the entire Red Sea and Amaala development, which Pagano said would help plan projects strategically.

“We’re going to limit development and to stay within our ecological ceiling. We’re not going to cannibalize ourselves,” he added.

The claimed year-round destination is expecting strong regional and domestic demand, in addition to travelers from Western Europe, Africa and Asia. Pagano said 80 percent of the world’s population is within eight hours of the coastal area, with 250 million just a three-hour journey away.

While island resort destinations are not new to the industry, Pagano argues that cooler weather compared to regional competitors, a lack of seasonal restrictions in accessing places such as Maldives and Bora Bora, and the availability of a variety of experiences and landscapes in Saudi Arabia, such as AlUla, Abha, and Taif, will set the new development apart.

A significant milestone for Vision 2030

Most major hospitality brands like IHG and Marriott International are establishing an on-site presence. Pagano said RSG is selective with the service provider, adding that “every major hospitality brand, every hotel brand that I can think of, wants to be here.”

“They want to be here because this is the biggest growth market in tourism in the world,” he added.

On October 24, RSG signed an agreement with Kingdom Holding Co., which has hospitality chains Four Seasons and Accor under its portfolio, to develop a resort on a private island under a 50-50 partnership.

“They’re strong domestically, as well as globally,” Pagano said on the latest agreement, adding that the investor aligns with RSG primarily on protecting and enhancing the natural environment.

Opening the development to tourists, with Six Senses Southern Dunes ready for stay and The St. Regis Red Sea Resort opening in Q1 2024, would mark a significant milestone as one of many giga-projects coming to life as part of Saudi’s Vision 2030 goals. The Ritz-Carlton Reserve on Ummahat islands is also scheduled to open in the first quarter of next year.

These luxury resorts will be accessible by the recently opened Red Sea International Airport (RSI), serviced currently by the country’s flag carrier, Saudia. A twice-weekly service currently connects Riyadh, the capital, and RSI.

The airport will also begin flights to and from Jeddah soon, rounding up five domestic services a week at the new airfield, Pagano said.

As RSG works to open the remaining 13 resorts of phase one throughout 2024 and 2025, he added that a Dubai-bound service to and from RSI is expected in November 2023, though he did not name the carrier.

For international travelers, the RSG chief plans a hub-and-spoke model. “Realistically, for the long haul, it won’t happen until we open up more of the destination because the three resorts make up just 250 rooms. So, that’s not enough inventory and enough passengers to justify long-haul flights at this stage,” Pagano clarified.

‘Mix of equity and debt’

In May 2023, Pagano told Bloomberg that the company was considering raising funds from the market through an initial public offering (IPO) or a real estate investment trust fund (REIT) by 2026.

As of October 2023, Pagano told Al Arabiya English that internal discussion continues around “different vehicles” apart from an IPO and that the latter is not “imminent.”

“IPO is not necessarily the best solution for a property company,” the RSG chief said, adding that if the company goes to market now, when it is still in the development stage, they would have to launch at a discount, “leaving a lot of value on the table.”

“We don’t need capital at this stage. We’re fully funded. Our capital structure is in place. PIF provides us with equity. We raised a SAR14.1 billion ($3.7 billion) denominated loan debt facility for the first phase of construction of Red Sea,” Pagano said, the first ever and largest Saudi-denominated green loan facility accredited by HSBC.

“We will be coming to market consistent with the approach to financing and developing real estate – a mix of equity and debt. We will be coming to the markets early next year for debt facility for Amaala,” he added.

“If you think about the last five or six years,” including the COVID-19 pandemic in 2020 and the ever-fluctuating oil prices owing mainly to geopolitical concerns, “we’ve not been deflected from our course. We’ve never slowed down, we’ve never taken a pause. It’s been full steam ahead. So, the commitment is clear. We’re now opening the destination,” Pagano said.

“When we started, GDP contribution from tourism was around 3.4 percent. Today, it’s already seven [percent] and we have only just begun. The global average is 10 and I think we’ll exceed that,” he concluded.

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