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Sat 10 Aug 2013 11:58 AM

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Built to last

One year after paying off its $1bn sukuk, Saudi Arabia’s biggest listed developer is preparing to cash in on the kingdom’s housing boom. In an exclusive interview, Yousef Al Shelash, the founder and chairman of Dar Al Arkan, talks diversification, financing and how the firm can become the Gulf’s biggest developer in a decade’s time

Built to last

On the last afternoon before the holy month of Ramadan begins, Al Qasr Mall is a hive of activity. On all four floors of the cavernous shopping complex, families are rushing to complete their last-minute shopping, and retailers’ tills are ringing. Although the mall has been open for just over a year now, its official launch took place at the beginning of last month. The governor of Riyadh, Prince Khalid Bin Bandar, was on hand to cut the tape, underlining the importance of the mall to a fast-growing local community.

The key to Al Qasr Mall lies in its location, in southern Riyadh. Almost 85 percent of the city’s malls are based in the northern, developing part of town. But more than 70 percent of Riyadh’s population live in the southern, more mature, but less upmarket part of the city. With the Saudi capital growing at breakneck speed — the latest estimates put the population at well over 7 million, which is almost equivalent to the total population of the UAE — further development of Riyadh’s infrastructure is sorely needed.

It’s also vindication for the man behind the mall, Yousef Al Shelash. He is the chairman and founder of Dar Al Arkan, Saudi Arabia’s biggest real estate company, which has masterplanned the entire Al Qasr community, as well as a series of other developments throughout the kingdom.

When Al Qasr Mall opened to the public on 12 June last year, Dar Al Arkan was facing an unprecedented degree of scrutiny, as bourse observers queried whether the firm would be able to pay off its $1bn sukuk by mid-2012. Those doubts were quashed when the developer made the full payment, bang on time, in the middle of July last year.

“In June, we opened one of the biggest malls in Riyadh, and in July we repaid one of the region’s largest debts to the international debt market,” says Al Shelash. “There was a lot of pressure on this company, especially when you consider that a lot of high-value invoices had to be paid off before the mall opened, like the finishing of the mall, and final payments to contractors. So that shows our strength, the resilience of our business model and the ability to generate cash.”

Right now, the mall has around 85 percent occupancy, and features some of retail’s biggest brands. The Alshaya portfolio is there in force, with Mothercare, Debenhams and Victoria’s Secret all present. And Dubai’s Majid Al Futtaim Retail is also represented, via a large Carrefour hypermarket on the mall’s first floor.

“Carrefour has fourteen branches in Riyadh, but they are paying their highest rate in Al Qasr Mall,” says Al Shelash. “They paid this high rate because they see the feasibility and they see the crowds.”

The mall is also symptomatic of Dar Al Arkan’s five-year plan to diversify its revenue streams. The firm recently hired PwC to carry out a study assessing its structure and business processes. It began implementing the restructuring plan earlier this year, and the chairman says he hopes that this will be complete by the end of 2013.

The company has already said that by 2017, it is aiming to diversify its revenue mix by increasing its leasing portfolio and reducing its reliance on land sales. Building and leasing retail space is clearly part of that diversification plan.

“Yes, we are now looking to build other malls in Riyadh and Jeddah, but for any megaproject, we need to take a scientific approach, not trial and error,” he points out. “Some developers don’t know the difference between land use and market needs, and sometimes masterplans seem to be dreamt up by wishful thinking. We don’t do that, we take a scientific approach, and try to work out where the real demand is.”

Al Shelash says that the firm is hoping to build a new mall in the north of Riyadh, as well as in its Shams Al Riyadh development, a 2,694-unit megaproject based just outside the city’s northern suburbs. And in line with other regional developers’ moves into hospitality, the chairman also reveals that hotels are also likely to be a part of the company’s future.

“There is a plan to develop a hotel with a mall, much like the Kempinski at Dubai’s Mall of the Emirates, or at Dubai Mall,” he says. “The hospitality business in Riyadh is very attractive, especially for four-star hotels, and there is still plenty of demand. Furthermore, industry segments like health and education facilities are continuously reviewed by our property development team and should they proved to be feasible, we will certainly consider them for investment purposes.”

But it’s not just moves into other sectors that Dar Al Arkan is actively contemplating: the developer is also considering venturing outside its home base of Saudi Arabia as well. Al Shelash hints that two European deals could be in the pipeline, which he is hoping to confirm by the end of the year.

The main focus will, of course, remain at home. It’s now two years since King Abdullah announced that housing — particularly affordable housing — would be at the heart of his $130bn social spending programmes. Along with the passing of the long-awaited mortgage law, more and more Saudis are hoping to be able to afford a house of their own. According to National Commercial Bank (NCB), there are around 5.22 million housing units in Saudi Arabia, as of this year, with around 7.2 million needed by 2020 to keep up with the growing population. So with around 282,000 units per year needed in order to keep up with demand, the kingdom’s developers certainly have their work cut out for them.

What is making the issue even tougher is the fact that land plots within the kingdom’s major cities are increasingly hard to come by.

“The problem of high land prices hinder the attempts by private sector developers who find themselves largely unable to meet the price requirements of the mid to low-end sectors of society who wish to buy a property,” property consultancy CBRE said in a report on the Saudi market in March.

“High net worth Saudis continue to favour land as a long-term investment vehicle, vastly inflating residential land prices and consequently excluding low-cost housing from vast areas of the kingdom.”

The upshot of all of this is that barely a handful of new units have come onto the market since 2011. In April, King Abdullah disbursed $66.7bn to the Ministry of Housing to help build new homes, and also ordered the Ministry of Finance to approve loans for new infrastructure. In recent months, there have also been hints that the Ministry of Housing will work closer with the kingdom’s private players, in order to reach its targets.

“I think they need time, it’s a difficult job,” says Al Shelash. “I think they have a lot of pressure from the king and from the public, and they’ve recently changed their strategy. Housing is one of the main objectives for the country, alongside jobs. Why? Because housing means stability. They need to develop their strategy and they also need to develop their rules and regulations. Still, they are a new institution and it will take time.”

If Saudi Arabia is to meet its housing targets, then it seems certain that the country’s biggest private developer has a part to play. However, as yet, the Ministry of Housing has tended towards operating with state-backed firms.

“Yes, everybody would like to participate with this, but who has the capability, that is the question,” says Al Shelash. “Just to give you an example, for us as Dar Al Arkan, we can develop almost 50,000 residential units, and we can start now, today.

“And when I say today, I mean today. We have the land, we have the permits, we have the management expertise and we have the infrastructure.”

However, further challenges lie in wait even if Dar Al Arkan is asked to participate in Saudi Arabia’s new housing programme. Despite an increase in credit growth to the private sector, which rose by 16.5 percent year-on-year in May (the biggest rise since February 2009), construction financing is still not easy to come by.

“Most of the banks aren’t willing to finance the developers here in Saudi Arabia,” shrugs Al Shelash. “I think most of their lending, or most of their liquidity, is short term, so they cannot spend it on a long-term project like development. The banks have their concerns, especially after the international crisis, but things are slowly changing and we are leading the way to get construction financing in the country going again.”

In addition, stringent rules against offplan selling introduced by the government in 2009 are also hampering private developers’ plans.

“I think there is a real need to revise and improve offplan-sale-related legislation in order to contribute to the funding of megaprojects, as equilibrating supply and demand forces requires greater fund allocations to initiate megaprojects,” Al Shelash says.

But from a financial perspective, and in comparison to many developers, the company is still in good shape.

“We are in a great position,” says Al Shelash. “We paid the sukuk last year in July, and we waited for nine months to let the market absorb that achievement. When the time was right in May 2013, we issued our fifth sukuk with great success.

 “Now, one of our main objectives is growth, so here we are. We want to grow fast and to grab a bigger slice of the cake, and that’s why we are looking for the cash.”

That cash came in the form of $450m raised from the first tranche of Dar Al Arkan’s five-year sukuk programme, which was issued in May. That first tranche was more than 3.7 times oversubscribed, reflecting abundant investor interest in a company that has seen its stock price rise by thirteen percent in the year to date. Al Shelash says he is planning to issue the second ticket “which will be around the same number” in either the last quarter of this year, or the first quarter of 2014.

“That will give us twelve months to utilise the money,” he says. “You can’t utilise this amount of money immediately, you need some time, and it will also give us some flexibility for both utilising the  money and paying it back again after five years.”

In terms of bottom line results, Al Shelash is sanguine about 2013, given the firm’s continued diversification and the fact that the proceeds from the sukuk are yet to be invested. Dar Al Arkan reported a 69 percent drop in net profits in the second quarter to $27.7m, although that figure was distorted due to the fact the developer sold a 1.8 million sq m plot of land to SABIC for $198m in the same period last year.

“This year, I don’t think you’ll see the growth immediately,” the chairman says. “The real growth will come next year and in the years to come. We issued the sukuk for $450m in May, which will be gradually deployed over the course of the coming months. 2013 will still be a good year, but I think 2014 will be the year of growth for Dar Al Arkan.”

Given Saudi Arabia’s desperate need for more housing, it seems unlikely that Dar Al Arkan will not be increasingly busy over the next five-year period. But Al Shelash won’t just be satisfied with being busy; he has set himself a far more ambitious goal.

“This company is a private company, the government has no ownership,” he explains. “Most of our competitors are government companies and have received a lot of support. In the last five years, we got nothing from the government, precisely nothing.

“But our business model has worked; we paid all our debt, we continued with and finished most of our projects and we’ve had a great performance despite one of the toughest times, economically speaking, in history,” Al Shelash continues. ”So my goal is that in ten years’ time, we will be the biggest developer in the region. This is the dream, and I believe we can make it come true.”

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