Top Saudi developer plans to spend $267m on projects in 2015

Dar Al Arkan Real Estate Development Co also aims for 10% growth this year, says its chairman
Top Saudi developer plans to spend $267m on projects in 2015
Dar Al Arkan founder and chairman Youssef Al Shelash. (Photo for illustrative purposes only)
By Reuters
Fri 24 Oct 2014 01:07 AM

Dar Al Arkan Real Estate Development Co, Saudi Arabia's largest listed developer, plans to spend over SR1 billion ($267 million) on projects in 2015 and aims for 10 percent growth of its business that year, its chairman has said.

The company has a strong tailwind: supply of housing in the country lags strong demand, the result of rapid population growth and slow progress in government building programmes designed to ease the shortage.

While government data shows the home ownership rate among roughly 20 million Saudis citizens is 60 percent, the International Monetary Fund has estimated that excluding people living in traditional housing, the rate is 36 percent.

With the population expected to grow 2.1 percent annually through 2015, much faster than the global average of around 1.1 percent, according to a central bank report, demand is set to keep increasing for some years.

"We have a target to achieve 10 percent growth next year and this will mainly come from the local real estate market. I am very optimistic with the situation in the Saudi market over coming years," Yousef al-Shelash said.

"We plan to spend over 1 billion riyals on projects in 2015, compared to less than 1 billion in 2014."

Dar Al Arkan, which has yet to announce third-quarter earnings, reported a 17 percent year-on-year rise in second-quarter net income to SR121.3 million. It cited higher sales of properties at higher profit margins, though payroll costs, consultancy fees and finance charges also grew.

For the third quarter, a Reuters poll of analysts has predicted a 5 percent rise in profit to an average SR193.0 million.

To insulate itself from the vagaries of the Saudi land market, where prices can be volatile and plots difficult to obatin in some areas, the company has launched a diversification plan which envisages obtaining only 50 percent of its revenue from selling land and housing units.

The remaining 50 percent is to come from fixed income: 40 percent via the leasing of housing and commercial units, and 10 percent from investment in equities and bank deposits.

"We haven't reached the 50 percent of fixed income yet but we plan to achieve it within five years," Shelash said, adding that the company's rental portfolio grew 105 percent in 2013 and about 18.5 percent in the first half of 2014.

In May, Dar Al Arkan raised $400 million by issuing a five-year Islamic bond, attracting over $1 billion of demand. Shelash said the company preferred to secure financing via sukuk as they were suitable for long-term projects; Saudi bank loans often have shorter maturities.

Dar Al Arkan has SR1.69 billion of sukuk maturing next February. Shelash said repayment would be easy since the company had SR3 billion of liquidity at the end of June, an asset base worth about SR26.4 billion and net debt worth only 18.5 percent of total assets.

The company has a land bank of slightly below 35 million square metres, concentrated in Saudi Arabia's major cities: 60 percent in Jeddah, 12 percent in Riyadh, 21 percent in Mecca and 7 percent distributed between Medina and Eastern Province.

Dar Al Arkan stopped paying dividends over the past few years, but Shelash said the company planned in 2015 to study a mechanism to distribute profits.

"We stopped dividends to invest the money, but when you invest today, you don't expect to get the yield the next day. We are studying a distribution mechanism, and there are a number of ideas being discussed," he said without elaborating.

Shelash said he expected the housing shortage in the kingdom to last a few more years, as the market's capabilities were not enough to meet increasing demand. He predicted property prices would rise by about 10 to 15 percent annually.

"I expect the housing crisis to last for a few years because demand is huge. The economy ministry expected demand of 1.2 million housing units from 2009 to 2014, but the market was not able to meet this number, which will cause an increase in demand," he said.

"Demand is expected to reach 4 million units during 2014-2024, which is four times the demand in the past five years. This will create huge pressure on prices and we think the market with all its tools, the housing ministry and private sector, won't be able to meet this challenging number."

Local firms have struggled to satisfy demand partly because of limited bank financing for developers and home buyers, while ownership restrictions make it hard for foreign companies to enter the Saudi real estate sector.

Last year, local media quoted Housing Minister Shuwaish al-Duwaihi as saying his ministry was able to obtain only a third of the land it needed to carry out housing projects. It has suggested taxing unused land as a means to solve the problem by encouraging owners to sell to developers.

The Supreme Economic Council, a top policy body chaired by King Abdullah, will study whether to tax undeveloped urban land. Shelash, however, said taxing unused land would hurt rather than help the market and complicate the housing problem further.

"Taxing white land won't help meet demand, as the increase will be passed on to the end consumer, which would increase prices not reduce them. Also, it won't encourage property owners to develop."

However, if taxes are imposed, they will not hurt Dar Al Arkan because the company already pays zakat, an Islamic tax, on all its assets annually, Shelash said without elaborating.

Lack of finance is the biggest challenge facing Saudi developers, as there are not enough property financing products in the market to meet demand, he said. Meanwhile, government red tape delays projects and makes it hard to provide new supply.

"Licences - for both infrastructure and superstructure - shouldn't take such a long time, which extends to years and sometimes a decade. We are taking about five to eight years, and 10 years in some cases."

Saudi labour market reforms over the past couple of years, designed to push more Saudi citizens into private sector jobs, have made it harder and more expensive to hire relatively cheap foreign workers.

Shelash said Dar Al Arkan was indirectly affected by the reforms as it dealt with construction firms that were hit by a big increase in building costs.

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