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Ground Realities

09 May 2011
While the new housing decrees are set to boost Saudi real estate sector, the on-the-ground reality is that the country's housing authorities do not have the capacity to build 500,000 homes. Meet the key Saudi players in real estate.

The Saudi real estate sector received a major fillip with the announcement that 500,000 new housing units will be built in the Kingdom. This is an urgent need of the Saudi population, and it is already proving to be a challenge given that the current infrastructure is not sufficient to immediately supply those 500,000. While nobody expects the entire plan to be executed within a year, there are questions on how the government will go about creating the necessary infrastructure and all the added developments such as roads, civil structures, and utilities be put in place.

The key players are seeking clarity and the quicker the Saudi Government can outline a plan, the faster developers can fulfill the dreams of 500,000 Saudi families.

Saudi Real Estate: On The Ground Realities
While the recent announcements by Saudi King Abdullah bin Abdulaziz AlSaud are expected to boost the country's real estate sector, the authorities do not have the capacity or expertise to develop the 500,000 units on their own; hence, the collaboration of public and private sectors will be a pre-requisite, says Bahrain-based SICO in a research note.

"No timeline has been set for the completion of the development and historically such government backed project take a long time to materialise considering the delays and utility services related issues," says SICO.

Saudi-based NCBC estimates that the country will need an additional 973,000 units over the 2010-15 period and a total of 2.1-million units over the coming decade, or 215,000 units per year.



Can the key Saudi real estate players meet that challenge?

Here is a brief look at some of the key players in real estate in Saudi Arabia and how they are placed to take advantage of the new focus on real estate.

DAR ALARKAN ( DAAR )
Dar Al Arkan ( DAAR ) was formed in 1994 by six well-known business and is the largest developer in the Kingdom. The company is focused on purchase of real estate land and construction of residential and commercial properties. Dar Al Arkan was listed on the Saudi Stock Exchange, Tadawul, in December 2007.

Dar Alarkan ( DAAR ), the biggest developer in Saudi Arabia, will not benefit directly by the King's initiatives in the near term, as its core business is land development and sales rather than property development, says SICO, which downgraded its rating for the DAAR stock from 'buy' to 'neutral'.

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Global Investment House, which has a strong buy rating for DAAR , disagrees, citing growth from the rental market, especially from its Alqasr development.

Rental income is increasingly important for property companies as it offers a steadier revenue stream rather than cyclical nature of land sales. The Saudi real estate rental market remains one of the few in the region that remain robust, rising 8.5% in 2010 and 2% year-to-date, and that has ensured that property management firms has outperformed core developers at least in the first quarter of the year.

Still, SICO's point stands that DAAR 's bottomline will not see the benefit of the proposed Saudi housing construction spree at least in the immediate future.

National Commercial Bank Capital (NCBC) notes that Dar Al Arkan is one of the few listed real estate companies positioned to benefit from the rising demand in housing.

However, land is the company's largest revenue source, which is declining. "We expect revenues to grow marginally from 2010 levels. Any unexpected declines would lead to lower stock levels.

"In the past, Dar Al Arkan faced many challenges regarding its residential projects. Further delays beyond our assumptions in our base case could further pressure earnings and cash flows," says NCBC.

One analyst has a strong buy rating on DAAR , three have 'buy' and 2 have a 'hold' rating, according to Zawya data.

AKARIA ( Saudi Real Estate Company )
Saudi Real Estate Company , or Akaria is a Riyadh-based company created in 1976 and was focused on the capital city. The company owns and manages residential and commercial Properties and is largely owned by the government, with the Public Investment Fund (PIF) and Public Pension Authority (PPA) owning 64.6% and 4.8% respectively.

Akaria has its share of challenges, and will also not benefit immediately from the King's announcement.

SICO believes that the company manages its resources at a 'sub-optimal' level.

"During 1Q11, the company recorded an investment loss of nearly SAR 8mn following a loss of SAR 13mn in 4Q10. Akaria invests its excess cash in Saudi Arabia's equity markets, which we believe increases risk to the company," said SICO in its note, adding that the company can significantly improve returns if it can master plan the significant raw land (13.5 million sqm with more than 70% in Dammam) it owns and reduce its investments.

"However, we do not see this materialising in the medium-term considering management's conservative attitude."

Akaria 's land bank stands at 13.6 milllion square metres situated across Saudi Arabia. Much of this land was bought years ago and it has no doubt appreciated, as has much of the Saudi real estate market. A $1.1-billion Binban Project is also awaiting government approval.

One analyst has a strong buy rating on Akaria , another two have buy and two have hold, according to Zawya data.

ARRIYADH
Arriyadh Development Company was established in 1994, and is now listed on the Saudi stock exchange. Emar Arabian Shield For Investment, Development and Investment Services and Aydar Holding Company also have stakes in the company. The company is focused on projects in Riyadh city.

Arriyadh Development may benefit from government-backed awards in 2011, says SICO. The company is working on Attameer Centre, but some of its other projects are not doing that well. The second phase of Duhairah District, valued at nearly $4.6-billion, is still waiting approval.

Arriyadh 's other projects Sunrise Cities and Technical City are not showing any signs of getting off the ground.

"The development was planned to be sold as land plots. However, the underlying land is not permitted to be sold due to legal issues over its status with the government. There is no clarity over when this issue will be solved and we do not expect to see any significant change in its status in FY11," says SICO.

One analyst has a hold rating on Arriyadh , according to Zawya data.

TAIBA HOLDING
Taiba, established in 1988, is based in Madinah. The company owns and manages real estate properties and hotels and remains focused on Madinah and the adjoining areas.

Taiba Holding completed two major projects last year and expects to complete another three this year.

The company completed the development of Dar Qausar and ARAC Madinah in 2010 and management expects to complete three more properties namely Al Ajaou, Aramas Makkah and Taiba Palace in 2011.

"Nevertheless, we expect a delay compared to management's targets," says SICO. Three analysts have a buy rating on Taiba, according to Zawya.com data.

EMAAR ECONOMIC CITY
Far removed from much of the urban developments is Emaar Economic City. The company suffers from a deteriorating cash balance according to a Global report in late March.

Given the size and nature of its development, the company, which is partly owned by Dubai-based Emaar, has a large sunk cost, but has faced a number of delays.

Since raising the initial SAR2.6bn of IPO proceeds and the founders' seed contribution of SAR4.3bn in 2006, no new financing of any kind has been tapped. "As of the end of 2010, this aggregate amount was fully channelled into infrastructure works and property developments that have not generated any significant cash flow to support operations."

On May 7, Emaar announced it will review all foreign projects, and no doubt EEC will come under the microscope of its consultants McKinsey & Co.

Two analysts have a hold rating on EEC, according to Zawya.com data.

REAL ESTATE DEVELOPMENT FUND ( REDF )
Saudis with low incomes can apply for home loans through publicly held Real Estate Development Fund ( REDF ), established in the 1970s with a goal of distributing non-interest-bearing home loans to citizens for construction and purchase of homes. REDF dominates the Saudi housing market, accounting for 81% of total home financing.

The King's decrees included a clause of bolstering REDF with a SR40-billion injection of capital. But Banque Saudi Fransi does not expect the new capital to help reduce the waiting period for a loan from 18 years to the government's target of eight years.

"One cause of the long waiting period for REDF loans has been the body's difficulty in collecting outstanding loans, according to the Ministry of Economy and Planning," notes BSF. "Saudi Arabia's finance minister said... REDF would use the new funds to provide an additional 133,000 loans - adding to the 600,000 loans it has dispersed since 1975. Up to the first week of February, REDF approved new loans to build 54,000 homes valued at SR13.5 billion under the scheme."

BSF also remains concerned with price affordability issues, given that a SR300,000 REDF loan does not fully cover the cost of land and construction of homes.



A BSF survey published on May 9 shows that villa sale prices across Saudi Arabia rose by 20.5% in the first half of the year, compared to the second half of 2010, driven by a rise in prices in East and north Riyadh. Apartment sale prices also rose while residential land prices rise have risen 4.8% across the country. The figures are a reflection of the acute supply pressures developing in the country.

According to the Saudi Press Agency, the REDF will be run by the minister of the newly-appointed Ministry of Housing.

HOUSING MINISTRY
On March 26, a government decree announced the creation of Saudi housing ministry under Shuwaish Al Duwaihi.

The General Housing Authority, which had the task of allocating land throughout the Kingdom will be rolled into the new ministry and carrying out its mandate. All public sector employees in housing, as well as financial allocations, properties, documents and plans for projects will be transferred to the ministry.

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MORTGAGE LAW
Since the King's announcement, the only other significant development has been the Shura Council's approval of the mortgage law, and which has now been passed on to King Abdullah for a final stamp of approval.

The law is expected to bring key financial institutions and lenders into the market, thus widening the loan base and offering more choice to aspiring home owners.

SICO expects the new mortgage law to benefit Dar Al Arkan and Taibi Holding, but warns that there is no timeframe - and that is truly crucial in determining how quickly how the construction spree takes off.

CONCLUSION
Until the final mortgage law is approved, the true extent of the opportunities available in the Saudi real estate sector will not become evident.

While the estate sector promises untold riches, much of the development has yet to take place. All the key stakeholders are looking for more clarity on how, where and who will be building and contracting these 500,000 homes, before they can develop a strategy and allocate resources for the undertaking.

There are many other players within Saudi Arabia and in the region which could help develop this massive project, but they won't move till there are more specific details available.

The urgency with which the Saudi King announced the development plan needs to be matched with an equal urgency in its execution.

But given Saudi Arabia's record of moving at its own pace, don't hold your breath.

© alifarabia.com 2011