GDP growth and attractive demographics are long term sustainable growth drivers for real estate
Attractive residential and retail segments but office segment is weak
We issue a Hold recommendation on Dar Alarkan and Emaar Economic City and Buy on Saudi Real Estate Company
Fundamental factors are strongest in Saudi given the country's attractive demographic landscape, which offers a more solid long term scenario compared to that of the UAE and Kuwait. The national Saudi population represents 73% of the aggregate versus only 32% in Kuwait and 18% in the UAE implying a more sustainable organic demand for housing over the long term. Almost 60% of the Saudi population is below the age of 30 compared to 54% in Kuwait and 46% in the UAE. Further, Saudi has the most balanced gender structure with expatriate males representing only 18% of total population as opposed to 44% in Kuwait and 69% in the UAE.
Although Saudi witnessed the slowest 5-year population CAGR amongst the three countries registering 2.1% versus 3.2% in Kuwait and 6.8% in the UAE, sustainability remains a key advantage of the Saudi demographic profile given its organic nature and the ability to maintain a growth trend. Unlike the UAE which saw its population decrease by 4.4% in 2009 and Kuwait by 0.3%, the Saudi population saw growth in both its expatriate and national populations between 2005 and 2009.
The Saudi economy posts more vigorous growth figures witnessed in a 2008-2011e average GDP growth of 3.9% as opposed to 2.4% for Kuwait and 1.6% for the UAE. Saudi also maintains a more robust M2 growth that averaged at 13% in 2011 versus 6% for Kuwait and 10% for the UAE. Quarterly inflation in the UAE hovers between negative 0.5% to a positive 2% (3Q11: 0.1% YoY) with the housing component strongly heading down reflecting the pressures on the sector between 2009 and 2011. Saudi and Kuwait report healthier inflation figures at 5% and 5.6%, respectively on annual basis in 3Q11.
The favorable Saudi economic landscape is more encouraging for the real estate sector, in our view. Direct government spending and the REDF housing loans will continue to generate market activity in the sector in the short to medium term. Major constraints to the development of the Saudi undersupplied sector are related to the structural and legislative inefficiencies along with affordability limitations.
Saudi has consistently topped the region in terms of FDI inflows with the majority of these inflows being injected in the petrochemicals sector. Saudi is also top ranked, region-wise, in terms of ease of doing business. The Saudi ranking has been improving consistently moving from a global ranking of 23rd in 2007 to the 10th in 2011 reflecting a more business friendly environment. The UAE and Saudi, accordingly, are better positioned to attract new business, which will have a positive impact on the oversupplied office segment in all three countries and will, in turn, create more demand for housing and increase consumer spending, a trend we see materializing sooner in Saudi given its more stable economic outlook.
Real estate market update:
Riyadh and Jeddah residential markets still strong...
Selling prices of ready to move in residential units and land continued their upward move during 2011 in both Riyadh and Jeddah driven by stringent supply shortage coupled with affordability constraints. Villa and apartment prices increased by 8-10% on average in Riyadh while Jeddah witnessed a more aggressive increase of 13-15%.
Rental yields expanded in Riyadh versus a year earlier to 8.4% up from 7.9% for villas and 7.8% from 7.4% for 2-bedroom apartments. In Jeddah, yields contracted to 8.8% for villas from 9.1% in 4Q10 while those for 2-bedroom apartments shrank from 11.5% to 10.8% as property prices increase faster than rent, which indicates potential for further rent appreciation in 2012.
Selling prices and rentals are expected to maintain their upward move given the persistent supply shortage of affordable units along with the country's young and growing population. The increase in the REDF loan from SAR300k to SAR500K and the added flexibility that allows utilizing the full loan amount to purchase ready units will stimulate demand for residential apartments. Further, should the current negotiations on increasing housing allowance for government employees get approved; further inflationary pressures on rents will materialize.
Pressures on Saudi office vacancies and rents to grow in 2012 ...
Riyadh vacancy is expected to increase over the coming two years as new high quality supply of 818,000 sqm, equivalent to 25% of 4Q11 offering, enters the market between 2012 and 2014. Jeddah is expecting a larger 31% addition to its 4Q11 supply as an additional 159,000 sqm become ready for delivery in 2012.
Limited new supply in Riyadh and Jeddah retail in 2012...
Riyadh and Jeddah will expand their retail offering by 15% and 12%, respectively, during 2012-13. We believe that the two markets are well positioned to absorb the new supply as they replace current stock with new higher quality offerings. We expect rentals to increase slightly throughout the year on higher averages for new supply.
Modern retail malls are an important source of entertainment in Saudi as a replacement to the absence of several other entertainment means due to cultural restrictions, which is an added source of demand and footfall generation. Further, Jeddah enjoys high footfall and consumer spending generated from religious tourism to Makkah.
New supply in the hospitality segment in the pipelines as well...
The percentage of tourism and travel capital investment to overall economy capital investment averaged 21% for the UAE between 2007 and 2011 versus a regional average of 7.1% and a low of 4.6% for Saudi and 3.3% for Kuwait. Spending by leisure visitors as percent of total tourist spending is the highest in the UAE while Saudi has the highest share of business spending. We believe this pattern is sustainable in the foreseeable future given each country's cultural and business attractiveness profile. Leisure spending in Saudi is, however, stable given it is mostly driven by the inelastic religious tourism.
Riyadh and Jeddah saw their ADRs reported the highest regional increase during 2011 with the former up 6.6% and the latter up 6.9% YoY. Nationwide average occupancy rates also increased 8.6% but are still low at 58.2% compared to 71.4% in the UAE. Demand for hotel rooms in Riyadh and Jeddah is mostly driven by business tourism or domestic leisure as the two cities miss on the bulk of the flow of religious tourism concentrated in Makkah and Madina. We expect 2012 to fair well in both markets but perceive the current vacancy rates along with the upcoming supply as potential threats.
View & recommendation:
Dar Alarkan:
We believe that the default concerns on the SAR3.75 billion 2012 sukuk that pushed the stock price to its all time low of SAR6.05/share are now over and that investors have priced that in. The company's business model positions it favorably in the fundamentally strong land and residential property sales market of Riyadh. AlQasr mall will be delivered in 2Q12 offering usable collateral for new debt, which should lower average debt service costs. We have changed our valuation of Dar Alarkan raising our target price 46% to SAR13.05/share but issue a Hold recommendation from Strong Buy previously given the recent price rally.
Emaar the Economic City:
EEC is now one of our favorite stories after the change in strategy and improved financing profile. The change in revenue mix towards land sales has enabled EEC to monetize on its idle land bank with minimal capex requirements and a much shorter cash cycle. We now forecast 2012-2014 revenue CAGR of 51% up from 10% previously and 2.8x revenue growth in 2012. For now, we are still looking at testing the absorption of EEC's land offering and accordingly opt to remain conservative in our assumptions against management guidance and, accordingly, update with a target price of SAR13.00/share and a Hold recommendation.
Saudi Real Estate Company (Akaria):
Akaria maintains its stable operating profile managing its rental portfolio of the Riyadh located properties. We expect the 292 villas of the Diplomatic Quarters 2 project to be delivered in 2Q13 and to be fully rented out by the end of the year. No significant progress so far on the Binban project as the company awaits government approvals. We expect the first wave of sales from the Binban project to be pushed back to 2015 from 2014. Based on our SOTP valuation of Akaria, we now value the company at SAR32.50/share up from SAR28.90/share and issue a Buy recommendation.
© Press Release 2012
