Saudi housing sector to stay strong
Riyadh, October 28, 2013
By Marwa Rashad
The supply of housing in Saudi Arabia may lag demand for at least the next five years, creating lucrative opportunities for developers who can benefit from rapid population growth and a new mortgage law, the chairman of the kingdom's largest listed developer said.
"Official numbers refer to a need for 1.25 million units from 2010 through 2014 and for sure the market has not provided these units, which has led to a rise in prices," said Youssef Al-Shelash, who heads Dar Al Arkan Real Estate Development Co .
"Supply remains well below demand which is expected to rise to 4 million units in the next 10 years...For developers this is definitely an opportunity."
Saudi Arabia's housing gap is an example of the market distortions that can open up in the wealthy country, where rapid growth of population and income coexist with sometimes inefficient industries and government agencies.
Some 60 percent of nearly 20 million local citizens in Saudi Arabia, the world's top oil exporter, are estimated to live in rented accommodation. Home ownership is below rates in many developed and even developing countries.
Local firms have struggled to meet 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.
Keen to ease social tensions, the government has intervened; in 2011 King Abdullah announced a $67 billion programme to build 500,000 homes over several years. But the scheme has been slow to get underway because of bureaucratic delays and difficulties with the complex process of obtaining land.
The result is weak competition in the residential real estate market which will make the market very attractive for at least the next five years, said Shelash, who with over 20 years of experience is known as a pioneer of the Saudi property industry.
Satisfying demand for housing "is a big challenge for the country", he said in an interview at the Reuters Middle East Investment Summit.
Partly because of the distortions in the market, responding to the demand does not guarantee rising profits for Saudi developers. Last week Dar Al Arkan posted its fifth straight decline in quarterly profit, citing lower margins and sales; net profit for the three months to end-September dropped 17 percent from a year earlier to 183.3 million riyals ($48.9 million).
But the company's shares are up 21 percent year-to-date, slightly outperforming a 19 percent rise in the main Saudi stock market index.
Shelash said that after suffering in 2009-2012 from the global financial crisis, Dar Al Arkan had focused this year on stabilising cash flow and diversifying income sources, which limited profit growth.
Construction firms in Saudi Arabia have faced rising cost pressures this year as the government, aiming to boost employment among its citizens, has cracked down on unregistered employment of cheaper foreign workers.
"We don't face direct labour problems, but contractors and suppliers do, and they are the two legs we walk on - their problems are ours," Shelash said.
But he said Dar Al Arkan was now well placed to capitalise on growing demand for residential real estate, partly because a long-awaited package of new mortgage laws introduced last year would gradually make life easier for home buyers.
"We expect 2014 to be the year of real growth and we seek growth of not less than 10 percent," he said.
Early next year Dar Al Arkan plans to launch a multi-billion riyal, mixed-use real estate project inside Saudi Arabia and will need at least 1.2 billion riyals of financing for this, which could be raised via a sukuk (Islamic bond) issue, he said.
The company does not expect to need this money for at least six to eight months, he added without giving further details of the project. In May this year, Dar Al Arkan sold a $450 million, five-year sukuk, its first international bond sale since 2010.
Shelash said company's financial position was now very strong, with an asset base worth 24 billion riyals at end-June and debts worth only 15 percent of total assets, making it easy to afford payment of two sukuk issues maturing in 2014 and 2015.
To ensure stable revenue, Dar Al Arkan has set a diversification plan which aims to obtain 50 percent of revenue from selling housing units and land, 40 percent from leasing housing and commercial units, and 10 percent from investments in equities and deposits.
As part of the diversification, the company is studying the possibility of making two relatively small-scale investments in projects in Europe and Turkey, he said without elaborating. - Reuters