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29 March 2024

Saudi firms beat Gulf peers in debt levels

Part of King Abdullah Economic City in Jeddah, the most expensive Saudi city in which to buy property. (AFP)

Published
By Parag Deulgaonkar

The debt level of Saudi-listed real estate companies is significantly lower compared to regional peers, said a new industry report.

This is a a result of operations tilted towards real estate management, their nascent stage of activities and plot sales, it said.

"In order to remain Shariah-complaint, some Saudi real estate firms refrain from raising debt and operate on a cash basis. The industry's leverage ratio stands at 12 per cent, which provides significant room for expansion. Efficient restructuring of the capital base can lead to overall improvement in profitability ratios of the sector," Bahrain-based Securities and Investment Company (Sico) said in a research paper on Saudi real estate sector.

The listed Saudi real estate companies on an average had 12 per cent assets in the form of cash and liquid financial assets as of December 2008. "Apart from Dar Al Arkan, all the companies in Saudi's real estate sector are equity financed with debt/assets of the industry being negligible in financial year 2008," the report said.

As the business model of real estate management companies (such as Saudi Real Estate, Taiba Holding, and Arriyadh Development) shifts towards property development, composition of assets is expected to change towards lower cash balances and financial assets as a result of a higher need for capital expenditure for development purposes, Sico said.

However, listed Saudi real estate companies are dominated by property management and infrastructure development firms. Their business model is considerably different to that of UAE-based developers, who have mixed-use property development as their core activity. Most listed Saudi real estate firms have portfolios of completed developments, which generate sustainable recurring revenue, and have significant investments in financial assets. However, Dar Al Arkan and Emaar Economic City focus on infrastructure and community development-based business model.

Some of the property management companies have announced plans to shift towards the property development model to increase return on equity and assets. The business models of the existing companies are relatively less risky compared to the UAE-based developers considering their cash-based operations, Sico said.

According to the investment bank, residential prices average around SR 2,750 (Dh2,693) per square metre with rental yields averaging at 8.6 per cent.

Jeddah is the most expensive city in terms of both purchasing property and leasing, at an approximate premium of 30 per cent from the average. Madinah is the least expensive in terms of housing.

These prices are heavily weighted by older developments and understate current prices in the residential market. Current prices of newer developments for the upper middle income segment range from SR 5,500-6,500, while those in the lower bracket range from SR 2,500-2,800. High-end luxury developments at Emaar Economic City were sold at about SR 11,000 per sq m in late 2008.

As indicated by the rent and fuel index released by Saudi Arabian Monetary Agency, rents did not start declining until June 2009.

"However, rent growth has slowed down to single digits and we expect it to turn negative between second half of 2009 and second half of 2010."

Considering the current demographic and affordability dynamics, Sico foresees strong demand for residential units in Saudi Arabia. According to the Ministry of Economy and Planning, a pent-up demand of 270,000 units existed in the country in 2004, with a demand of 146,000 units per annum forecast each year from 2004 to 2009.

"Based on supply estimates of 100,000 units per annum by government agencies, we expect the undersupply situation to continue in the medium term. We expect demand for middle-income housing – in the low end segment – to be the strongest in the medium term," the report said.

In the office sector, Sico expects lease rates in Riyadh to weaken the most, considering the substantial anticipated increase in available area and higher lease rates compared to other cities.

Occupancy rates in Jeddah and Dammam are expected to remain strong since the market is considerably undersupplied, and has the highest occupancy levels. Makkah and Madinah have the lowest office lease rates, since they are primarily focused on religious tourism. Office space in these areas has been occupied by businesses that have developed around the Hajj and Umrah industry. In recent years, demand for additional office space has been stagnant, and the available stock is old.

"Only Muslims are allowed to enter Makkah, which restricts investment by foreigners. It is expected that the office sector in Makkah and Madinah will continue to experience slow growth for the foreseeable future. However, a decline in lease rates is expected in Riyadh," the report added.


Realty's role in non-oil GDP

The contribution of the real estate sector to non-oil GDP has declined from an approximate average of 35 per cent in the 1970s to an average of nine per cent during 2000-2008. However, over the past decade, its share has remained relatively stable.

Similarly, the contribution of real estate to total GDP declined from 6.2 per cent in the 1970s to 5.2 per cent over 2000-2008, with the downward trend resulting from the growing contribution of oil related sectors.

The real estate sector grew by nine per cent year-on-year.

 

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