Dar al-Arkan was established in anticipation of demographic trends that would support a substantial expansion in real-estate demand. That demand is now materialising. This has helped the firm to transform from a small-scale developer to the kingdom’s largest residential developer in terms of market capitalisation, with sustained growth since its formation in 1994.

This strong position carries risks. The slide in the company’s share price during 2010 reflects the challenges confronting a relatively young company in a market that has been buffeted by the global recession.

Much will depend on Dar al-Arkan’s ability to repay maturing debt without having to resort to the debt markets once more. With a SR3.75bn sukuk maturing in July 2012, and two more for SR750m and SR1.7bn maturing in 2014 and 2015 respectively, this will place intense pressure on the firm’s cash position.

On 11 November, US ratings agency Moody’s Investors Service downgraded its credit rating on Dar al-Arkan to Ba3, citing the maturing debt and a decline in land sales that had impacted earnings. The firm posted a 53 per cent fall in its third-quarter net income to SR289.6m. Margins on land sales have declined amid buyer caution.

With investors witnessing a 40 per cent slide in the value of shares in the six months to December 2010, the company must work hard to revive land sales income next year. The firm faces an invidious choice of conserving its cash – thereby improving its ratings profile and being in a stronger position to raise future debt – yet having to delay projects. On the positive side, Dar al-Arkan’s formidable land bank, estimated at 2 million square metres in mid-2010, can provide capital support if conditions worsen.

If the Saudi property market develops in line with long-range forecasts and widespread mortgage financing becomes available, the foundations for Dar al-Arkan’s business model will strengthen, but it could be a tough couple of years ahead for the company.