Dar al-Arkan Development Company

07 December 2010

The Saudi real-estate firm has built up a market-leading position, but maturing debt clouds its outlook

Company Snapshot

Date established 1994

Main business sectors Residential real-estate development and land sales

Main business region Saudi Arabia

Chairman Yousef Abdullah al-Shelash

Structure

Dar al-Arkan Real Estate Development Company was established in 1994 by six prominent Saudi business families with extensive real-estate development experience. In December 2007, 30 per cent of the company’s capital was floated on the Saudi stock exchange, the Tadawul.

The largest investors are Khalid Abdullah al-Shelash, who owns 9.1 per cent of shares; Yousef Abdullah al-Shelash, with 7.7 per cent; Hethloul bin Saleh al-Hethloul, with 6.9 per cent; and Majed bin Abdulrahman al-Qasem, with 5.3 per cent.

Financial performance
(SRbn)200720082009
Gross profit2.412.852.51
Net income22.362.12
Source: Dar al-Arkan

Dar al-Arkan operates three wholly owned, Saudi-registered subsidiaries: Dar al-Arkan Properties Company is involved in the development and acquisition of commercial and residential real estate, providing management and maintenance of residential and commercial buildings and public facilities; Dar al-Arkan Projects Company undertakes general construction of residential and commercial buildings; and Dar al-Arkan Investment Company manages the firm’s real-estate investments.

In addition to its head office in Riyadh, Dar al-Arkan has branches across the kingdom, including offices in Mecca, Jeddah and Medinah. The company is Saudi Arabia’s biggest property firm by value, with a market capitalisation of SR15bn ($3.9bn) at the end of 2009. Revenues for the first nine months of 2010 totalled almost SR3.2bn, with a net income of SR1.1bn.

Operations

Dar al-Arkan’s main activity is land development, namely purchasing and developing infrastructure on raw land parcels. It also master-plans residential projects and commercial schemes. Property management – the leasing and management of residential, retail and commercial units – is a smaller but growing part of the business.

Financial performance 
(SRbn)2009*2010*
Gross profit1.941.38
Net income1.661.13
*Nine months to end September. Source: Dar al-Arkan

The company’s income is heavily dependent on land sales, which are mostly concentrated in urban areas of the kingdom. An estimated 80 per cent of the developer’s assets of about SR23bn are Saudi land plots. Revenue from residential sales in 2010 was driven by existing inventory based at the Al-Qasr integrated residential project in Riyadh and Al-Tilal, a Medinah-based residential development.

Dar al-Arkan’s other main projects are two Jeddah-based developments due for completion by 2015. The Shams al-Arous project entails the construction of 10,000 villas and apartments at an estimated investment cost of SR7.5bn. The Qasr Khozam scheme, valued at SR10bn, is a land development project that involves the demolition of existing buildings followed by the redeployment of basic infrastructure. The developed land will then be sold off.

Ambitions

Dar al-Arkan aims to capitalise on the shortage of housing units in Saudi Arabia. It hopes to dominate the future middle-income market segment by rolling out large residential projects near the kingdom’s main cities, fending off competition from local rivals, such as Al-Akaria.

Total assets 
 30 Sep 200930 Sep 2010
(SRbn)22.4828.02
Source: Dar al-Arkan

The long-term aim is to set the benchmark for design, project management and construction of masterplanned residential communities across the kingdom. In Dar al-Arkan’s assessment, population growth in Saudi Arabia will remain high over the coming decades. This will underpin a sustained increase in new household formation – the main driver behind its future revenue projections. 

The company also hopes to capture a large share of the kingdom’s mortgage market. In 2008, Dar al-Arkan launched a SR2bn mortgage finance company, the Saudi Home Loans Company, a joint venture with Kingdom Installment Company and Arab National Bank. This will help the low-to-middle-income sector obtain housing finance, thereby shoring up demand for new residential units.

Although Dar al-Arkan’s expansion plans will require further debt financing, the company maintains it will not need to resort to further debt issuance to help pay a $1bn sukuk that matures in 2012. Asset sales may be needed, but this will be land plots, not assets that will be liquidated. 

Challenging year for leading developer

Like many Gulf property developers, Dar al-Arkan is seeking to effect a long-term transformation of its business strategy. The firm wants to shift from being mainly a seller of land into a company that earns a greater proportion of its revenue from developing complete residential communities.

Dar al-Arkan’s key ambition is to consolidate its market-leading position in the Saudi real estate market

As Dar al-Arkan has grown in size and financial strength over the past 10 years, the company has become more willing to take on larger projects, such as the development of entire districts. It has increased its sales mix to include more developments from virgin land to fully built villas and apartments. Included in this change in approach is a new focus on integrated residential communities in suburban areas rather than city-centre locations. 

Ratings agency CI Ratings estimates that there will be an annual shortfall of 50,000 residential units in the kingdom over the next few years, which will support Dar al-Arkan’s strategy.

But this long-term ambition is challenged by short-term necessities. Even though Saudi Arabia’s real-estate sector is in better shape than others in the Gulf, the company has been affected by declining land sales, on which its cash flow heavily depends. Property development is still a secondary activity compared with Dar al-Arkan’s primary land trading business.

Land trading activity was significantly weak in 2010 as sales declined by 41 per cent year-on-year in the third quarter of 2010.

Given the weak outlook for land sales, local investment house Riyad Capital predicts Dar al-Arkan will need to conserve cash for debt servicing while curtailing reinvestment in project development and land bank replenishment.

The firm’s investment pot has shrunk throughout 2010, affecting its ability to meet deadlines on its impressive portfolio. Riyad Capital says that in 2009, Dar al-Arkan invested about SR3.9bn in its projects. In the first nine months of 2010, investments have totalled just SR383m. External financing may be needed to fill the gap and keep the company’s projects on track for completion.

What form of external financing will materialise is unclear, given constraints on raising further funding through debt issuance.

Investors’ concerns over the real-estate group’s liquidity position has been aggravated by its stretched balance sheet, says HC Securities in a research note on real estate in the kingdom issued in July 2010. The company’s net debt/equity stood at 46 per cent at the end of the first half of 2010.

Next year could prove challenging for the company in light of declining sales revenues and the need to conserve funding for debt repayments.

Riyad Capital says there are attractive areas in the Saudi real-estate market that command premiums and will continue to do so in 2011. Details of Dar al-Arkan’s land bank are opaque, but judging from the contraction in gross margins, it is facing price pressure. The land area sold through nine months of 2010 was only 4.8 million sq m compared with 8.5 million sq m in 2009, according to Riyad Capital.

However, beyond 2011, analysts see better times ahead, led by the company’s ongoing efforts to diversify revenue streams within the kingdom. Dar al-Arkan is also seeking rental income from its Al-Qasr project to reduce dependence on land sales.

Dar al-Arkan will not shift its strategy beyond focusing on the core real-estate development market in Saudi Arabia, and has no plans for regional diversification.

The key ambition is to consolidate its market-leading position in the Saudi property market, concentrating on master planning projects – buying up undeveloped land and developing infrastructure – and residential projects focused on the middle-income household.

The demographic fundamentals suggest the company is focused on a sector with strong long-term earning potential. The hard part will be keeping its project pipeline on course in the near-term and ensuring that it is able to conserve cash.

 

 

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