x Abu Dhabi, UAEWednesday 24 January 2018

Falling demand to challenge Saudi Arabia's Dar Al Arkan

Dar al Arkan, Saudi Arabia's biggest property developer by market value will struggle as its land sales slip

Dar Al Arkan's business model is based mostly on land sales, but falling demand will put the Saudi property developer's shares under pressure.

Funding concerns for development projects could also lead to a delay in sales, which is also worrying investors of the kingdom's largest developer by market value.

"The company is still too focused on high-margin land plot sales," said Ahmed Badr, a property analyst at Credit Suisse, adding the land sales model is "unsustainable".

The funding difficulties related to development projects will make it difficult for the company to capitalise on housing demand in Saudi Arabia, one of the most populous countries in the Gulf.

Land sales are expected to drop by 23 per cent this year compared with last year as the market becomes more mature and the company's land bank becomes depleted. Almost half of the company's revenues come from land development.

Mr Badr cut the company's target price to 10.1 Saudi riyals from 14.77 riyals a share but kept a "neutral" view of Dar Al Arkan because the market is expected to have already priced in these concerns. Its shares ended yesterday 0.5 per cent lower at 9.6 riyals.

"A further decline in land sales would result in overstretching Dar Al Arkan's balance sheet as the company would take on more debt," Mr Badr said.

The lack of off-plan sales, or developments sold before construction, is also expected to put stress on the company's finances.

The Saudi government regulates the number of off-plan sales but Mr Badr said it was likely Dar Al Arkan would eventually get an off-plan sales licence, leading to increased property sales and easing funding concerns.

Lower land sales have already cut into margins at the developer. Fourth-quarter profit fell 29 per cent compared with the same period in 2009 to 330.4 million riyals.

The company has been through a round of refinancing but has not yet resolved its debt issues. In December it said it would need to sell some assets to pay down debt.