NCB Capital: Macro drivers support positive outlook for KSA real estate sector

Issuing its update report on the Saudi Real Estate sector,  NCB Capital, the GCC’s leading wealth manager and the Kingdom’s largest asset manager, believes that the strong macroeconomic drivers of Saudi Arabia keep the long-term outlook of the sector positive. 

“Data on construction contracts indicate a strong pipeline that continues to focus on Real Estate,” say the authors of the report, Abdulelah Babgi and Mohamed Tomalieh, equity research analysts at NCB Capital. “However, concerns for the sector include the impact of new governmental programs such as Land and Loan, project delays due to Saudisation measures and cuts in the number of pilgrims.” 

The authors go on to state:  “We remain Overweight on Dar Al Arkan with a PT of SR11.9. Our price target has been revised down marginally due to the disappointing 2Q13 results which we believe is due to lower land sales. However, the stock trades at an attractive 0.7x P/B given a promising project pipeline and a large undeveloped land bank. We believe this supports our Overweight call. We remain Neutral on Taiba and Al Akaria with price targets of SR38.0 and SR33.2, respectively.” 

Sector outperforms index by 26% YTD; Taiba best performer – up 67%

“The sector is up 44% YTD, outperforming the market by 26%.,” say the authors. “The rally has been led by Jabal Omar which is up 62% due to investor optimism on its projects in the vicinity of the Holy Mosque in Makkah. From the stocks under our coverage, Taiba has increased the most at 67% YTD. We believe this is due to the expectations of significant compensations from possible compulsory purchase orders of properties in Madinah by the government.” 

Sector data suggests strong demand prospects for the sector

Continuing, the authors state: “Construction contracts show that the value of contracts awarded in 2Q13 reached SR54bn (SR103bn in 1H13), with around 39% awarded to the real estate sector – hence, indicating the strong demand present. Moreover, the Ministry of Housing announced that the current shortage of housing units in the kingdom is around 700,000 which we believe will further support the demand in this sector.” 

Government policy continues to drive sector outlook

NCB Capital’s report notes that the Saudi government remains an important stakeholder in the real estate sector in the Kingdom. Newly introduced policies such as Land and Loan and Ejaar in addition to loans from SREDF aim to narrow the gap between demand and supply, regulate the rental market and encourage home ownership. 

Ratings Update  

DAR AL ARKAN

Land sales limit impact of government programs

“We remain Overweight on Dar Al Arkan with a PT of SR11.9. Our PT is down marginally due to the downward revision of future land sales after disappointing 2Q13 results,” state the authors of the report. “We believe recently introduced government programs will have a limited impact on the company. These programs target the rental/construction segment of the sector, as opposed to land sales which remain more than 85% of Dar Al Arkan’s revenue.” 

TAIBA

Expected compensation behind stock rise

“We remain Neutral on Taiba with our PT increasing from SR31.6 to SR38.0 off the back of multiples expansion as well as improved estimates post 2014E,” say the authors. “Overall, our revised 2013 and 2014E net income numbers are down due to lower expected land sales and other income. We believe the reduction in Hajj permit cuts could negatively affect 2H13 earnings, but new openings of hotels could negate this.” 

AL AKARIA

Project delays pressure valuations

Concluding their comments, Abdulelah Babgi and Mohamed Tomalieh state: “We remain Neutral on Al Akaria with our PT relatively unchanged at SR33.2. The stock has underperformed the sector and market YTD by 45% and 19%, respectively. We attribute this to the continued delays in the diplomatic quarter which we believe is due to the Saudisation measures in the Kingdom. Updates on new projects such as Remal Residences and the new Sixty Street complex will be positive catalysts for the stock.”