Why Saudi real estate stocks are less popular than you might think

November 27, 2024, 4:31 PM

Unlisted developers, whether government or privately owned, build about 70% of residential properties in Saudi Arabia

Most developers are unlisted
Land ownership is fragmented
Dubai-style compounds not popular

Saudi Arabia has rising property prices, soaring homeownership rates and steady mortgage approvals – so you might think its real estate sector would be in high demand on the stock market.

This is the case in Dubai, where Emaar Properties and its subsidiaries serve as a proxy for equity investors to gain exposure to the emirate’s real estate industry and broader economy.

But Saudi Arabia’s listed developers are little covered by analysts. Even the biggest developer by market capitalisation, Jabal Omar Development Company, is worth barely a quarter of Emaar.

There are no Saudi equivalents of Emaar for good reason, says Wael Ziada, founder of Zilla Capital, an investment bank in Cairo.

Saudi Arabia “is a completely different market”, according to Ziada. Land ownership is fragmented among individuals and institutions and the country itself is vast.

Saudi Arabia’s large indigenous population is another important differentiator, he says. Unlike the expat-majority residents of Dubai, Saudis are not keen on living in gated compounds or high-rise towers – the kinds of development with which Emaar made its reputation.

“Liquidity in the Saudi banking sector is tighter than the UAE, so relying on one developer would be risky if you want to tap into liquidity outside the banking system,” Ziada says.

“Saudi Arabia needs many balance sheets to build all the developments that the country aspires to create.”

In addition, unlisted developers, whether government or privately owned, build about 70 percent of residential properties in Saudi Arabia. For this reason, the majority of the country’s real estate development sector is unavailable to equity investors.

Saudi Arabia’s bourse classifies 13 listed companies as real estate management and development companies. Combined, these Saudi real estate stocks had a market capitalisation of $33 billion in mid-November, according to AGBI calculations. This is only $9 billion more than Emaar Properties on its own.

On November 25, for example, Retal Urban Development Co was the sector’s most traded stock and the 13th most active on the bourse, as 6.9 million of its shares changed hands. The same day, nearly 163 million shares were traded in Saudi Aramco, the bourse’s biggest company.

The 13 real estate stocks accounted for just 2.6 percent of the 637.8 million shares bought on November 25.

Profit slump

Combined nine-month profits totalled $282 million, down 55 percent on the previous year’s total of $621.8 million. This slump was largely due to Emaar The Economic City, an affiliate of Dubai’s Emaar. It reported a loss of $307.4 million in the first nine months of 2024, a massive increase on its $13.1 million loss a year earlier.

Despite the profit slump, 11 of the 13 real estate stocks are up this year. The average gain is 39 percent so far in 2024, while the median rise is 23 percent.

Dar Al Arkan’s stock is up 19 percent this year to trade at a price-to-earnings ratio of 29. Among the 13 Saudi companies, the highest PE is 579 while the lowest is seven. The median is 34. Some companies are loss-making and so do not have a PE ratio.

“Most listed developers are fairly valued,” Ziada says. In Saudi Arabia, “it’s very rare to find a stock that is cheap with significant growth potential. Most listed companies with strong potential are overpriced.

“The utility sector driven by Acwa looks radioactively expensive. Consumer-focused stocks are among the cheapest. Real estate has a rich valuation, but compared with some sectors is relatively cheap.”

Over the first nine months of 2024, Dar Al Arkan was the top earner, making a nine-month net profit of $120.9 million, up 9 percent year on year. It operates in eight countries.

According to Dar Al Arkan’s website, four analysts cover its stock. Two have “buy” recommendations, one has a "sell" rating and the last has a “neutral” view. The quartet’s stock target price for Dar Al Arkan ranges from SAR11 to SAR16.80. The stock ended November 26 at SAR16.4.

The Saudi property sector: facts and figures

Homeownership among Saudi citizens hit a record 64 percent at the end of 2023. It stood at 47 percent in 2016, when the government set a target to increase the figure to 70 percent as part of Vision 2030.

State initiatives to help Saudis become homeowners have fuelled a mortgage bonanza that has reaped big profits for banks.

In the 12 months to June 30, there were 18,500 property sales completed in Riyadh, up 52 percent versus the same period in 2022-3, according to the consultancy CBRE.

Transactions in Jeddah rose 43 percent to just under 9,400, while transactions in Dammam increased 22 percent to almost 2,400 sales.

In Riyadh, villa prices rose 3.3 percent and apartment prices 6.6 percent over the same period, CBRE estimates.

“Demand for residential real estate will remain high, particularly in Riyadh and Jeddah, thanks to robust population growth,” S&P Global wrote in November.

However, S&P also warned that the residential sector was “fraught with challenges, including the growing costs of land, construction, and materials; construction capacity constraints; and competition for financing with other Vision 2030 projects”.

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