Saudi Property Stokes 3-Times Bigger Bond Gains: Islamic Finance

Dar Al Arkan’s Islamic bonds have returned more than three times the regional average as the property developer benefits from Saudi Arabia’s plan to build at least 500,000 new homes.

Dar Al Arkan Real Estate Development Co.’s $450 million sukuk due February 2015 earned more than 7 percent this year including profit rate, the most among Islamic bonds in the Gulf Cooperation Council, according to data compiled by Bloomberg. Dubai-based Emaar Properties PJSC’s (EMAAR) 2016 sukuk was second-placed with a return of 5.7 percent. The average gain was 2.1 percent.

Real estate companies in the Gulf are profiting as economic growth accelerates, with yields on sukuk from Emaar and Nakheel Properties PJSC tumbling amid surging Dubai property prices. Saudi Arabia’s construction program, part of a plan to avoid unrest that toppled governments in Egypt, Tunisia, Libya and Yemen, helped Dar Al Arkan pay a $1 billion sukuk last year, easing concern over its finances.

“There have been some major projects coming to the Saudi real estate market, and Dar Al Arkan is one of the companies that has benefited most,” Ahmed Shehada, head of trading at Qatar National Bank Financial Services in Doha, said by phone Nov. 3. People know the scale of real estate developments in Saudi and how property companies will gain, he said.

Yields Slide

The yield on Dar Al Arkan’s (ALARKAN) 2015 percent notes tumbled 130 basis points this year to 4.8 percent at 12:13 p.m. in Dubai, according to data compiled by Bloomberg. The yield on Emaar’s $500 million 2016 notes fell 80 basis points to 3.61 percent. That compares with an average 81 basis-point, 0.81 percentage-point, jump to 3.73 percent on Nov. 4 for sukuk from the six nation GCC, according to HSBC/Nasdaq Dubai indexes.

“This is a 2015 maturity, and we’re getting close to that,” Samer Mardini, Dubai-based vice president of fixed income at SJS Markets, said by phone yesterday. “Investors in Saudi who are aware of the company and its strategy, and the prospects for being repaid, are happy to hold to maturity.”

Dar Al Arkan, Saudi Arabia’s third-biggest real estate developer by market value, repaid a $1 billion sukuk in July last year. The price for the debt fell below 70 cents on the dollar in 2009 on concern over the company’s financial position.

‘Walk Out’

Now could be the time to sell the 2015 sukuk, QNB’s Shehada said. A market rally following the Sept. 18 decision by the Federal Reserve to maintain bond buying, boosted by the U.S. Congress’ October deal to raise the debt ceiling, pushed the yield on the Islamic bond 134 basis points lower.

“This is a great opportunity to walk out,” Shehada said. “The U.S. problems remain, they have just been pushed down the road. For those who bought when the price of this debt was low, there is no reason to take a risk over what will happen next.”

Dar Al Arkan’s cash and equivalents declined 17 percent in the third quarter from the previous, according to data compiled by Bloomberg. Profit fell 17 percent from a year earlier to 183 million riyals ($49 million) amid lower margins on property sales and finance charges, the company said in a statement.

While Dar Al Arkan’s cost of funding has improved, the company pays more than many Saudi borrowers because of its cash flow, Mardini said. The company is rated B+ by Standard & Poor’s, four levels below investment grade.

Needing Development

Dar Al Arkan’s 2015 notes were sold in 2010 with a profit rate of 10.75 percent. The company raised a further $450 million by selling sukuk in May that pay 5.75 percent. The notes currently yield 6.41 percent, according to data compiled by Bloomberg.

Saudi Arabia needs to build 85,000 homes a year to keep up with a population of 28.4 million that’s growing 2.5 percent annually, Mike Williams, head of MENA research at CBRE, wrote in a March report. Dar Al Arkan’s pipeline includes the Al Qasr project in Riyadh that will provide homes for 13,000 people, and the Shams Al-Arous project near Jeddah that will include more than 10,000 units.

“The prospects will be good for Dar Al Arkan, because real estate works in the long term,” Mardini said. “Investors will judge that the company will be around a long time because it’s a Saudi real estate company and Saudi needs a lot of development.”

To contact the reporter on this story: Samuel Potter in Dubai at spotter33@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.