Property prices to decline on distressed assets, says Aljazira Capital

Saudi Arabia’s residential real estate sector is expected to witness declines in prices in the short to medium-term on the back of distressed assets, but the ongoing rebalance might turn out to be healthy for enhancing “transparent investment environment,” Aljazira Capital said in a recent research note. 

“The resurgence of residential real estate going forward can only be driven by an upturn in available liquidity and/or a rise in relative affordability giving broader access to entry level homebuyers,” analysts at Aljazira wrote in the note. “Lack of data adds a layer of risk to sector investment.”

Under the Saudi economic reform plans 2020 and 2030, institutional contribution to real estate development will be increased to 30 percent from 10 percent by 2020. Real estate financing as a percentage of non-oil GDP will also be raised to 15 percent from the current 10 percent by 2020. 

“Such initiatives have the potential of backing institutional investment to rise and fill market gaps as market transparency improves,” according to Aljazira.

The brokerage firm updated its recommendation for real estate companies under its coverage to “neutral.”

“Real estate equities have outperformed the market; not a complete reflection of the state of the sector,” the analysts said.

Aljazira has a “neutral” rating on Dar Al-Arkan with a price target of SAR 5.10, but it noted that the company’s credit and real estate conditions do not support a positive outlook and debt repayment to take place at the expense of investment in future projects.

Emaar The Economic City was updated to “neutral” with a target share price of SAR 15.6; however, liquidity remains a concern and favorable views depend on the company’s ability to generate recurring income asset base.

Earlier this year, SAMA, the country’s central bank, set LTVs (Loan to Value) at 70 percent to avoid real estate credit bubbles.

Tax on vacant land (white land) is also set to change market dynamics and approach towards real estate investment.

“The real estate investment landscape is expected to shift away from raw land and divestment and lean towards income generating assets,” according to Aljazira.