Dar Al Arkan struggles despite Saudi property boom

The kingdom's largest property company continues to make only slow headway, despite a boom in its sector, as it announces that it will need to sell some assets to pay down debt.

The Saudi property market is booming, but the kingdom's largest company in the sector continues to struggle.

Dar Al Arkan shares are down almost 40 per cent in the past six months and the company said this week it would need to sell some assets in order to pay down debt.

It has been through a round of refinancing this year but is not getting any closer to clearing its outstanding payments, analysts say.

Asim Bukhtiar, an equity analyst at Riyad Capital in Saudi Arabia, said: "In terms of replenishing their land bank, they have to look at outside sources of funding. We don't expect too much improvement in 2011."

Dar Al Arkan is an anomaly in an otherwise vibrant Saudi property market, where land prices are up 10 per cent and demand is high. The problem is that the company's margins on land sales have fallen somewhat and it has had to cut prices to attract buyers.

Margins on sales are down to about 45 per cent this year, from a previous average of 52 per cent.

But residential property, Dar Al Arkan's speciality, has taken the biggest hit, with margins down to 6 or 7 per cent this year from about 22 per cent last year.

The company said this week it would not need to return to the debt markets to repay a US$1 billion sukuk maturing in 2012. The value of the bond fell 7 per cent last week, the fifth-biggest loss among regional bonds.

It also reported a 53 per cent slump in third-quarter net profit to 289.6 million Saudi riyals, from 616.2 million riyals in the same period last year, which triggered a cut by the ratings agency Moody's Investors Service.

But not all analysts are worried about the plan to sell assets.

Majed Azzam, a property analyst at HC Securities and Investments, said: "When they say asset sale, they mean land sale. It's part of the general operations of the company rather than liquidating its assets to pay off a debt. They are highly leveraged but they can definitely sell more land."

However, many investors would like to see a clear debt repayment strategy before next year. Dar Al Arkan shares closed 1.7 per cent higher yesterday at 8.75 riyals.