In its latest updated report covering the Saudi real estate market, NCB Capital, the GCC’s leading wealth manager and the Kingdom’s largest asset manager, believes the outlook for the sector is positive, driven by the Ministry of Housing programs and the positive outlook for real estate financing.

“The sector continues to be the best performing sector in the TASI (Tadawul All-Share Index), up 34 percent YTD and outperforming the index by around 22 percent,” stated Mohamed Tomalieh, equity research analyst at NCB Capital. “We remain neutral on Dar Al Arkan, Taiba and Al Akaria.”

He added: “The real estate sector has increased the most in the Saudi market YTD, and we believe this rally is driven by positive sentiment regarding several residential and tourism projects. Optimism on expected contracts from the Ministry of Housing drives shares of real estate developers.”

He said: “Meanwhile, we believe that compulsory purchase orders and unlocking the value of properties in the immediate vicinity of the holy mosques is a positive sentiment for hotels and tourism companies in the sector.”

The report notes that the Ministry of Housing is currently working on developing around 153,000 units as part of its housing programs. These programs aim to offer affordable housing units to address the shortage in supply. The ministry announced that it looks to involving the private sector in executing its current projects.

“From listed companies, Dar Al-Arkan is best positioned to benefit from this due to its position as a developer and its large land bank and licensed land plots to build around 40,000 housing units,” Tomalieh stated.

“Furthermore, during Q2, 2014, Taiba received compensation for one of its hotels while Jabal Omar has sold units in an auction. Both properties are in the vicinity of the two holy mosques and we believe similar news going forward, may further support the sector.”

NCB Capital remains neutral on Dar Al-Arkan (PT SR 13.3), Taiba (PT SR 44.2) and Al Akaria (PT SR 38.2). “Although potential contracts from the Ministry of Housing are a major catalyst for Dar Al-Arkan and Al Akaria, we have not priced any such contracts in our models given the lack of clarity. Other key catalysts include any developments on Al-Remal project for Al Akaria and higher than expected compensation from compulsory purchase orders for Taiba,” Tomalieh added.

NCB Capital’s report points out that real estate financing is another key factor in the sector. Financing is expected to increase significantly, supported by the full approval and implementation of the Mortgage Law.

To date, 20 institutions, including twelve banks, have received a real estate financing license from Saudi Arabian Monetary Agency (SAMA). In addition, the total number of institutions applying for the license stands at 48. This supports NCB Capital’s belief that complete approval of the Mortgage Law will be fully implemented soon.

NCB Capital also believes that the demand for modern office space in Riyadh is another positive for the real estate sector. The office supply in Riyadh is expected to increase 71 percent by 2016.

“The main addition to the office supply in Riyadh will be the King Abdullah Financial District (KAFD), which we believe will be negative for Al Akaria, specifically for its older Grade B offices,” said Tomalieh.

“KAFD is the most significant upcoming project in the office market and when Phase 1 is completed, expectedly in 2014, as much as 558,000 sqm of office space will be added to the market, while a total of 1.66 million sqm will be the full amount added on final completion of KAFD,” he added.

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