Details

Incentive programmes revitalising

Saudi property sector

 

-Al Mazaya report says: Saudi economy expected to make large strides over coming few years on the back of robust economic stimulus packages

The performance of Gulf real estate companies in the first half of 2018 has been adversely impacted by a noticeable decline in both financial and economic activities and in public spending. Slowdown in foreign direct investment (FDI) inflows due to rising competition from other foreign markets is another factor that has had its own bearing on the sector.

However, a large number of companies have been able to record positive results and others managed to offset the cumulative losses, while the rest are attempting to reduce losses through the development of robust cost optimisation mechanisms, including opting for mergers and acquisitions at the local and regional levels.

As for the Saudi real estate market, Al Mazaya Holding’s weekly real estate report pointed out that the market provides a number of incentives, coupled with pressures on the performance of construction companies and real estate developers. The report added that the real estate companies’ first-half performance  was below expectations despite the continued launch of projects and rising government spending on infrastructure and housing projects of all kinds.

The report attributed the accumulated losses in this sector mainly to the reduction in asset values. The lower margin of profits due to higher raw material prices and lower sales contributed to augmenting the losses.

The report says that the deceleration and dumping recorded in the building material markets have had a serious impact on the performance of construction companies in Saudi Arabia, and it may be difficult to find appropriate solutions in the near future, taking into account the high public and administrative expenses and the high cost of financing. The report also cited the slowdown registered in the completion of several projects as playing a role in the negative results recorded by real estate companies until the moment.

In the meantime, a number of real estate companies in the Kingdom have succeeded to post accumulated quarterly profits and to reduce accumulated losses, which corroborated the success of these companies in finding solutions to offset their losses, according to the report. A large number of companies have implemented development programmes and tapped new markets for their products. These companies also reduced their selling prices to maintain their share in local markets and reduced operating costs and financing burdens.

The report added that the ability of real estate developers and construction companies to achieve positive results is a good roadmap for other firms to follow suit and achieve similar results over the coming period. The report stressed that the plans to stimulate sales by looking for new customers despite the recession have had a direct role in reducing operational losses and sales costs.

In the meantime, listed real estate companies’ profits  increased 10.2% by the end of the first quarter of this year to reach SAR337 million  compared to the same period last year during which profits amounted to SAR306 million. The plans developed by the Ministry of Housing and the pumping of thousands of housing units on all sites and cities have a significant impact on boosting supply, pushing prices down. In Q1, five companies sustained a decline in profits, three companies showed negative results and two firms reported an increase in their profits, reflecting their ability to efficiently survive pressures and find alternative tools to survive the current headwinds.

The report pointed out that the performance of the Saudi economy has not yet achieved the results targeted through the incentive projects launched recently. The main sectors, especially the real estate sector, are most likely to go through some fluctuations on the back of a large number of projects and financial and economic decisions taken over the past period. These decisions need more time to achieve the desired positive results and stability, the report said.

The report added that property prices are still recording some decline as the housing problem is still out of control. And despite the current levels of real estate prices, some segments of Saudi society are still unable to own convenient homes. It’s noteworthy that the Saudi Vision 2030 aims to address the problem and increase Saudi homeownership by 5% to reach 52% by 2020, which will reflect positively on the performance of construction and property development companies alike.

The report highlighted the dumping-related issues and their impact on the performance of construction companies in the Kingdom. It said that the quarterly operating profits were adversely affected by the unrestricted flow of imports and the lack of protective fees that safeguard the sector and ensure its growth and attractiveness. Dumping impedes FDI inflows, according to the report, which pointed out that opening the door for import appears to be a successful measure only under circumstances where the market is in a state of shortage of construction products, with local companies failing to meet quality and quantity standards. This means that the sector performance needs to be improved over the coming period in terms of import policies to boost the ability of domestic products to compete. There must be new mechanisms and tools to open external markets, whether by improving the quality of products or reducing production costs to boost the competitiveness of Saudi products in foreign markets, which are already full of goods from all over the world. It is worth mentioning that the continuation of the current approach will increase the challenges faced by property companies despite the current momentum and the mobility expected to be seen by the reconstruction and construction sector in the coming years.

On the other hand, the indicators of the construction sector in the Kingdom, according to the weekly real estate report of Al Mazaya Holding, are supporting the performance of real estate developers and the construction sector during the coming period. This comes at a time of increasing signs of improvement and exit from stagnation. The announcement of new government development projects is a good indicator to be built upon when evaluating the sector’s ability to meet the challenges.

It is worth mentioning that the contracting sector is contributing 6% to the Saudi GDP and is thus playing a vital role at the level of macro-economic performance of the Kingdom, being the main engine for commercial, industrial and service activities, and therefore any growth recorded by the contracting sector would reflect positively on the construction and reconstruction activities, and vice versa.

The report indicates that real estate companies seem to be able to benefit from the current pace of activity and the volume of projects being implemented as well as those under execution provided that these companies would develop their own innovative tools, enhance their ability to compete, reduce costs and introduce advanced technologies capable of efficiently meeting the constant changes in demand.