Complex Made Simple

Mecca developer can’t sell its mixed-use properties! Is it alone?  

It’s been no secret that the GCC real estate market has not been enduring its greatest of times, and new research has revealed that things won’t necessarily improve in 2019.

Jabal Omar Development Co (JODC), the world-famous Mecca real-estate developer, has received the brunt of these difficult times, losing about 40% of stock value this year, according to Bloomberg. Current share price is $9.39 (SAR 35.25), down from $15.72 (SAR 59) at the start of the year.

What has JODC’s performance been like this year, and what does the market hold for it in 2019?

Mounting losses in early 2018

2018 has not been kind to JODC.

A 40% share value drop aside, the Saudi company posted a 143.5% year-on-year increase in net losses for the second quarter of the year, according to Mubasher. Its net losses amounted to $39.46 (SAR 148.02 million) during Q2 2018, up from $16.21 million (SAR 60.79 million) in Q2 17, according to a statement to the Saudi Stock Exchange (Tadawul).

Quarter-on-quarter, the Saudi firm’s losses rose 14.5% during the period between April and June, from $34.46 million (SAR 129.3 million.)

Another obstacle holding JODC back is the fact that company has not been open to foreign investment, Bloomberg explains, also noting that it “won’t benefit from inclusion in emerging-markets indexes next year.”

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Some light for JODC at the end of the tunnel?

Q3 2018 did offer JODC some respite, however.

In a Saudi exchange filing posted in late September, JODC returned to profit.

Net profit — minus Zakat and tax — reached $125.13 million (SAR 469.62 million) for the three months ending Sept. 30 in a Saudi exchange filing on Tuesday. This compared to a loss of SR593.97 million recorded in the same quarter last year, Arab News reported. JODC cited increased sales of residential units as the cause of this improvement in profits.

Q3 2018 reached $351.8 million (SAR 1.32 billion) compared to revenue of $12.1 million (SAR 45.52 million) in the same time period the previous year, according to the listing.

Is a better year ahead? JODC could find solid footing in Mecca, with Arab News reporting that “market commentators are saying they expect demand for luxury hotels and other residential projects in Mecca to continue to be “strong” in the coming year — something Jabal Omar Development Co. will be keen to capitalize on.”

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Is it a real estate problem that JODC is facing?

JODC’s losses have been caused by numerous factors.

Ratings agency S&P Global Ratings has said in a recent research note that real estate markets in the GCC are expected to remain under pressure during 2019, and not expected to fare any better than in 2018, as the region remains wrought with political uncertainties, supply-demand imbalances, economic slowdown, and lower population growth.

Harshjit Oza, vice president of research at Shuaa Capital told Bloomberg: “Factors like a low oil price, rising financing costs and geopolitical risks are acting as a headwind to sector growth.”

The instability of oil prices in anticipation and later onset of US sanctions on Iran has led to weakened investor faith, though OPEC’s planned supply cuts in 2019 should stabilize the price of oil. If the oil market stabilizes, the real estate market could reflect this with positive change.

The introduction of first-time-ever 5% VAT in Saudi and the UAE at the start of 2018 has not helped matters, either.

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Market outlook for 2019

As S&P Global Ratings noted, things aren’t looking too great for the GCC real estate market in 2019. As mentioned earlier, the OPEC oil should help to alleviate the situation a bit.

Tough times aside, as a component of the real estate sector, Saudi Arabia has the largest Facilities Management (FM) service market in the GCC and is also the fastest growing market in the region, as reported by the Saudi Gazette.

The Saudi newspaper noted that the FM service market in Saudi Arabia was valued at around $4.6 billion in 2017 and is further expected to reach around $39.6 billion by 2022 after growing at a CAGR of around 10%, which should ease sentiments regarding the sector in the long run.

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