LONDON, 30 July 2007 — Riyadh-based Dar Al-Arkan Real Estate Development Company (DAAR), one of the largest real estate developers in Saudi Arabia, has issued a five-year $1 billion Sukuk-Al-Ijara (Islamic bond) — the second Sukuk issuance by the company in a space of six months. DAAR issued its debut Sukuk in January 2007, a $600-million Sukuk Al-Ijara, which was the first Sukuk issued in the international capital markets by a Saudi corporate.
The DAAR issuance follows a spate of Sukuk issuances by leading Saudi corporates in the last few days, including the stand-alone SR5-billion issuance announced on Friday by Saudi Electric Company (SEC) which matures in 2027; and the second issuance announced earlier in July 2007 by Saudi Basic Industries Corporation (SABIC) which is in the process of finishing its book-building exercise, before announcing the final value of the issuance, which is expected to be in the region of SR8 billion.
The first SABIC issuance, a SR3-billion Sukuk, the first such public offering in the domestic Saudi market, was issued in tandem with the introduction of a stand-alone Sukuk Law in the Kingdom in September 2006. This together with the huge capital expenditures planned by the oil, gas, petrochemicals, and other infrastructure sectors such as the real estate sector over the next few years, according to experts, will spur the Sukuk and Islamic corporate and project finance markets, because also of the increasing preference of Saudi corporates and utilities to access Islamic finance per se or as part of a new strategy of diversification of sources of funding.
The debut SABIC and DAAR Sukuk are now paving the way for more corporate issuances as Saudi companies go to the financial markets to raise funds primarily for general corporate purposes including balance sheet requirements for expansion or working capital; or even for refinancing existing perhaps more expensive conventional debt.
An encouraging sign is that Sukuk issuances are pioneering new asset pools that are being securitized. In the case of SEC, it is the company’s rights in maintaining and reading a pool of electricity meters and the distribution of bills, for which it accrues levies; and in the case of SABIC it is rights pertaining to marketing of petrochemical products. In the latest DAAR Sukuk as in the previous one, the underlying assets that are being securitized include land and property on the land at DAAR’s Al Qasr Residential Project in the Al-Suwaidi suburb of Riyadh.
The joint lead managers and underwriters for the $1 billion DAAR Sukuk Al-Ijara include ABC Islamic Bank E.C., Arab National Bank, Deutsche Bank, Gulf International Bank B.S.C, Dubai Islamic Bank PJSC, Kuwait Finance House (Malaysia) Berhard and Unicorn Investment Bank BSC.
Mohammed Al-Sheikh, Senior Partner of The Law Office of Mohammed Al-Sheikh, in association with White & Case LLP, who acted for the joint lead managers of the $1 billion DAAR issuance, agreed that “we are seeing increasing demand for Shariah-compliant investments and we expect to see rapid growth in Sukuk issuance over the next few years.”
DAAR is now emerging as a major player in Islamic finance particularly in real estate and mortgage finance. DAAR is one of the major shareholders in Unicorn Investment Bank, an Islamic investment bank incorporated in Bahrain and which last year pioneered the first true-sale securitization, whether Islamic or conventional, in the Middle East region.
In April this year, DAAR together with the International Finance Corporation (IFC), the private sector financing affiliate of the World Bank Group; Arab National Bank (ANB); and Kingdom Installment Company (KIC) signed a joint venture agreement to establish the Saudi Home Loans Company (SHLC) whose mandate is to provide Shariah-compliant residential mortgage and commercial property finance. SHLC is the first such company in the Kingdom.
The aim, according to the IFC, is to promote affordable home ownership in the Kingdom by making housing more available for the country’s middle-and-lower-income population. DAAR managing director, Abdullatif Al-Shelash, told Arab News that the JV is “to help Saudi youth purchase suitable houses by providing them with Shariah-compliant financial tools.” SHLC, a joint stock company incorporated in the Kingdom, has a paid-in capital of SR2 billion, of which the IFC is providing SR100 million (about $27 million) in equity investment for a 5 percent stake. DAAR owns 15 percent of the equity; followed by ANB and KIC each owning 40 percent of the remaining equity respectively. Dar Al Arkan, established in 1993 and assigned an A- rating by Capital Intelligence, is the largest residential real estate development company in Saudi Arabia and the first to obtain the ISO9001 certification. The company mandate is to provide affordable, international standard housing solutions to middle income families across the Kingdom. The company is currently involved in or planning over 20 residential developments throughout Saudi Arabia and expects that it will have developed approximately 65,000 residential units by 2009.
According to the company, Saudi Arabia in recent years has been witnessing a huge increase in its population — a growth of about 4 percent. In the capital Riyadh alone, this growth has reached an astonishing 8 percent.
Dar Al-Arkan estimates that the housing market in the Kingdom is expected to increase by 2 percent in 5 years, from 4.34 million stocks of units in 2004, to 5.4 million units in 2010, servicing one of the youngest population demography in the world. Some 55 percent of the Saudi population is under 20 years old.
The $12 billion DAAR Sukuk certificates will be freely transferable, in registered format, and will be listed on the Dubai International Financial Exchange (DIFX). The transaction like the first one is a true-scale securitization and is fully underwritten by the lead managers to the full value. There is direct recourse to Dar Al-Arkan Real Estate Development Company for the Sukuk profit and principal amount. The issuance has a tenor of five years, maturing in 2012.