Riyadh – Mubasher: Aljazera Capital said on Tuesday that it expects that the Saudi real estate market to react in a more definitive manner to changes in interest rates.
It added that the combination of purchasing power decline and interest rates rise impact the housing sector negatively, adding that credit driven markets are sensitive to changes in interest rates and the broad credit environment.
"Rising interest rates are followed by rising cap rates (i.e. a higher required rate of return on real estate), which tends to be at the expense of lower real estate values rather than on higher rents. However, real estate prices tend to be sticky in nature and require significant time to adjust," the report said.
The report showed that relatively low levels of debt in the market, compared to regional debt levels, could partially lessen the effects of rising interest rates on real estate values.
Stricter lending standards through a lower loan-to-value (LTV) ratio mandated by Saudi Arabian Monetary Agency (SAMA) were reflected on lenders and affected the level of liquidity in the market.
The research firm expected that LTV is estimated to remain at current levels, as real estate markets show a level of transparency in a more regulated market, added that it is likely that LTV classifications might be introduced and used as a tool to direct investment towards specific market segments.
"The introduction of Real Estate Investment Trusts (REITs) will prompt institutional investment in different income generating real estate sub sectors on the medium- and long- terms," Alriyadh Capital said.
The report noted that real estate equities outperformed the market; but that is not considered an indication for the sector's state.
Aljazera Capital updated its recommendation for sector companies under coverage to “Neutral” and assigned “Neutral” recommendation on Dar Al-Arkan Company with a price target (PT) of SAR 5.10 per share.
