OFFERING CIRCULAR

OFFERING CIRCULAR
Offer of Sukuk due 15 April 2014G
DAR AL-ARKAN REAL ESTATE DEVELOPMENT COMPANY
A Saudi Joint Stock Company in accordance with Ministerial Resolution Number 1021
dated 10/6/1426H (corresponding to 17/7/2005G)
The Sukuk due 15 April 2014G (the “Sukuk”) of Dar Al-Arkan Real Estate Development Company (hereinafter referred to as the “Issuer” or “Dar Al-Arkan”)
are being issued at par, without discount or premium.
Pursuant to an investment agency agreement (the “Investment Agency Agreement”) dated on or about the Closing Date (as defined in the terms and conditions of
the Sukuk in the section headed “Terms and Conditions of the Sukuk” in this Offering Circular (the “Conditions”)) between the Issuer as investment agent (the
“Investment Agent”) and the Sukukholders’ Agent (as defined below) acting on behalf of the holders of the Sukuk (the “Sukukholders”), the proceeds of the sale
of the Sukuk will be applied by the Investment Agent (through the Investment Manager pursuant to the Investment Management Agreement (each as defined in
the Conditions)) to form a single portfolio of investments consisting of Ijara and Murabaha contracts (the “Sukuk Assets”) in accordance with the Investment Plan
(as defined in the Conditions), including a requirement to invest the proceeds from the Sukuk into Sukuk Assets generating returns at least equal to the Periodic
Distribution Amount (as defined in the Conditions) and a requirement for the Investment Agent and the Investment Manager to ensure satisfaction of certain
conditions relating to the preservation of value of the Sukuk Assets (the “Underlying Value Conditions”). The Ijara contracts will at all times constitute a
minimum of 51 per cent. (by value) of such investment portfolio.
On the fifteenth (15th) day of April, July, October and January, in each year, commencing on 15 July 2009G and up to and including 15 April 2014G or, if any
such day is not a Business Day (as defined in the Conditions), the next following Business Day (each a “Periodic Distribution Date”), the Investment Manager,
acting as agent for the Issuer, is expected to pay through a Payments Administrator (as defined in the Conditions) an amount equal to the Periodic Distribution
Amount to the Sukukholders, calculated as a percentage rate per annum equal to SIBOR plus a Margin (each as defined in the Conditions), of the aggregate
Nominal Amount (as defined below) of the Sukuk as are current on the Transfer Record Date (as defined in the Conditions) immediately preceding the last day of
the relevant Periodic Distribution Period (as defined in the Conditions). At the Expiry Date, the Investment Manager will pay to the Sukukholders in respect of the
Sukuk current at such date their pro rata share of the Sukuk Settlement Amount.
The Sukuk will be the subject of a declaration of agency (the “Declaration of Agency”) to be dated on or about the Closing Date (as defined below) between the
Issuer and Samba Capital & Investment Management Co. (the “Sukukholders’ Agent”).
Pursuant to a guarantee dated on or about the Closing Date (the “Guarantee”) between the Issuer and the Sukukholders’ Agent, the Issuer will irrevocably
undertake to pay to the Sukukholders their pro rata share of the Distribution Shortfall Restoration Amount, if any, and the Value Restoration Amount, if any.
In the event that the amount distributed to the Sukukholders on any Periodic Distribution Date is less than the Periodic Distribution Amount for the relevant
Periodic Distribution Period (as defined in the Conditions) and such shortfall remains unpaid in full five (5) Business Days after its due date (except as a result of
an administrative or technical error), and in certain other circumstances described in Condition 12 (Events of Default), the Sukukholders may notify the Issuer of
an Event of Default (as defined in the Conditions) under the Investment Agency Agreement. The Issuer shall then redeem the Sukuk as are current on the Event of
Default Date (as defined in the Conditions) and the Investment Manager shall pay to each Sukukholder its pro rata share of the Sukuk Settlement Amount (as
defined in the Conditions) in respect of the Sukuk current at such date. Upon the occurrence of a Tax Event (as defined in the Conditions), the Sukuk may be
redeemed, subject to certain conditions, at the option of the Issuer in whole, but not in part, in which case each Sukukholder shall receive its pro rata share of the
Sukuk Settlement Amount from the Investment Manager in respect of the Sukuk current at such date.
The aggregate Nominal Amount of the Sukuk to be issued and the Margin will be determined by agreement between the Issuer and the Joint Bookrunners and
Joint Lead Managers (as defined in the Conditions) and announced following the end of the Investor Presentation Period (as defined in the Conditions) (see the
“Subscription and Sale” section of this Offering Circular).
An investment in the Sukuk involves certain risks and uncertainties. For a discussion of certain factors to be considered in connection with an
investment in the Sukuk, see the “Risk Factors” section of this Offering Circular.
The Saudi Arabian Stock Exchange (“Tadawul”) will be appointed as registrar (the “Registrar”, which expression includes any successor registrar) of the Sukuk
(as described in Condition 3 (Register, Title and Transfers) and the “Subscription and Sale” section of this Offering Circular, respectively). The Sukuk will be in
registered form in nominal amount of SAR 1,000,000 (the “Nominal Amount”). The Sukuk will be represented at all times by interests in a registered form
global Sukuk (the “Global Sukuk”), which will be deposited with the Sukukholders’ Agent. The Sukuk may only be held in book entry dematerialised form and
definitive certificates will not be issued to Sukukholders in relation to their holdings of Sukuk.
The distribution of this Offering Circular and the offering, sale and delivery of the Sukuk in any jurisdictions is restricted by law. Any person who comes into
possession of this Offering Circular is required by the Issuer and the Joint Bookrunners and Joint Lead Managers to inform themselves about and to observe any
such restrictions. For a description of certain restrictions on offers, sales and deliveries of the Sukuk and on distribution of this Offering Circular and other
offering material relating to the Sukuk, see the “Subscription and Sale” section of this Offering Circular.
Joint Bookrunners and Joint Lead Managers
This Offering Circular is dated 17/3/1430H (corresponding to 14/3/2009G)
IMPORTANT NOTICE
This Offering Circular does not constitute an offer to sell or a solicitation of an offer to buy the
Sukuk by any person in any jurisdiction where it is unlawful to make such an offer or solicitation.
The distribution of this Offering Circular and the offer or sale of the Sukuk in certain jurisdictions
is restricted by law. This document may not be used for, or in connection with, and does not
constitute, any offer to, or solicitation by, anyone in any jurisdiction or under any circumstance in
which such offer or solicitation is not authorised or is unlawful.
This Offering Circular is submitted to a limited number of persons on a confidential basis. By
accepting this document and other information relating to the offering of the Sukuk, each recipient
agrees that neither it nor any of its employees or advisers shall use the information for any purpose
other than for evaluating its interest in the offering of the Sukuk or divulge such information to any
other party. This Offering Circular shall not be photocopied, reproduced or distributed to others
without the prior written consent of Dar Al-Arkan or the Joint Bookrunners and Joint Lead Managers
(as defined below). If the recipient determines not to purchase any of the Sukuk, it shall promptly
return all material received in connection therewith (including this Offering Circular) to either Dar
Al-Arkan or the Joint Bookrunners and Joint Lead Managers without retaining any copies.
HSBC Saudi Arabia Limited and Samba Capital Assets & Investment Management Company have
been appointed by Dar Al-Arkan to act as the joint bookrunners and joint lead managers (the “Joint
Bookrunners and Joint Lead Managers”) in relation to the Sukuk described herein. In connection
with the offering of the Sukuk, no person has been authorised to give any information or to make any
representation about Dar Al-Arkan or the Sukuk (other than as contained in this document) and, if
given or made, any such other information or representation should not be relied upon as having been
made by Dar Al-Arkan or the Joint Bookrunners and Joint Lead Managers.
The information contained herein is subject to change. The delivery of this Offering Circular does not
imply that any information contained herein will continue to be correct subsequent to the date hereof
and Dar Al-Arkan and the Joint Bookrunners and Joint Lead Managers undertake no obligation to
provide the recipient with access to any additional information or to update this Offering Circular or
additional information.
This Offering Circular is not to be regarded as a recommendation on the part of Dar Al-Arkan, the
Joint Bookrunners and Joint Lead Managers or any of their advisers or affiliates to participate in the
offering of the Sukuk. Information provided herein is of a general nature and has been prepared
without taking into account any potential investor’s investment objectives, financial situation or
particular investment needs. Prior to making an investment decision, each recipient of this Offering
Circular is responsible for obtaining his own independent professional advice in relation to Dar
Al-Arkan and the offering of the Sukuk and for making his own independent evaluation of Dar
Al-Arkan, an investment in the Sukuk and of the information and assumptions contained herein, using
such advice, analysis and projections as he deems necessary in making any investment decision.
Prospective investors are not to construe the contents of this document as constituting tax, investment
or legal advice. Prior to purchasing any Sukuk, a prospective investor should consult with his, her or
its own legal, business and tax advisors to determine the appropriateness and consequences of an
investment in the Sukuk for such investor and arrive at an independent evaluation of such investment.
The sole purpose of this document is to provide background information about Dar Al-Arkan to assist
each recipient in making an independent evaluation of the offering and any investment in the Sukuk.
Dar Al-Arkan reserves the right, to the maximum extent permitted by applicable laws and regulations,
to terminate at any time any further participation by any party in the evaluation process and the
offering of the Sukuk and/or reject all bids without any liability or responsibility. Dar Al-Arkan shall
have no obligation to inform any investor or bidder of the grounds of such termination or rejection.
The cost and expenses incurred by any prospective investor or successful bidder (which includes, but
is not limited to, cost of employing the services of financial, accounting, technical and legal advisors,
traveling expenses, etc.) will be for their own account and neither Dar Al-Arkan nor the Joint
(i)
Bookrunners and Joint Lead Managers in any way would be held responsible for any such cost,
regardless of, without limitation, the conduct or outcome of the bidding, evaluation and selection
process.
This document may not be distributed in the Kingdom of Saudi Arabia except to such persons
as are permitted under the Offers of Securities Regulations issued by the Capital Market
Authority.
The Capital Market Authority does not make any representation as to the accuracy or
completeness of this document, and expressly disclaims any liability whatsoever for any loss
arising from, or incurred in reliance upon, any part of this document. Prospective purchasers
of the securities offered hereby should conduct their own due diligence on the accuracy of the
information relating to the securities. If you do not understand the contents of this document
you should consult an authorised financial adviser.
The Sukuk are being offered by way of an offer restricted to sophisticated investors. To qualify as an
“offer restricted to sophisticated investors”, the Sukuk may only be offered and sold in the Kingdom
of Saudi Arabia (the “Kingdom”) in accordance with Article 10 of the Offers of Securities
Regulations issued by the Board of the Capital Market Authority pursuant to its Resolution
number 2-11-2004, dated 20/8/1425H (corresponding to 4/10/2004G), as amended (the “Offers of
Securities Regulations”). By accepting this document and other information relating to the offering
of the Sukuk, each recipient represents that he is a “sophisticated investor” for the purpose of the
Offers of Securities Regulations. In accordance with Article 12(a)(2) of the Offers of Securities
Regulations, the Capital Market Authority has been notified about the offering of the Sukuk.
Moreover, the distribution of this Offering Circular and the offering, sale and delivery of the Sukuk in
any jurisdictions other than the Kingdom may be restricted by law. Any persons who come into
possession of this Offering Circular are required by the Issuer and the Joint Bookrunners and Joint
Lead Managers to inform themselves about and to observe any such restrictions. For a description of
certain restrictions on offers, sales and deliveries of the Sukuk and on distribution of this Offering
Circular and other offering material relating to the Sukuk, see the “Subscription and Sale” of this
Offering Circular.
Industry and Market Data
In this Offering Circular, information regarding the real estate industry and other data regarding the
market segment in which Dar Al-Arkan operates have been obtained from: (i) Dar Al-Arkan’s
estimates; and (ii) data and analysis on the real estate industry, which were obtained from various
publicly available third party sources and materials. Such information, sources, and estimates are
believed to be reliable, but have not been independently verified by Dar Al-Arkan, the Directors of
Dar Al-Arkan or any of their respective advisers and no representation is made with respect to their
accuracy or completeness.
Industry and market data is subject to change and cannot always be verified with complete certainty
due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering
process and other limitations and uncertainties inherent in any survey of market size. None of the
publications, reports or other published industry sources referred to in this Offering Circular were
commissioned by Dar Al-Arkan, the Joint Bookrunners and Joint Lead Managers or prepared at their
request and neither Dar Al-Arkan or the Joint Bookrunners and Joint Lead Managers have sought or
obtained the consent from any of these sources to include such market data in this Offering Circular.
Financial Information
The audited consolidated financial statements of Dar Al-Arkan for the year ended 31 December 2008
and the notes thereto, as audited by Deloitte & Touche Bakr Abdulkhair & Co. and Talal
Abu-Ghazaleh & Co. (a member of Talal Abu-Ghazaleh Organization) and the audited consolidated
financial statements of Dar Al-Arkan for the year ended 31 December 2007 (including comparative
data for its financial year ended 31 Decemebr 2006) and the notes thereto as audited by Talal
(ii)
Abu-Ghazaleh & Co. (collectively, the “Audited Consolidated Financial Statements”), each of
which are incorporated elsewhere in this Offering Circular, have been prepared in conformity with the
Saudi Organization for Certified Public Accountants (“SOCPA”) Generally Accepted Accounting
Principles.
Certain figures included in this Offering Circular have been subject to rounding adjustments;
accordingly, figures shown for the same category presented in different tables may vary slightly and
figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which
precede them.
Use of Dates
Dates are referred to in the Hijri (H) calendar and the Gregorian (G) calendar.
Forward Looking Statements
Certain statements in this Offering Circular constitute “forward-looking-statements”. Such statements
can generally be identified by their use of forward-looking words such as “plans”, “estimates”,
“believes”, “expects”, “may”, “will”, “should”, “are expected”, “would be”, “anticipates” or the
negative or other variations of such terms or comparable terminology. These forward-looking
statements reflect the current views of Dar Al-Arkan with respect to future events, and are not a
guarantee of future performance. Many factors could cause the actual results, performance or
achievements of Dar Al-Arkan to be significantly different from any future results, performance or
achievements that may be expressed or implied by such forward-looking statements. Some of the
risks and factors that could have such an effect are described in more detail in other sections of this
Offering Circular (see “Risk Factors” section of this Offering Circular). Should any one or more of
the risks or uncertainties materialise or any underlying assumptions on which a forward-looking
statement is based prove to be inaccurate or incorrect, actual results may vary materially from those
described in this Offering Circular, as anticipated, believed, estimated, planned or expected.
Neither Dar Al-Arkan, the Joint Bookrunners and Joint Lead Managers nor the Directors of Dar
Al-Arkan intend to update or otherwise revise any information or forward-looking statements in this
Offering Circular, whether as a result of new information, future events or otherwise. As a result of
these and other risks, uncertainties and assumptions, the forward-looking events and circumstances
discussed in this Offering Circular might not occur in the way it is expected, or at all. Prospective
investors should consider all forward-looking statements in light of these explanations and should not
place undue reliance on forward-looking statements. Neither the delivery of this Offering Circular
nor any oral, written or printed interaction in relation to the Sukuk is intended to be, or should be
construed as or relied upon in any way as, a promise or representation as to future earnings, results or
events.
(iii)
PARTIES AND ADVISERS
ISSUER
Dar Al-Arkan Real Estate Development Company
Maathar Street
P.O. Box 105633
Riyadh 11656
Kingdom of Saudi Arabia
INVESTMENT MANAGER
Dar Al-Arkan Sukuk Company
P.O. Box 22172
Riyadh 11311
Kingdom of Saudi Arabia
SUKUKHOLDERS’ AGENT
Samba Capital & Investment Management Co.
Old Airport Road
P.O. Box 83
Riyadh 11421
Kingdom of Saudi Arabia
PAYMENTS ADMINISTRATOR
SABB Securities Limited
Olaya Road
P.O. Box 9084
Riyadh 11413
Kingdom of Saudi Arabia
REGISTRAR
Tadawul
NCCI Building – North Tower
King Fahd Road
P.O. Box 60612
Riyadh 11555
Kingdom of Saudi Arabia
JOINT BOOKRUNNERS& JOINT LEAD MANAGERS
HSBC Saudi Arabia Limited
Olaya Road
P.O. Box 9084
Riyadh 11413
Kingdom of Saudi Arabia
Samba Capital Assets & Investment Management Company
Old Airport Road
P.O. Box 83
Riyadh 11421
Kingdom of Saudi Arabia
LEGAL ADVISERS TO THE ISSUER
(iv)
Law Office of Mohammed A. Al-Sheikh in Association with White & Case LLP
7th Floor, Tower 1, Al-Tatweer Towers
King Fahad Highway
P.O. Box 17411
Riyadh 11484
Kingdom of Saudi Arabia
LEGAL ADVISERS TO JOINT BOOKRUNNERS AND JOINT LEAD MANAGERS
Abdulaziz AlGasim Law Firm in association with Allen & Overy LLP
4th floor, Al-Mada Center
King Fahad Highway
P.O. Box 89402
Riyadh 11623
Kingdom of Saudi Arabia
REGISTERED AUDITORS OF THE ISSUER
Deloitte & Touche
Bakr Abulkhair & Co.
P.O. Box 213
Riyadh 11411
Kingdom of Saudi Arabia
Talal Abu-Ghazaleh & Co.
Olaya Main Street – Al-Khalidiya Building
P.O. Box 9767
Riyadh 11423
Kingdom of Saudi Arabia
(v)
TABLE OF CONTENTS
Page
1.
STRUCTURE DIAGRAM AND CASHFLOWS ..................................................................... 1
2.
SUMMARY OF OFFERING .................................................................................................... 3
3.
SHARI’AH ADVISORY COMMITTEE AND PRONOUNCEMENT.................................. 10
4.
RISK FACTORS ..................................................................................................................... 12
5.
TERMS AND CONDITIONS OF THE SUKUK.................................................................... 19
6.
USE OF PROCEEDS .............................................................................................................. 42
7.
SAUDI ARABIAN REAL ESTATE SECTOR....................................................................... 43
8.
DESCRIPTION OF DAR AL-ARKAN REAL ESTATE DEVELOPMENT COMPANY.... 62
9.
FINANCIAL REVIEW AND ANALYSIS ............................................................................. 89
10.
TAXATION AND ZAKAT................................................................................................... 103
11.
SUBSCRIPTION AND SALE .............................................................................................. 105
12.
GENERAL INFORMATION ................................................................................................ 108
APPENDIX 1 — FINANCIAL STATEMENTS ............................................................................... F-1
(vi)
1.
STRUCTURE DIAGRAM AND CASHFLOWS
The following is a simplified structure diagram and description of the principal cashflows relating to
the Sukuk. It does not purport to be complete and is qualified in its entirety by reference to, and must
be read in conjunction with, the more detailed information appearing elsewhere in this Offering
Circular and related documents referred to herein, to which the prospective investors should also
refer for an explanation of the meaning of certain capitalised terms used below.
STRUCTURE DIAGRAM
Declaration of Agency
Investment Agency Agreement
Issuer
Ijara / Murabaha
Investment
Management
Agreement
Counterparties
Ijara / Murabaha
Counterparties
SPV will invest Sukuk
Proceeds through
Ijara and Murabaha
Profit Collections
Ijara / Murabaha
Counterparties
Guarantee
- Distribution Shortfall Restoration Amount
- Value Restoration Amount
Investment
Manager
Sukukholders’
Agent
Sukuk Proceeds
- Periodic Distribution Amounts
- Sukuk Settlement Amount
Issue
Price
Sukukholders
- Agency Fee
Payment
Administrator
Periodic Distribution Amounts
Sukuk Settlement Amount
CASHFLOWS
Payments on the Closing Date
Pursuant to the Investment Agency Agreement (as defined in the Conditions), the initial subscribers of
the Sukuk will pay the issue price in respect of the Sukuk (acting through the Sukukholders’ Agent (as
defined in the Conditions)) to the Investment Manager (as defined in the Conditions), acting as agent
of the Issuer pursuant to the Investment Management Agreement (as defined in the Conditions). The
Investment Manager will invest such proceeds in the Sukuk Assets (as defined in the Conditions) in
accordance with the Investment Plan (as defined in the Conditions), which provides, among other
things, that such proceeds shall be invested into Sukuk Assets generating returns at least equal to the
Periodic Distribution Amount (as defined in the Conditions) and a requirement for the Investment
Manager to ensure satisfaction of the Underlying Value Conditions (as defined in the Conditions).
Payments on the Periodic Distribution Date
On each Settlement Date (as defined in the Conditions), the Investment Manager shall collect the
profit from the Ijara and Murabaha counterparties (“Profit Collections”) and pay (through the
Payments Administrator pursuant to the Payments Administration Agreement (each as defined in the
Conditions)) on each Periodic Distribution Date (as defined in the Conditions) the Agency Fees (as
defined in the Conditions) to the Sukukholders’ Agent and the Payments Administrator and the
Periodic Distribution Amount to the Sukukholders, with any excess left from the Profit Collections to
be transferred to the Issuer as a Periodic Incentive Fee (as defined in the Conditions). To the extent
that there is a shortfall on any Periodic Distribution Date between: (a) the Profit Collections available
for distribution to the Sukukholders on that date; and (b) the Periodic Distribution Amount scheduled
for distribution on that date, and such shortfall arises from a failure by either the Investment Agent or
1
the Investment Manager to comply with its obligations under the Sukuk Documents (as defined in the
Conditions), the Issuer shall, without being called to do so, make up that shortfall in accordance with
the terms of the Guarantee (as defined in the Conditions), pursuant to which the Issuer will
irrevocably undertake to pay to the Sukukholders their pro rata share of the Distribution Shortfall
Restoration Amount (as defined in the Conditions), if any.
Payments on the Expiry Date, Event of Default Date or Early Redemption Date
At the Sukuk Assets Liquidation Date (as defined in the Conditions), the Investment Manager will
pay from the Sukuk Assets Liquidation Proceeds (as defined in the Conditions) the Sukuk Settlement
Amount (as defined in the Conditions) to the Payments Administrator who will distribute such
amount to the Sukukholders on the Expiry Date, Event of Default Date or Early Redemption Date
(each as defined in the Conditions). The Investment Manager will also transfer to the Issuer at such
date the Investment Agency Incentive Fees (as defined in the Conditions), if any. To the extent a
shortfall remains between the Sukuk Assets Liquidation Proceeds and the Sukuk Settlement Amount
on the Expiry Date, Event of Default Date or Early Redemption Date, subject to such shortfall
resulting from a failure by either the Investment Agent or the Investment Manager to comply with its
obligations under the Sukuk Documents or otherwise to ensure satisfaction of the Underlying Value
Conditions, the Issuer shall make up that shortfall under the terms of the Guarantee by paying to the
Sukukholders the Value Restoration Amount (as defined in the Conditions).
Under no circumstances shall the Sukukholders’ Agent or any Sukukholders have any right to cause
the sale or other disposition of any of the Sukuk Assets, and the sole right of the Sukukholders’ Agent
and Sukukholders against the Issuer shall be to enforce the obligation of the Issuer to pay them their
pro rata share of the Distribution Shortfall Restoration Amount and/or the Value Restoration Amount
when due and payable, which are unsecured and unsubordinated obligations of the Issuer.
(2)
2.
SUMMARY OF OFFERING
The following summary information does not purport to be complete and should be read as
an introduction to, and in conjunction with, the more detailed information appearing elsewhere in this
Offering Circular from which it is derived. Any decision by a prospective investor to invest in the
Sukuk should be based on a consideration of this Offering Circular as a whole. Prospective investors
should carefully read the entire document, including the financial statements and related notes, before
making an investment decision. In particular, prospective investors should consider carefully the
factors set forth under the heading “Risk Factors”. Capitalised terms used but not defined in the
Summary have the meanings given to them in “Terms and Conditions of the Sukuk” unless indicated
otherwise.
Parties
Issuer and Investment Agent:
Dar Al-Arkan Real Estate Development Company
Investment Manager:
Dar Al-Arkan Sukuk Company
Joint Bookrunners and Joint Lead
Managers:
HSBC Saudi Arabia Limited and Samba Capital Assets &
Investment Management Company
Sukukholders’ Agent:
Samba Capital & Investment Management Co.
Registrar:
The Saudi Stock Exchange (“Tadawul”)
Payments Administrator:
SABB Securities Limited
Summary of the Investment Agency
Investment Agency Agreement:
Pursuant to an investment agency agreement (the
“Investment Agency Agreement”) dated on or about the
Closing Date between the Issuer as Investment Agent and
the Sukukholders’ Agent on behalf of the Sukukholders, the
proceeds of the sale of the Sukuk will be applied by the
Investment Agent (through the Investment Manager) to
form a single portfolio of investments consisting of Ijara
and Murabaha contracts (together with any such proceeds
which have not been so invested) (the “Sukuk Assets”), to
be held for the benefit of the Sukukholders in accordance
with an investment plan prepared by the Investment Agent
(the “Investment Plan”), including a requirement to invest
the proceeds from the Sukuk into Sukuk Assets generating
returns at least equal to the Periodic Distribution Amount
and a requirement for the Investment Agent to ensure
satisfaction of the Underlying Value Conditions (with such
non-compliance resulting in an obligation for the Issuer to
pay to the Sukukholders the Distribution Shortfall
Restoration Amount and the Value Restoration Amount
(each as defined in the Conditions) if any). The Ijara
contracts will be effective within two Business Days and
the Murabaha contracts will be effective within 30 days
after the date of the Investment Management Agreement
and the Ijara contracts will at all times thereafter constitute
not less than 51 per cent. (by value) of such investment
portfolio.
The Investment Agency will commence on the Closing
Date and will end on the Expiry Date or in the event that the
3
Sukuk are redeemed, purchased and cancelled in full prior
to the Expiry Date, on the day immediately following such
redemption or purchase and cancellation.
Investment Management Agreement:
Pursuant to an investment management agreement (the
“Investment Management Agreement”) dated on or about
the Closing Date between the Investment Agent and the
Investment Manager, the proceeds of the Sukuk shall be
invested by the Investment Manager in accordance with the
Investment Plan, including a requirement to invest the
proceeds from the Sukuk into Sukuk Assets generating
returns at least equal to the Periodic Distribution Amount
and a requirement for the Investment Manager to ensure
satisfaction of the Underlying Value Conditions. The
Investment Manager shall not be entitled to commingle its
own assets with the Sukuk Assets.
The Investment Manager shall make the Profit Collections
(as defined in the Investment Management Agreement) on
the Sukuk Assets on their respective due dates and on each
Settlement Date make the following payments in respect of
Profit Collections:
(a) first, to a charity chosen at the discretion of the
Investment Manager an amount equivalent to the
amount representing late payment penalties received in
connection with the Sukuk Assets;
(b) second, to the Payments Administrator, an amount
equivalent to Agency Fees due and payable to the
Sukukholders’ Agent and the Payments Administrator;
(c) third, to the Payments Administrator, an amount
equivalent to the Periodic Distribution Amount as per
Condition 8 (Periodic Distributions);
(d) fourth, all remaining amounts to the Investment Agent
less the Management Fees (as defined in the
Investment Management Agreement) as the Periodic
Incentive Fee.
Guarantee:
The Issuer will enter into a guarantee with the
Sukukholders’ Agent (the “Guarantee”) pursuant to which
the Issuer (in its capacity as guarantor) will irrevocably
undertake to pay, without being called to do so, to the
Sukukholders their pro rata share of:
(a) the Distribution Shortfall Restoration Amount, if any,
on any Periodic Distribution Date to the extent that
there is a shortfall on any such date between: (i) the
Profit Collections available for distribution to the
Sukukholders on that date; and (ii) the Periodic
Distribution Amount scheduled for distribution on that
date; and
(b) the Value Restoration Amount, if any, on the Expiry
Date, the Event of Default Date or Early Redemption
4
Date to the extent that there is a shortfall between the
Sukuk Assets Liquidation Proceeds and the Sukuk
Settlement Amount on such date,
in either case subject to such shortfall resulting from a
failure by either the Investment Agent or the Investment
Manager to comply with its obligations under the Sukuk
Documents or otherwise to ensure satisfaction of the
Underlying Value Conditions.
Under no circumstances shall the Sukukholders’ Agent or
any Sukukholders have any right to cause the sale or other
disposition of any of the Sukuk Assets, and the sole right of
the Sukukholders’ Agent and Sukukholders against the
Issuer shall be to enforce the obligation of the Issuer to pay
to them their pro rata share of the Distribution Shortfall
Restoration Amount or the Value Restoration Amount when
due and payable, which are unsecured and unsubordinated
obligations of the Issuer.
Summary of the Sukuk
Sukuk:
Sukuk due 15 April 2014G.
Issue Price:
100 per cent. of the aggregate Nominal Amount (as defined
below) of the Sukuk.
Currency:
The Sukuk will be denominated in Saudi Arabian Riyals.
Term:
The Sukuk will expire on 15 April 2014G, unless
previously redeemed, purchased and cancelled (the “Expiry
Date”).
Status:
The Sukuk constitute undivided beneficial ownership
interests in the Sukuk Assets and will rank pari passu,
without any preference or priority among themselves. The
Sukuk will be issued on an unsecured and unsubordinated
basis.
Periodic Distribution Dates:
The fifteenth (15th) day of April, July, October and January,
in each year, commencing on 15 July 2009G and up to and
including 15 April 2014G. If any Periodic Distribution
Date is not a Business Day, it shall be postponed to the
following Business Day.
Periodic Distribution Amount:
The Investment Manager (through the Payments
Administrator and acting as agent of the Issuer) shall pay to
Sukukholders a distribution in relation to each Sukuk on
each Periodic Distribution Date equal to the Periodic
Distribution Amount and at the same time the Investment
Manager shall distribute to the Issuer the Periodic Incentive
Fee (as defined in the Conditions), if any.
“Periodic Distribution Amount” means for each Periodic
Distribution Period, an amount equal to the product of:
(a) SIBOR plus Margin (as defined below);
5
(b) the aggregate Nominal Amount of the Sukuk as are
current on the Transfer Record Date immediately
preceding the last day of such Periodic Distribution
Period; and
(c) the actual number of days in such Periodic Distribution
Period for which such Periodic Distribution Amount is
being paid divided by 360,
rounding the resultant figure to the nearest SAR 0.01,
SAR 0.005 being rounded upwards.
If the Investment Manager fails to pay any amount that is
due and payable in accordance with Sukuk Documents (the
“Overdue Amount”), the Investment Manager undertakes
to pay the Sukukholders Agent any late payment amount
(the “Late Payment Amount”) that is calculated on a daily
basis in respect of the period from, and including, the due
date for such Overdue Amount to, but excluding, the date of
settlement in full of such Overdue Amount, as the product
of:
(a) 1.00 per cent. per annum; and
(b) the Overdue Amount; and
(c) the number of days when such Overdue Amount is
outstanding divided by 360.
The Sukukholders’ Agent shall pay the Late Payment
Amount to The Red Crescent Society or, in the event that it
is not practicable for the Sukukholders’ Agent to donate
such funds to The Red Crescent Society, to such charity as
the Sukukholders’ Agent may choose in accordance with
the principles of Islamic Shari’ah.
“Margin” means a percentage per annum for each Periodic
Distribution Period until and including the Periodic
Distribution Period ending on the Periodic Distribution
Date falling on 15 April 2014G, as determined by the Issuer
and the Joint Bookrunners and Joint Lead Managers and
communicated to prospective investors following the end of
the Investor Presentation Period (as defined in the
Conditions).
Events of Default:
Sukukholders may only oblige the Investment Manager to
make a payment to them of their pro rata share of the Sukuk
Settlement Amount prior to the Expiry Date upon the
occurrence of the limited circumstances set out in
Condition 12 (Events of Default) of this Offering Circular.
Early Redemption
Upon the occurrence of a Tax Event, subject to certain
conditions, the Sukuk may be redeemed at the option of the
Issuer on any Periodic Distribution Date (the “Early
Redemption Date”) in whole, but not in part, at any time,
on giving not less than 30 nor more than 60 days’ notice (an
“Early Redemption Notice”) to the Sukukholders in
accordance with Condition 17 (Notices) (which notice shall
6
be irrevocable), in which case and subject to Condition 4(b)
(Status; Limited Recourse), each Sukukholder shall receive
from the Investment Manager its pro rata share of the
Sukuk Settlement Amount.
Sukuk Settlement Amount:
The amount payable by the Investment Manager upon the
occurrence of an Expiry Date, Event of Default Date or
Early Redemption Date in respect of the Sukuk current at
such date equal to the Sukuk Assets Liquidation Proceeds,
plus any accrued and unpaid Periodic Distribution
Amounts, Periodic Distribution Default Amount and/or
Distribution Shortfall Restoration Amount and less
Investment Agency Incentive Fees (each as defined in the
Conditions).
To the extent the Underlying Value
Conditions are not satisfied at such date, the Issuer shall, in
its capacity as guarantor under the Guarantee, make up any
resulting shortfall between the Sukuk Assets Liquidation
Proceeds and the Sukuk Settlement Amount by payment to
the Sukukholders of the Value Restoration Amount.
Underlying Value Conditions
Means the Investment Agent ensuring that the following
conditions are met by the Investment Manager:
(a) proper application of the proceeds of the sale of the
Sukuk in appropriate revenue-generating Sukuk
Contracts (as defined in the Conditions) in accordance
with the Investment Management Agreement;
(b) proper monitoring and timely enforcement of the
performance of each counterparty under such
contracts;
(c) ensuring that each such contract remains in full force
and effect whilst any Sukuk remains current, unless it
expires in accordance with its term or is terminated
prior to its term, where such contract is replaced by
one or more such contracts of equal or greater
aggregate value within 30 days of such expiry or
termination; and
(d) not waiving or forgiving the obligation of any
counterparty under any such contract and not entering
into any arrangement to dispose at a discount of any
rights under any such contract.
Failure to ensure satisfaction of the above conditions will
result in an obligation for the Issuer to pay to the
Sukukholders of the current Sukuk: (i) on the occurrence of
the Periodic Distribution Date and in relation to a shortfall
in any Periodic Distribution Amount, their pro rata share of
the Distribution Shortfall Restoration Amount (as defined in
the Conditions); and (ii) on the occurrence of the Expiry
Date, Event of Default Date or Early Redemption Date (as
applicable) and in relation to a shortfall in the Sukuk
Settlement Amount, their pro rata share of the Value
Restoration Amount (as defined in the Conditions).
7
Taxation:
All payments in respect of the Sukuk will be made free and
clear of withholding taxes of the Kingdom unless such
withholding is required by law, in which case the Issuer and
the Payments Administrator shall be entitled to make a
deduction or withholding from any payment which it makes
under the Sukuk Documents for or on account of any
present or future taxes, duties or charges if and to the extent
so required by applicable law, in which event the Issuer
and/or the Payments Administrator shall make such
payment after such withholding or deduction has been made
and shall account to the relevant authorities for the amount
so withheld or deducted. In that event, the Issuer shall pay
such additional amounts to Sukukholders who have their
tax residency in the Kingdom as would result in the receipt
by such Sukukholders of such amounts as would have been
received if no such withholding or deduction had been
required. References herein to the Periodic Distribution
Amount and any other amounts payable to the
Sukukholders shall include any additional amounts so
payable pursuant to this Condition 15 (Taxation).
Selling Restrictions:
The primary distribution of the Sukuk will be directed at
sophisticated investors. The Sukuk will be subject to
restrictions on secondary trading until their listing on the
Official List maintained by the Capital Market Authority.
In addition, the Sukuk will not be tradable for so long as
less than 51 per cent. of the Sukuk Assets (by value) are
constituted by Ijara contracts in the form referred to in the
Investment Plan.
For a more detailed description of these and other
restrictions on offers, sales and deliveries of Sukuk and on
the distribution of offering material relating to the Sukuk,
see the “Subscription and Sale” section of this Offering
Circular.
Use of Proceeds:
The proceeds of the sale of the Sukuk will be applied by the
Issuer as Investment Agent through the Investment
Manager to form a single portfolio of investments
consisting of Ijara and Murabaha contracts in accordance
with the Investment Plan, including a requirement to invest
the proceeds from the Sukuk into Sukuk Assets generating
returns at least equal to the Periodic Distribution Amount
and a requirement for the Investment Agent and the
Investment Manager to ensure satisfaction of the
Underlying Value Conditions. The Ijara contracts will be
effective within two Business Days and the Murabaha
contracts will be effective within 30 days after the date of
the Investment Management Agreement, and the Ijara
contracts will at all times thereafter constitute a minimum
of 51 per cent. (by value) of such investment portfolio. See
“Investment Agency Agreement” above.
Sukukholder Meetings:
A summary of the provisions for convening meetings of
Sukukholders to consider matters relating to their interests
as such are set forth under Condition 14 (“Meetings of
8
Sukukholders, Modification”).
Form of the Sukuk:
The Sukuk will only be issued in dematerialised registered
form and will be represented at all times by interests in a
registered form Global Sukuk (as more particularly
described in Condition 2 (Form and Denomination) of this
Offering Circular), which will be deposited with the
Sukukholders’ Agent.
Clearance and Settlement:
The Sukuk may be transferred in accordance with the
regulations and procedures established by the Registrar by
delivering to the Registrar such information as such
regulations and procedures shall require. See Condition 3
(Register, Title and Transfers) and the “Subscription and
Sale” section of this Offering Circular, respectively.
Denominations:
Sukuk will be issued in the nominal amount of
SAR 1,000,000 and integral multiples of 1,000,000 in
excess thereof (the “Nominal Amount”).
Sukuk Documents:
The Investment Agency Agreement, Investment
Management Agreement, Declaration of Agency,
Guarantee, Payments Administration Agreement, Registry
Agreement, Sukuk (including the Global Sukuk), Investor
Application Form, each Sukuk Contract and any other
agreements and documents delivered or executed in
connection therewith.
9
3.
SHARI’AH ADVISORY COMMITTEE AND PRONOUNCEMENT
Prospective Sukukholders should not rely on the pronouncement referred to below in deciding
whether to make an investment in the Sukuk and should consult their own Shari’ah advisers as to
whether the proposed transaction described in the pronouncement referred to above is in compliance
with Shari’ah principles.
3.1
Pronouncement of the Shari’ah Committee of HSBC Saudi Arabia Limited
Copies of the detailed pronouncement issued by the Shari’ah Committee of HSBC Saudi Arabia
Limited relating to the Sukuk and confirming that, in their view, the proposed issue of the Sukuk and
the related structure and mechanism described in the Sukuk Documents are in compliance with
Shari’ah principles, shall be distributed to prospective Sukukholders upon request by HSBC Saudi
Arabia Limited.
Overview of the Shari’ah Committee of HSBC Saudi Arabia Limited
The Shari’ah Committee of HSBC Saudi Arabia Limited is an independent committee appointed by
its board of directors. It meets regularly for review and appraisal to ensure full compliance with
Shari’ah of transactions conducted by HSBC Saudi Arabia Limited, its affiliated institutions or its
clients.
Members of the Shari’ah Committee of HSBC Saudi Arabia Limited
Dr. Mohamed Ali Elgari
Dr. Elgari holds a Ph.D. in economics from the University of California. He is a professor of Islamic
Economics at King Abdul Aziz University. He is an expert at the Islamic Jurisprudence Academies of
the Organization of Islamic Countries and the Islamic World League. Dr. Elgari is member of Shariah
Boards of many Islamic Banks and Takaful Companies including those of HSBC, SABB, Dow Jones,
International Islamic Fund Market, Citi Islamic Investment bank and Merrill Lynch.
Sheikh Nizam Yaquby
Mr. Yaquby is a graduate in Economics and Comparative Religion from McGill University and is an
internationally acclaimed scholar in the Islamic banking industry. He has been a teacher of Tafsir
since 1976. He advises a number of banks and financial institutions including HSBC, Abu Dhabi
Islamic Bank, BNP Paribas, Dow Jones, Lloyds TSB, Citi Islamic Investment Bank E.C. Bahrain and
Standard Chartered on matters pertaining to Islamic Banking and Finance.
3.2
Pronouncement of the Shari’ah Executive Committee of Samba Financial Group
Copies of the detailed pronouncement issued by the Shari’ah Executive Committee of Samba
Financial Group relating to the Sukuk and confirming that, in their view, the proposed issue of the
Sukuk and the related structure and mechanism described in the Sukuk Documents are in compliance
with Shari’ah principles, shall be distributed to prospective Sukukholders upon request by Samba
Financial Group.
Overview of the Shari’ah Executive Committee of Samba Financial Group
The Shari’ah Executive Committe of Samba Financial Group is an independent committee appointed
by its board of directors. It meets regularly for review and appraisal to ensure full compliance with
Shari’ah of transactions conducted by Samba Financial Group, its affiliated institutions or its clients.
Members of the Shari’ah Executive Committee of Samba Financial Group
Dr. Mohamed Ali Elgari
10
For the profile of Dr. Elgari, please see the previous section.
Sheikh Dr. Abdul Sattar Abu Ghuddah
Dr. Abu Ghuddah holds several degrees in Islamic Law from different universities including
Damascus University and Al Azhar University in Cairo where he obtained his PhD in Islamic Law.
He is an active member of the Islamic Fiqh Academy in Jeddah and the Accounting & Auditing
Standards Board of a number of Islamic Financial Institutions. Dr. Ghuddah teaches Fiqh, Islamic
studies and Arabic in Riyadh, holds the positions of Shariah Advisor and Director of the Department
of Financial Instruments at Al-Baraka Investment Co. of Saudi Arabia and is a member of the
Shari’ah boards of many Islamic Banks and Financial Institutions.
11
4.
RISK FACTORS
In considering an investment in the Sukuk, prospective investors should carefully consider the
following risk factors and the other information contained in this Offering Circular. The risks and
uncertainties described below are those that Dar Al-Arkan currently believes could affect it and any
investment that the prospective investors make in the Sukuk. However, the risks listed below do not
necessarily comprise all those associated with an investment in the Sukuk. Additional risks and
uncertainties that Dar Al-Arkan is currently not aware of or that it currently believes are immaterial
may also adversely affect its business, financial condition, results of operations or prospects. Any of
the following risks and uncertainties may materially and adversely affect Dar Al-Arkan’s business,
financial condition, results of operations and/or prospects, the price of the Sukuk may decline, the
Investor Manager’s ability to pay Periodic Distribution Amount or the Sukuk Settlement Amount
and/or Dar Al-Arkan’s ability to pay the Distribution Shortfall Restoration Amount or the Value
Restoration Amount could be impaired and/or investors may lose all or part of their investment.
4.1
Risks relating to Dar Al-Arkan
There is no assurance that Dar Al-Arkan’s financial performance can be sustained in the future
Dar Al-Arkan’s expansion in the last few years has been supported by strong economic conditions in
the Kingdom and the remainder of the Gulf Cooperation Council (GCC) region during that period
against a background of relative political stability and peak in oil prices. Demand for residential units
in future will depend on a couple of factors, including population growth, average family size, per
capita income and availability of Islamic financing. There can be no assurance that Dar Al-Arkan’s
financial performance can be sustained in the future, or that growth and stability in the Saudi Arabian
real estate market in which Dar Al-Arkan operates will continue. Any negative change in the
aforementioned factors could have a material adverse effect on Dar Al-Arkan’s business, financial
condition and results of operations.
Dar Al-Arkan may not complete its properties that are under construction or in initial stages of
development
Dar Al-Arkan’s current and future development and construction activities involve a number of risks,
including:
●
delays or refusals in obtaining all necessary building, occupancy and other required governmental
permits and authorizations;
●
requirement to make significant current capital expenditures for certain properties while receiving
revenue from these properties over future periods, resulting in possible mismatches between
expenditure and income;
●
inability to complete development projects on schedule or within budgeted amounts; and
●
fluctuations in occupancy rates at newly developed properties due to a number of factors,
including market and economic conditions that may result in certain of Dar Al-Arkan’s projects
not being profitable and hence halted or re-planned for other uses.
Any of the above could have a material adverse effect on Dar Al-Arkan’s business, financial
condition and results of operations.
Fluctuations of real estate property value
It is possible that decreased real estate values will adversely influence Dar Al-Arkan’s activity
because all the assets of Dar Al-Arkan are either real estate properties or related investments.
Changes in the requirements of central or local Government, properties management, price
competition, property location, and quality of construction are likely to impact real estate values in the
Kingdom.
12
In addition to that, there is a strong relation between real estate values and oil price, whereby any
further decrease in oil prices is likely to affect liquidity in the pipeline to the real estate market and
consequently, decrease real estate values.
The majority of Saudi real estate companies’ fixed assets are commercial complexes and buildings for
religious tourism, which are rented for long-term contracts. On the other hand, Dar Al-Arkan’s fixed
assets are different in that construction of the projects is normally completed within 18 months,
following which period the assets are sold to customers. Therefore, Dar Al-Arkan might be
vulnerable to the risk of assets value fluctuations during the 18 months-period depending on when the
assets are sold (start-up stage, intermediate stage, or at the final stage of project construction). Dar
Al-Arkan’s assets value may decrease, adversely influencing Dar Al-Arkan’s profitability as well as
Dar Al-Arkan’s capability to achieve remunerative returns of the sold assets.
Reliance of significant business portion on strategically allied parties and third parties
Dar Al-Arkan was able to obtain technical assistance and technology through strategic alliances in
2005 with international reputable firms, like Turner (with respect to project management) and
Cluttons (with respect to market strategy). In addition, Saudi Home Loans, one of Dar Al-Arkan’s
related parties, contributed to financing of real estates projects by providing loans to purchasers of
real estates developed by Dar Al-Arkan. Dar Al-Arkan’s operations therefore, may encounter
problems or may adversely be influenced by delay or failure of the mentioned allied parties or other
related parties in meeting their commitments. Moreover, Dar Al-Arkan’s operations may also,
adversely be influenced by modifications of contractual terms and conditions of strategic allied parties
and/or other related parties.
Construction approvals and licensing
As part of its operations, Dar Al-Arkan obtains all regulatory approvals and licenses required for its
development and construction projects in the Kingdom. Violation of the terms of such regulatory
approvals and licenses may lead to their cancellation, withdrawal, suspension or imposition of
financial and non-financial fines by the relevant regulatory authorities. Such violations are likely to
have an adverse impact on Dar Al-Arkan’s business, financial position and operations
results/outcome.
Dar Al-Arkan’s development projects could be exposed to events over which it has no control
Dar Al-Arkan’s development properties may be exposed to risks which may adversely affect the value
of its development properties. These risks include, but are not limited to:
•
changes in conditions affecting the industry or specific industry segments;
•
a decline in property values;
•
fluctuations in cost of financing and inflation rates;
•
changes in governmental rules, regulations and fiscal and other policies;
•
natural disasters, construction equipment failure or discontinuity of utilities supply; and
•
other factors which are beyond Dar Al-Arkan’s control.
Any of the above could have a material adverse effect on Dar Al-Arkan’s business, financial
condition and results of operations.
Maintaining the standard of quality and warranty
Defects and defaults free construction and finishing is one of the basic preconditions to successfully
market and sell real estate. Any failure to maintain quality standard may lead to difficulties in
marketing Dar Al-Arkan’s products, decreased number of units sold and increased liabilities pursuant
13
to customer warranty claims, which could have adverse impact on Dar Al-Arkan’s business, operation
results and financial position.
Reliance on key persons
Dar Al-Arkan’s success and operations rely to a greater extend on continuous contributions of some
of the members of the Board of Directors and management. If any existing key persons leaves
employment and Dar Al-Arkan is unable to find suitable replacement, or if Dar Al-Arkan either fails
to maintain a sufficient number of appropriate or technical staff or fails to recruit appropriate
professional and technical staff in pace with its growth, its business performance may be adversely
affected.
Property valuation is inherently subjective and uncertain
Like every valuation of property and property-related assets, the valuation of Dar Al-Arkan’s
development properties is inherently subjective. This is because property valuations are made on the
basis of assumptions which may not prove to reflect the true position. As a result, valuations are
subject to uncertainty. There is no assurance that the valuations of the properties will reflect actual
sale prices even where any such sales occur shortly after the relevant valuation date and therefore
could have a material adverse effect on Dar Al-Arkan’s business, financial condition and results of
operations.
Possibility of sale of undeveloped land
Dar Al-Arkan owns undeveloped land areas adjacent to either established projects or projects in
establishment process, which Dar Al-Arkan intends to sell later at higher prices. Success of such
strategy depends on the success of the projects (whether established or in the process of being
established), projects in establishment process, geographical as well as residential expansion,
communal extension to such locations and customers’ high demand for purchasing units located in
relatively new regions, where Dar Al-Arkan intends to establish projects. Failing to achieve such
goals and requirements may adversely affect the possibility of achieving the anticipated profit margin
or even the ability of Dar Al-Arkan to sell land, which may adversely impact Dar Al-Arkan’s
business, financial position and operations results.
Land inventory related risks
The value of Dar Al-Arkan’s land inventory as of 31 December 2008 amounted to SAR 13.5 billion
Saudi Arabian Riyals for developed land and land in development process, which is 67 per cent. of
Dar Al-Arkan’s total assets. Any reduction in demand for residential real estates may entail a
decrease in the value of the land stock and slow-down of its sale rate, which may adversely influence
Dar Al-Arkan ’s financial position, cash flows and margin of profitability.
Dar Al-Arkan’s business requires substantial capital investment
Dar Al-Arkan will require additional financing to fund capital expenditures, to support the future
growth of its business and/or to refinance existing debt obligations. Dar Al-Arkan’s ability to arrange
for external financing and the cost of such financing are dependent on numerous factors, including
general economic and capital market conditions, financing rates, credit availability from banks or
other lenders, investor confidence, the success (or otherwise) of Dar Al-Arkan’s business, provisions
of tax and securities laws that may be applicable to Dar Al-Arkan’s efforts to raise capital and
political and economic conditions in any relevant jurisdiction. There can be no assurance that
additional financing, either on a short-term or a long-term basis, will be made available or, if
available, that such financing will be obtained on terms favourable to Dar Al-Arkan.
Liquidity risk
Liquidity risk is the risk that Dar Al-Arkan may be unable to meet commitments associated with
financial instruments when they fall due. Although Dar Al-Arkan mitigates this risk by dealing with
14
reputable counterparties, diversifying its investments and matching the maturities of financial assets
and liabilities, there can be no assurance that Dar Al-Arkan will be able to meet its financial
obligations when they become due.
Risks related to previously issued Ijara Sukuk
Ijara Sukuk have been previously issued to finance some of Dar Al-Arkan’s projects. The Ijara
Sukuk are collateralized by portions of strategic land projects. In the event of any default by Dar
Al-Arkan, the investors in question may act to realize the value of the land stock and land of the
projects in question with Dar Al-Arkan losing their ownership, which could adversely affect Dar
Al-Arkan’s financial position, cash flows and eventually its profitability margin. Moreover, the Ijara
Sukuk issuance may also limit Dar Al-Arkan’s accessibility to more financing in future and such risk
will influence future expansion schemes. The Ijara Sukuk are issued in the amounts of six
hundred million US dollars and one billion US dollars respectively. Therefore any change in the rate
of exchange of the Saudi Arabian Riyal against the United States dollar resulting in the weakening of
the Saudi Arabian Riyal may increase Dar Al-Arkan’s liabilities. The Ijara Sukuk issuances assume a
floating rate of return (LIBOR) + 200 basis points for the first issue and 225 base-points for the
second issue. Any increase in the floating rate of return will adversely affect the financial
performance of Dar Al-Arkan.
Saudisation
All firms having in excess of 20 employees are obliged, by virtue of the circular of the Ministry of
Labor issued on 1/5/1423 H (corresponding to 12/7/2002 G), to maintain the portion of employees on
its staff at no less than 30 per cent. During the recent years Dar Al-Arkan adopted a saudisation
program, whereby the portion of Saudi employees to the total workforce, up to the date of this
Offering Circular, has accounted for 40 per cent. and consequently Dar Al-Arkan obtained a
certificate of adherence to saudisation issued by Ministry of Labor on 15/11/1427 H (corresponding to
6/12/2006 G). Failing to maintain the stipulated saudisation ratio could cause Dar Al-Arkan to be
questioned by the Ministry of Labour for non-compliance with these requirements. The occurrence of
any of these events could have an adverse effect on the business, financial condition, results of
operations and reputation of Dar Al-Arkan.
Information technology
Dar Al-Arkan capitalizes on information technology systems to run its operations and activities.
Information technology systems utilized by Dar Al-Arkan comprise applications of financial
management (financial reports, accounting and treasury), supplies and management (administrative
directives, procurement and stock control/management), human resources, production planning,
project and project related stock control/management (work in progress and completed units). Any
defect in the capability of those systems may have adverse effect on Dar Al-Arkan’s operations.
Insurance liabilities
Dar Al-Arkan is obliged, by virtue of agreements with contractors, to insure all contractor’s risks,
third parties’ liability, physical damages and other general insurance. These obligations’ costs are
normally passed onto contractors, but if they are not, the cost of such insurance may be incremental
and may adversely affect Dar Al-Arkan’s business and profitability margin.
4.2
Risks relating to Real Estate Industry
Competition
Real estate industry in the Kingdom is characterized by strong competition among global and local
real estate development companies. There is no assurance that Dar Al-Arkan’s business will not be
affected by existing and future competitors in the Kingdom. Such competitors may, for example,
charge lower prices for their properties or otherwise see demand for their properties increase
disproportionately to the demand for properties developed by Dar Al-Arkan. If this were to
15
materialize, it could have a material adverse effect on the revenue that Dar Al-Arkan could generate
from its business.
Capability of increasing sale prices
Dar Al-Arkan’s capability to sustain profitability, specifically in a business environment characterized
by continuous increase in cost of materials, construction and labor force, depends on Dar Al-Arkan’s
capability of charging such increase to its customers if prior agreements with suppliers to fix prices
over construction period are lacking. However, generally final sale price depends on a number of
market factors, which are beyond Dar Al-Arkan’s control. Dar Al-Arkan’s inability to increase sale
prices of its products upon increase of the price of construction materials, labor force or land purchase
may have adverse repercussions on its business, financial position and operations results.
Fluctuation of prices of building products and their availability
The real estate industry depends on products like steel, cement and finishing materials. The prices of
these products have witnessed considerable fluctuations (as much as 30 per cent. each way) during the
past three years, due to either exchange rate variations or scarcity of these materials in some markets.
Owing to the difficulty of building project raw materials stocks and materials suppliers’ inability to
always enter into long-term fixed price supply agreements, the concerned suppliers may charge such
increment to developers, who in turn will gradually increase their products’ sale prices (to the extent
that they can) to their customers.
There is no guarantee that either materials supply will be available to Dar Al-Arkan in sufficient
quantities, or their prices will not witness frequent fluctuations. Each of these two factors may
adversely influence Dar Al-Arkan ’s business, financial position and results of operations.
Dar Al-Arkan may be materially affected by legal and regulatory changes
Dar Al-Arkan’s activities are subject to the laws of the Kingdom of Saudi Arabia including the
Ministry of Commerce and Industry’s regulations. Laws and regulations that are applied in the
Kingdom may change from time to time. Dar Al-Arkan cannot guarantee that future changes of these
laws and regulations will not have a material adverse effect on the results of the operations of Dar
Al-Arkan.
4.3
Risks relating to the Political/Regulatory Environment in the Kingdom
Dar Al-Arkan is dependent on the economy of the Kingdom and its position in the world market
Dar Al-Arkan’s results and its financial condition are affected by the condition of the economy in the
Kingdom and global economic conditions that affect the economy of the Kingdom. Despite its
growth in other sectors, the Saudi economy is still dependent on the price of oil and gas in the world
markets and therefore, a further decline in the prices of oil and gas could substantially slow down or
disrupt the Saudi economy, and the resulting effect on liquidity could adversely affect demand in the
real estate sector. It would also cause delays or cancellations of ancillary projects on which Dar
Al-Arkan’s developments may depend, such as access roads or other infrastructure. In addition, any
negative change in one or more macroeconomic factors, such as the exchange rate, commission rates,
inflation, wage levels, unemployment, foreign investment and international trade, could have a
material adverse effect on Dar Al-Arkan’s business, financial condition and results of operations.
The political, economic and legal environments remain subject to continuous development
As the political, economic and legal environments in the Kingdom remain subject to continuous
development, investors face uncertainty as to the security of their investments. Dar Al-Arkan’s
operations in the Kingdom are exposed to risks common to all regions that have recently undergone,
or are undergoing, political, economic and social change, including evolving regulatory environment,
inflation, changes in disposable income or gross national product, variations in commission rates,
levels of economic growth and other similar factors. Many of these factors are entirely beyond Dar
16
Al-Arkan’s control. Adverse social, economic or political developments in the Kingdom,
neighbouring countries or others in the region may have a material adverse effect on Dar Al-Arkan’s
business, financial condition, results of operations and cash flows.
Saudi Arabian Judicial Reform
The Saudi Government recently approved a restructuring of the judicial system, including the
establishment of a Supreme Court as well as commercial, personal status and labour tribunals. The
new Judiciary Law and Grievances Board Law were enacted by Royal Decree No. M/78 dated
19/9/1429H (corresponding to 1 October 2007G) but have not yet been fully brought into force.
Under the new judiciary law, the Supreme Court will take over all the functions other than certain
administrative responsibilities of the Supreme Judiciary Council, which currently serves as the
Kingdom’s highest tribunal. The Grievances Board’s current jurisdiction over the commercial
disputes will also pass to a new Commercial Court as part of this restructuring. The restructuring also
contemplates the establishment of a committee to review the jurisdiction and status of the Committee
for the Resolution of Securities Disputes (the “Committee”). It is not clear at this stage what the
outcome of this review will be or its impact on the Sukuk or any claim under the Sukuk.
4.4
Risks relating to the Sukuk
Suitability of investments
The Sukuk may not be a suitable investment for all investors. Each potential investor in the Sukuk
must determine the suitability of that investment in light of its own circumstances. In particular, each
potential investor should:
●
have sufficient knowledge and experience to make a meaningful evaluation of the Sukuk, the
merits and risks of investing in the Sukuk and the information contained in this Offering Circular;
●
have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its
particular financial situation, an investment in the Sukuk and the impact the Sukuk will have on
its overall investment portfolio;
●
have sufficient financial resources and liquidity to bear all of the risks of an investment in the
Sukuk, including where the currency of payment is different from the potential investor’s
currency;
●
understand thoroughly the terms of the Sukuk and be familiar with the behaviour of any relevant
indices and financial markets; and
●
be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for
economic and other factors that may affect its investment and its ability to bear the applicable
risks.
Absence of secondary market/limited liquidity
The Sukuk will not be admitted to any trading system or platform and trading of the Sukuk will need
to be conducted through over-the-counter transactions. Accordingly, trading of the Sukuk is likely to
take longer and be less efficient than would be the case if the Sukuk were traded through a trading
system or platform, thereby potentially restricting the liquidity of the Sukuk. In addition, the offer of
the Sukuk constitutes an “offer restricted to sophisticated investors” within the meaning of the Saudi
Arabian Offers of Securities Regulations and may not be transferred, subject to certain exceptions, for
an aggregate consideration of less than 1,000,000 Saudi Arabian Riyals. Moreover, there is no
existing market for the Sukuk and there can be no assurance that a secondary market for the Sukuk
will develop or, if a secondary market does develop, that it will provide the Sukukholders with
liquidity of investment or that it will continue for the life of the Sukuk. The market value of the
Sukuk may fluctuate. Consequently, any sale of Sukuk by Sukukholders in any secondary market
which may develop may be at a price that is higher or lower than the initial offering price depending
17
on many factors, including prevailing interest rates, Dar Al-Arkan’s performance and the market for
similar securities. The Joint Bookrunners and Joint Lead Managers are under no obligation to provide
pricing on or make a market in the Sukuk. Accordingly, no assurance can be given as to the liquidity
of, or trading market for, the Sukuk and an investor in the Sukuk must be prepared to hold the Sukuk
for an indefinite period of time or until their maturity.
There is no assurance that the Sukuk will be Shari’ah compliant
Prospective Sukukholders should note that different Shari’ah advisers, and Saudi courts and judicial
committees, may form different opinions on identical issues and therefore prospective Sukukholders
may wish to consult their own legal and Shari’ah advisers to receive an opinion if they so desire.
Prospective Sukukholders should also note that although the Shari’ah Committee of HSBC Saudi
Arabia Limited and the Shari’ah Executive Committee of Samba Financial Group have issued
pronouncements confirming that the Sukuk are in compliance with Shari’ah principles, such
pronouncements would not bind a Saudi Arabian court or judicial committee, including in the context
of any insolvency or bankruptcy proceedings relating to Dar Al-Arkan, and any Saudi Arabian court
or judicial committee will have the discretion to make its own determination about whether or not the
Sukuk, the Sukuk Documents and the related structure (or any part thereof) complies with the laws of
the Kingdom and Shari’ah principles and therefore is enforceable. Accordingly, no person
(including, without limitation, Dar Al-Arkan) makes any representation that the Sukuk, the Conditions
and any other Sukuk Documents comply with Shari’ah principles and in particular no representation
is made regarding the Shari’ah pronouncements issued by the Shari’ah Committee of HSBC Saudi
Arabia Limited and the Shari’ah Executive Committee of Samba Financial Group regarding the
Sukuk, which pronouncements are subject to change and disagreement from other Shari’ah scholars.
Accordingly, there is no assurance that the Sukuk will be Shari’ah compliant.
The Sukuk are limited recourse obligations
Under no circumstances shall the Sukukholders’ Agent or any Sukukholders have any right to cause
the sale or other disposition of any of the Sukuk Assets, and the sole right of the Sukukholders’ Agent
and Sukukholders against the Issuer upon occurrence of the Periodic Distribution Date, Expiry Date,
Event of Default Date or Early Redemption Date shall be to enforce the obligation of the Issuer to pay
them their pro rata share of the Distribution Shortfall Restoration Amount or the Value Restoration
Amount when due and payable, which are unsecured and unsubordinated obligations of the Issuer.
The Sukukholders will otherwise have no recourse to any assets of Dar Al-Arkan, the Investment
Manager, the Payments Administrator, the Sukukholders’ Agent or the Joint Bookrunners and Joint
Lead Managers or any affiliate of any of the foregoing entities in respect of any shortfalls of amounts
due and payable. There can be no assurance that as a result of the enforcement by the Sukukholders
of their right to receive payment from the Issuer of their pro rata share of the Distribution Shortfall
Restoration Amount or the Value Restoration Amount when due and payable they will be able to
recover the full amount of their pro rata share of such amounts, if any.
Governing law, jurisdiction and enforceability
The Sukuk are governed by, and are to be construed in accordance with, the laws of the Kingdom. As
per Condition 18 (Governing Law and Jurisdiction), the Committee shall have exclusive jurisdiction
to hear and determine any suit, action or proceedings, and to settle any disputes, which may arise out
of or in connection with the Sukuk. Prospective Sukukholders should note that, to the best of Dar
Al-Arkan’s knowledge, no securities of a similar nature to the Sukuk have previously been the subject
of adjudicatory interpretation or enforcement in the Kingdom. Accordingly, it is uncertain exactly
how and to what extent the Sukuk, the Conditions and/or the Sukuk Documents would be enforced by
the Committee or by any other Saudi Arabian adjudicatory authority.
18
5.
TERMS AND CONDITIONS OF THE SUKUK
The following is the text of the Terms and Conditions of the Sukuk which (subject to completion and
amendment, and save for the text in italics) will be attached and (subject to the provisions thereof)
apply to the Global Sukuk:
Introduction
The Sukuk (the “Sukuk”) due 15 April 2014G represent an undivided beneficial ownership interest in
the Sukuk Assets (as defined below) and will at all times rank pari passu amongst themselves. The
Sukuk Assets will be held by Dar Al-Arkan Real Estate Development Company (the “Issuer”)
(through the Investment Manager (as defined below) pursuant to the Investment Management
Agreement (as defined below)) for the benefit of the registered holders of the Sukuk (the
“Sukukholders”) pursuant to an investment agency agreement (the “Investment Agency
Agreement”) dated on or about the Closing Date (as defined below) between the Issuer as investment
agent the “Investment Agent”) and the Sukukholders’ Agent on behalf of the Sukukholders and
constituting among the Investment Agent and the Sukukholders an investment agency (the
“Investment Agency”). The obligations of the Issuer in respect of the Sukuk are not secured.
Pursuant to a declaration of agency (the “Declaration of Agency”) to be entered into on or about the
Closing Date) by the Issuer and Samba Capital & Investment Management Co. as Sukukholders’
Agent (the “Sukukholders’ Agent”, which expression includes any successor Sukukholders’ Agent
appointed in relation to the Sukuk), the Sukukholders’ Agent will be appointed to act as agent for and
on behalf of the Sukukholders.
In these Conditions, references to “Sukuk” shall be references to the Sukuk as represented by a
Global Sukuk as described in Condition 2 (Form and Denomination).
Payments relating to the Sukuk will be made pursuant to a payments administration agreement to be
entered into on or about the Closing Date (the “Payments Administration Agreement”) between the
Sukukholders’ Agent, the Issuer and SABB Securities Limited acting as the payments administrator
(the “Payments Administrator”, which expression includes any successor Payments Administrator
appointed in relation to the Sukuk).
Each initial Sukukholder, by acquiring and holding Sukuk, shall be deemed to authorise, ratify and
approve the appointment of the Sukukholders’ Agent as its agent and the entry by the Sukukholders’
Agent into the Sukuk Documents (as defined below) to which it is a party and to the terms of each of
the Sukuk Documents.
Certain provisions of these Conditions are summaries of the Sukuk Documents and are subject to their
detailed provisions. The Sukukholders are entitled to the benefit of, are bound by, and are deemed to
have notice of, all the provisions of the Sukuk Documents applicable to them. Copies of the Sukuk
Documents are available for inspection from the Closing Date by Sukukholders during normal
business hours at the specified offices of each of the Issuer and the Sukukholders’ Agent, the specified
offices of which are set out in the section entitled “Parties and Advisers” in this Offering Circular.
1.
Definitions
(a)
In these Conditions, the following words and expressions shall have the following meaning:
“Agency Fees” means: (i) the fees and expenses (if any) payable to the Sukukholders’ Agent
for its services in connection with the Sukuk as further described in the Declaration of
Agency (among other things, the Sukukholders’ Agent will be paid a flat fee of SAR 100,000
(one hundred thousand Saudi Arabian Riyals) per year (or proportional part thereof if due for
a period shorter than one year); and (ii) the fees and expenses (if any) payable to the
Payments Administrator for its services in connection with the Sukuk as further described in
the Payments Administration Agreement (among other things, the Payments Administrator
19
will be paid a flat fee of SAR 100,000 (one hundred thousand Saudi Arabian Riyals) per year
(or proportional part thereof if due for a period shorter than one year);
“Authorisation” means an authorisation, consent, decree, approval, resolution, licence,
exemption, filing, notarization and registration;
“Authorised Holding” has the meaning given to it in Condition 2 (Form and Denomination);
“Business Day” means a day on which commercial banks are open for general business in
Riyadh, The Kingdom of Saudi Arabia;
“Closed Period” has the meaning given to it in Condition 3(e) (Register, Title and Transfers);
“Closing Date” has the same meaning as set out in the Offering Circular;
“Conditions” means these terms and conditions of the Sukuk;
“Declaration of Agency” has the meaning given to it above under “Introduction”;
“Distribution Shortfall Restoration Amount” means an amount payable by the Issuer to the
Sukukholders in accordance with the terms of the Guarantee to the extent that there is a
shortfall on any Periodic Distribution Date between: (i) the Profit Collections available for
distribution to the Sukukholders on that date; and (ii) the Periodic Distribution Amount
scheduled for distribution on that date, to the extent such shortfall arises from a failure by
either the Investment Agent or the Investment Manager to comply with its obligations under
the Sukuk Documents or otherwise to ensure satisfaction of the Underlying Value Conditions;
“Early Redemption Date” has the meaning given to it in Condition 11(b) (Dissolution of
Sukuk);
“Early Redemption Notice” has the meaning given to it in Condition 11(b) (Dissolution of
Sukuk);
“Event of Default” has the meaning given to it in Condition 12 (Events of Default);
“Event of Default Date” has the meaning given to it in Condition 12 (Events of Default);
“Event of Default Notice” has the meaning given to it in Condition 12 (Events of Default);
“Exercise Notice” has the meaning given to it in Condition 12 (Events of Default);
“Exercise Period” has the meaning given to it in Condition 12 (Events of Default);
“Expiry Date” means the last Periodic Distribution Date falling on 15 April 2014G;
“Extraordinary Resolution” means a resolution passed at a duly convened meeting of the
Sukukholders by the Sukukholders holding a majority of at least one half of the aggregate
Nominal Amount of the Sukuk as are current as of the date of such resolution;
“Financial Indebtedness” has the meaning given to it in Condition (7)(d)(ii) (Undertakings);
“Financial Statements” means the Issuer’s audited financial statements for its financial years
ended 31 December 2008 and 2007 (including comparative data for its financial year ended
31 December 2006);
“Global Sukuk” means the registered form global Sukuk representing the Sukuk;
20
“Guarantee” means the guarantee entered into by the Issuer with the Sukukholders’ Agent
pursuant to which the Issuer irrevocably undertakes to pay (whether upon the occurrence of
any Periodic Distribution Date, Event of Default, the Expiry Date or Early Redemption Date)
to each Sukukholder its pro-rata share of:
(i)
the Distribution Shortfall Restoration Amount, if any; and
(ii)
the Value Restoration Amount, if any;
“Indebtedness” means any indebtedness of any person for money borrowed or raised
including (without limitation) any indebtedness for or in respect of:
(i)
amounts raised under any note purchase facility;
(ii)
the amount of any liability in respect of leases or hire purchase contracts which
would, in accordance with applicable law and generally accepted accounting
principles, be treated as finance or capital leases;
(iii)
the amount of any liability in respect of any purchase price for assets or services the
payment of which is deferred for a period in excess of 90 days; and
(iv)
amounts raised under any other transaction (including, without limitation, any
forward sale, purchase agreement) having the commercial effect of a borrowing;
“Indebtedness Guarantee” means, in relation to any Indebtedness of any person, any
obligation of another person to pay such Indebtedness including (without limitation):
(i)
any obligation to purchase such Indebtedness;
(ii)
any obligation to lend money, to purchase or subscribe shares or other securities or to
purchase assets or services in order to provide funds for the payment of such
Indebtedness;
(iii)
any indemnity against the consequences of a default in the payment of such
Indebtedness; and
(iv)
any other agreement to be responsible for such Indebtedness;
“Investment Agency Incentive Fees” means the Periodic Incentive Fee and Special
Incentive Fee;
“Investor Application Form” means the form required to be submitted to the Joint
Bookrunners and Joint Lead Managers before the end of the Investor Presentation Period by
the persons wishing to purchase the Sukuk;
“Investor Presentation Period” means the investor presentation period for the Sukuk
commencing 2/4/1430H (corresponding to 29/3/2009G) and ending on 08/07/1430H
(corresponding to 01/07/2009G), unless notified otherwise by the Issuer and the Joint
Bookrunners and Joint Lead Managers to the potential investors;
“Investment Plan” has the meaning given to it in Condition 5(a) (Investment Agency);
“Issuer” means Dar Al-Arkan Real Estate Development Company;
“Joint Bookrunners and Joint Lead Managers” means HSBC Saudi Arabia Limited and
Samba Capital Assets & Investment Management Company, acting as joint Bookrunners and
joint lead managers;
“Late Payments Amount” means in relation to any Overdue Amount a late payment amount
that is calculated on a daily basis in respect of the period from, and including, the due date for
21
such Overdue Amount to, but excluding, the date of settlement in full of such Overdue
Amount, as the product of: (i) 1.00 per cent. per annum; (ii) the Overdue Amount; and
(iii) the number of days when such Overdue Amount is outstanding divided by 360. Any Late
Payment Amount received by the Sukukholders’ Agent shall be paid to The Red Crescent
Society or, in the event that it is not practicable for the Sukukholders’ Agent to donate such
funds to The Red Crescent Society, to such charity as the Sukukholders’ Agent may choose in
accordance with the principles of Islamic Shari’ah.
“Margin” means a percentage per annum for each Periodic Distribution Period until and
including the Periodic Distribution Period ending on the Periodic Distribution Date falling on
15 April 2014G, as determined by the Issuer and the Joint Bookrunners and Joint Lead
Managers and communicated to the Sukukholders following the end of the Investor
Presentation Period;
“Material Adverse Effect” means a material adverse effect on or a material adverse change
in:
(i)
the business, operations, property, condition (financial or otherwise) or prospects of
the Issuer;
(ii)
the ability of the Issuer to perform its obligations under any Sukuk Document to
which it is party; or
(iii)
the validity or enforceability of the Sukuk Documents or the rights or remedies of the
Issuer under the Sukuk Documents;
“Nominal Amount” means the nominal amount of the Sukuk, which is SAR 1,000,000;
“Offering Circular” means this offering circular dated 14/3/1430H (corresponding to
11/3/2009G) relating to the Sukuk;
“Overdue Amount” means any amount that the Issuer fails to pay that is due and payable in
accordance with the Sukuk Documents;
“Payments Administration Agreement” has the meaning given to it above under
“Introduction”;
“Payments Administrator” has the meaning given to it above under “Introduction”;
“Periodic Determination Date” has the meaning given to it in Condition 11 (Dissolution of
the Sukuk);
“Periodic Distribution Amount” has the meaning given to it in Condition 8(a) (Periodic
Distributions);
“Periodic Distribution Date” means the fifteenth (15th) day of April, July, October and
January, in each year, commencing on 15 July 2009G and up to and including 15 April
2014G.; provided, however, that if any such day is not a Business Day, the Periodic
Distribution Date will be the next following Business Day;
“Periodic Distribution Default Amount” means, in relation to the day on which the
Investment Manager is to pay the Sukuk Settlement Amount following the delivery of an
Exercise Notice, an amount equal to the Periodic Distribution Amount as would have been
payable on the next Periodic Distribution Date if an Exercise Notice had not been delivered
(provided, however, that for the purposes of calculating such Periodic Distribution Amount,
“P” (as defined in Condition 8 (Periodic Distributions)) shall mean the aggregate Nominal
Amount of such Sukuk as are current on the Transfer Record Date immediately preceding the
date of such payment); multiplied by (i) the number of days between the immediately
preceding Periodic Distribution Date and the date of such purchase; divided by (ii) the number
22
of days between the immediately preceding Periodic Distribution Date and the next scheduled
Periodic Distribution Date;
“Periodic Distribution Period” means the period from and including the Closing Date to but
excluding the first Periodic Distribution Date, and each successive period from and including
a Periodic Distribution Date to but excluding the next succeeding Periodic Distribution Date;
“Periodic Incentive Fee” means a periodic incentive fee, if any, payable to the Investment
Agent by the Investment Manager on each Periodic Distribution Date equal to an amount by
which the Profit Collections less due and payable Agency Fees exceed the Periodic
Distribution Amount on the Settlement Date;
“person” means any individual, company, corporation, firm, partnership, joint venture,
association, organisation, state or agency of a state or other entity, whether or not having
separate legal personality;
“Reference Banks” means the principal Riyadh office of each of three major banks engaged
in the Riyadh inter-bank market selected by or on behalf of the Payments Administrator,
provided that once a Reference Bank has first been selected by the Payments Administrator or
its duly appointed representative, such Reference Bank shall not be changed unless it ceases
to be capable of acting as such;
“Register” means the registry system administered by the Registrar or any successor entity;
“Registrar” means the Saudi Stock Exchange (“Tadawul”) (and includes any successor
registrar as may be appointed in accordance with the provisions of the Registry Agreement);
“Registry Agreement” means the registry and trading agreement to be entered into between
the Issuer and the Registrar in relation to the Sukuk on or about the Closing Date;
“Required Sukukholders”, as of any date, means Sukukholders of at least 33 1/3 per cent. in
aggregate of the face value of the Sukuk as are current on such date;
“Screen Rate” means the rate for three-month deposits in Saudi Arabian Riyals which
appears on the Reuters Screen SUAA Page across from the caption “AVERAGE” (or such
replacement page on that service or any successor service as may be nominated by the
Payments Administrator, which displays the same information);
“Security Interest” means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other title retention
agreement or lease in the nature thereof, any sale with recourse against the seller or any
affiliate of the seller, or any agreement to give any security interest) securing any obligation
of any person;
“Settlement Date” means the date falling two (2) Business Days prior to each Periodic
Distribution Date on which an amount equal to the Periodic Distribution Amount is
distributed to the Payments Administrator by the Investment Manager pursuant to the
Investment Management Agreement;
“SIBOR” means, for each Periodic Distribution Period, Saudi Interbank Offered Rate for
three-month Saudi Arabian Riyals deposits determined in accordance with Condition 8(b)
(Periodic Distributions);
“Special Incentive Fee” means a special incentive fee payable to the Investment Agent
pursuant to the Investment Agency Agreement on the Expiry Date, Event of Default Date or
Early Redemption Date equal to an amount by which the Sukuk Assets Liquidation Proceeds
exceed the Sukuk Settlement Amount on any such date;
“Sukuk Assets” has the meaning given to it in Condition 5(a) (Investment Agency);
23
“Sukuk Assets Liquidation Date” means the date falling two (2) Business Days prior to the
Expiry Date, Event of Default Date or Early Redemption Date;
“Sukuk Assets Liquidation Proceeds” means the proceeds of liquidating the Sukuk Assets
for the purpose of paying the Sukuk Settlement Amount;
“Sukuk Contracts” means the Ijara and Murabaha contracts to be entered into by the
Investment Agent through the Investment Manager using the proceeds from the Sukuk and
substantially in the form attached to the Investment Management Agreement;
“Sukuk Documents” means the Investment Agency Agreement, Investment Management
Agreement, Declaration of Agency, Guarantee, Payments Administration Agreement,
Registry Agreement, Sukuk (including the Global Sukuk), Investor Application Form, each
Sukuk Contract and any other agreements and documents delivered or executed in connection
therewith;
“Sukuk Settlement Amount” means an amount payable by the Investment Manager upon
the occurrence of the Expiry Date, Event of Default Date or Early Redemption Date in respect
of the Sukuk current at such date equal to the Sukuk Assets Liquidation Proceeds, plus any
accrued and unpaid Periodic Distribution Amounts, Periodic Distribution Default Amount
and/or Distribution Shortfall Restoration Amount and less Investment Agency Incentive Fees
(each as defined in the Conditions).
“Sukukholders” has the meaning given to it above under “Introduction”;
“Sukukholders’ Agent” has the meaning given to it above under “Introduction”;
“Tax Event” means:
(i)
a change in, or amendment to, the laws (or any regulations, rulings or other
adminstrative pronouncements promulgated thereunder) of the Kingdom of Saudi
Arabia; or
(ii)
any change in the application or official interpretation of such laws, regulations,
rulings or other administrative pronouncements (including a holding by a court of
competent jurisdiction or by any authority in the Kingdom of Saudi Arabia having a
power to tax),
which in either case becomes effective on or after the date of issue of the Sukuk, and obliges
any party to a Sukuk Document to make any withholding for Taxes from any amount payable
by it under that Sukuk Document.
“Taxes” means any present or future taxes, zakat, duties, assessments or governmental
charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of
the Kingdom of Saudi Arabia or any political subdivision thereof or any authority therein or
thereof having power to tax;
“Transfer Record Date” has the meaning given to it in Condition 3 (Register, Title and
Transfers);
“Underlying Value Conditions” means the following conditions to be met by the Investment
Manager:
(i)
proper application of the proceeds of the sale of the Sukuk in appropriate revenuegenerating Sukuk Contracts in accordance with the Investment Management
Agreement;
(ii)
proper monitoring and timely enforcement of the performance of each counterparty
under such contracts;
24
(iii)
ensuring that each such contract remains in full force and effect whilst any Sukuk
remains current, unless it expires in accordance with its term or is terminated prior to
its term, where such contract is replaced by one or more such contracts of equal or
greater aggregate value within 30 days of such expiry or termination; and
(iv)
not waiving or forgiving any obligation of any counterparty under any such contract
and not entering into any arrangement to dispose at a discount of any rights under any
such contract; and
“Value Restoration Amount” means the amount to be paid on the Expiry Date, Event of
Default Date or Early Redemption Date by the Issuer to the Sukukholders under the
Guarantee to make up any shortfall between the Sukuk Assets Liquidation Proceeds and the
Sukuk Settlement Amount in respect of the Sukuk which are current at such time, to the
extent such shortfall results from a failure by either the Investment Agent or the Investment
Manager to comply with its obligations under the Sukuk Documents or otherwise to ensure
satisfaction of the Underlying Value Conditions.
Without prejudice to its status for any other purpose, a Sukuk shall be considered to be
“current” unless it has been dissolved pursuant to Condition 11 (Dissolution of the Sukuk), or
purchased under Condition 9 (Purchase of Sukuk) or Condition 12 (Events of Default) and in
either case has been cancelled in accordance with Condition 9(b) (Purchase of Sukuk);
provided, however, that, for the purposes of: (i) ascertaining the right to attend and vote at
any meeting of Sukukholders; (ii) Condition 14(a) (Meetings of Sukukholders; Modification)
and Schedule 2 of the Declaration of Agency (Provisions for Meetings of Sukukholders);
(iii) determining the Required Sukukholders for the purposes of Condition 12 (Events of
Default) or Condition 13(b) (Enforcement and Exercise of Rights) and (iv) Condition 13(c)
(Enforcement and Exercise of Rights), those Sukuk (if any) which are for the time being held
by any person for the benefit of the Issuer shall (unless and until ceasing to be so held) be
deemed not to be current.
(b)
All references in these Conditions to an agreement, instrument or other document (including
the Investment Agency Agreement, Investment Management Agreement, Declaration of
Agency, Guarantee, Payments Administration Agreement, Registry Agreement, Investor
Application Form, each Sukuk Contract and Sukuk (including the Global Sukuk) shall be
construed as a reference to that agreement, instrument or other document as the same may be
amended, supplemented, replaced or novated.
2.
Form and Denomination
The Sukuk are issued in dematerialised registered form in denominations of SAR 1,000,000
each and integral multiples of 1,000,000 in excess thereof (the “Authorised Holding”). The
Sukuk will be collectively represented by the Global Sukuk which will be deposited with the
Sukukholders’ Agent. Individual Sukuk representing holdings of the Global Sukuk will not
be issued but Sukukholders will on request be entitled to receive a statement from the
Registrar recording their holding of Sukuk. The Global Sukuk will represent all of the Sukuk
that are current and the ownership by the Sukukholders of an undivided beneficial ownership
interest in the Sukuk Assets.
3.
Register, Title and Transfers
(a)
Register: The Registrar will maintain the Register in respect of the Sukuk in accordance with
the provisions of the Registry Agreement. In these Conditions, a “Sukukholder” means the
person in whose name such Sukuk is for the time being registered in the Register (or, in the
case of a joint holding, the first named).
25
(b)
Title: Each Sukukholder shall (except as otherwise required by law) be treated as the absolute
owner of such Sukuk for all purposes (whether or not it is overdue and regardless of any
notice of ownership, trust or any other interest therein).
(c)
Transfers: Subject to paragraphs (e) and (f) below, Sukuk may be transferred in accordance
with the regulations and procedures established by the Registrar by delivering to the Registrar
such information as such regulations and procedures shall require. Sukuk may not be
transferred unless:
(i)
the face value of Sukuk to be transferred together with any existing holding of Sukuk
by the party acquiring the Sukuk to be transferred are Authorised Holdings;
(ii)
where not all of the Sukuk held by a Sukukholder are being transferred, the face value
of the balance of Sukuk not transferred are Authorised Holdings;
(iii)
the Sukuk Assets are constituted by no less than 51 per cent. (by value) of Ijara
contracts in the form referred to in the Investment Plan.
(d)
Transfer Charges: The transfer of Sukuk will be subject to a charge by the Registrar in
accordance with its schedule of charges in force for its services and all such charges shall be
borne solely by the transferring Sukukholder and the transferee in accordance with the
Registrar’s practice. For the avoidance of doubt, neither the Issuer nor the Sukukholders’
Agent shall be liable to pay any such charges imposed by the Registrar.
(e)
Transfer Record Dates and Closed Periods: Prior to the Closing Date, it will be announced
publicly whether or not transfers of Sukuk effected during the period starting at the opening
of business no less than seven (7) Business Days prior to a due date for payment of any
Periodic Distribution Amount, or any other principal or distribution in respect of the Sukuk
or, if such a day is not a Business Day, on the next following Business Day (a “Transfer
Record Date”), and ending on (and including) the applicable due date itself (each such period
being a “Closed Period”) may be registered in the usual way or whether they may only be
registered after the expiry of the relevant Closed Period. If such transfers may be so
registered in the usual way, then, notwithstanding such registration, all payments shall
continue to be paid to such persons as are registered as Sukukholders at the opening of
business on the relevant Transfer Record Date. The Registrar may after the Closing Date
modify these Conditions insofar as they relate to the registration of transfers effected during
Closed Periods by notice to the Issuer and the Sukukholders.
(f)
Regulations concerning Transfers and Registration: All transfers of Sukuk and entries on the
Register are subject to the regulations and procedures of the Registrar and the provisions of
the Registry Agreement. The regulations may be changed by the Registrar at any time.
4.
Status; Limited Recourse
(a)
Status: The Sukuk constitute undivided beneficial ownership interests in the Sukuk Assets
and will at all times rank pari passu amongst themselves. The obligations of the Issuer under
the Guarantee will constitute unsecured and unsubordinated obligations of the Issuer which
will at all times rank at least pari passu with all other present and future unsecured and
unsubordinated obligations of the Issuer, save for such obligations as may be preferred by
provisions of law that are both mandatory and of general application.
(b)
Recourse to the Issuer: The Issuer is obliged to make the payments under the relevant Sukuk
Documents to which it is a party directly to the Sukukholders ((or in certain circumstances,
the Sukukholders’ Agent) and the Sukukholders’ Agent (subject to it being indemnified to its
satisfaction), as agent for and on behalf of the Sukukholders, will have direct recourse against
the Issuer to recover payments due to the Sukukholders or the Sukukholders’ Agent for the
account of the Sukukholders, pursuant to such Sukuk Documents. Under no circumstances
shall the Sukukholders’ Agent or any Sukukholders have any right to cause the sale or other
26
disposition of any of the Sukuk Assets, and the sole right of the Sukukholders’ Agent and
Sukukholders against the Issuer shall be to enforce the obligation of the Issuer to pay them
their pro rata share of the Distribution Shortfall Restoration Amount and/or the Value
Restoration Amount when due and payable, which are unsecured and unsubordinated
obligations of the Issuer.
5.
Investment Agency
(a)
Sukuk Assets. Pursuant to the Investment Agency Agreement, the proceeds of the sale of the
Sukuk will be applied by the Issuer as the Investment Agent through the Investment Manager
to form a single portfolio of investments consisting of Ijara and Murabaha contracts (together
with any such proceeds which have not been so invested, the “Sukuk Assets”). The Ijara
contracts will be effective within two Business Days and the Murabaha contracts will be
effective within 30 days after the date of the Investment Management Agreement and the
Ijara contracts will at all times thereafter constitute a minimum of 51 per cent. (by value) of
such investment portfolio. The Investment Agency will commence on the Closing Date and
will end either: (i) on the later of the Expiry Date and the date on which the Sukuk are
redeemed in full; or (ii) in the event that the Sukuk are redeemed, purchased and cancelled in
full prior to the Expiry Date, on the day immediately following such redemption.
The proceeds from the Sukuk are to be invested by the Investment Manager in the Sukuk
Assets in accordance with an investment plan (the “Investment Plan”), including a
requirement to invest the proceeds from the Sukuk into Sukuk Assets generating returns at
least equal to the Periodic Distribution Amount and a requirement for the Investment
Manager to comply with the Underlying Value Conditions. The Investment Manager shall
not be entitled to commingle its own assets with the Sukuk Assets.
(b)
6.
Profit Collections: The Investment Manager shall make the Profit Collections (as defined in
the Investment Management Agreement) on the Sukuk Assets on their respective due dates
and on each Settlement Date make the following payments in respect of Profit Collections :
(i)
first, to a charity chosen at the discretion of the Investment Manager an amount
equivalent to the amount representing late payment penalties received in connection
with the Sukuk Assets;
(ii)
second, to the Payments Administrator, an amount equivalent to Agency Fees due
and payable to the Sukukholders’ Agent and the Payments Administrator;
(iii)
third, to the Payments Administrator, an amount equivalent to the Periodic
Distribution Amount as per Condition 8 (Periodic Distributions);
(iv)
fourth, all remaining amounts to the Investment Agent less the Management Fees (as
defined in the Investment Management Agreement) as the Periodic Incentive Fee.
Representations and Warranties of the Issuer
The Issuer will make in the Investment Agency Agreement, subject to certain qualifications,
the following representations and warranties to the Sukukholders as of the date of the
Investment Agency Agreement.
(a)
Status
(i)
It is a joint stock company, duly incorporated and validly existing under the law of its
jurisdiction of incorporation.
(ii)
It has the power to own its assets and carry on its business as it is being conducted.
(iii) The Investment Manager is a limited liability company, duly incorporated and validly
existing under the law of its jurisdiction of incorporation.
27
(b)
(iv)
The Investment Manager has the power to own its assets and carry on its business as it
is being conducted.
(v)
The Investment Manager has no substantive trading history and has no liabilities other
than the liabilities assumed by it under the Sukuk Documents to which it is a party.
Binding transactions and obligations
Subject to the Reservations (as defined in the Investment Agency Agreement):
(c)
(i)
the transactions contemplated by, and all obligations expressed to be assumed by it, in
each Sukuk Document to which it is party constitute its valid and legally binding
obligations; and
(ii)
the transactions contemplated by, and all obligations expressed to be assumed by the
Investment Manager, in each Sukuk Document to which the Investment Manager is
party constitute valid and legally binding obligations of the Investment Manager.
Non-conflict with other obligations
The entry into, and the transactions contemplated by, the Sukuk Documents to which the
Issuer and/or the Investment Manager is party do not and will not conflict with:
(d)
(i)
any law or regulation applicable to the Issuer or the Investment Manager;
(ii)
the constitutional documents of the Issuer or the Investment Manager; or
(iii)
any agreement or instrument binding upon the Issuer or the Investment Manager or
any asset of the Issuer or the Investment Manager.
Power and authority
Each of the Issuer and the Investment Manager has the power to enter into, perform and
deliver, and has taken all necessary action to authorise its entry into, performance and
delivery of, the Sukuk Documents to which it is a party and the transactions contemplated by
those Sukuk Documents.
(e)
Validity and admissibility in evidence
All Authorisations required to enable each of the Issuer and the Investment Manager lawfully
to enter into, exercise its rights and comply with its obligations in the Sukuk Documents to
which it is a party, other than translation into Arabic, to make the Sukuk Documents to which
it is a party admissible in evidence in its jurisdiction of incorporation, have been obtained or
effected and are in full force and effect.
(f)
No Event of Default
No Event of Default has occurred and is continuing.
(g)
Pari passu ranking
The obligations of each of the Issuer or the Investment Manager under the Sukuk Documents
to which it is a party rank at least pari passu with the claims of all its other unsecured and
unsubordinated creditors save as mandatorily preferred at law.
(h)
No proceedings pending or threatened
No litigation, arbitration or administrative proceedings of or before any court, arbitral body or
agency which, if adversely determined, might reasonably be expected to have a Material
Adverse Effect, have (to the best of its knowledge and belief) been started or threatened
28
against the Issuer or the Investment Manager nor is there subsisting any unsatisfied judgment
or award given against the Issuer or the Investment Manager by any court, arbitrator or other
body.
(i)
Insolvency
Neither the Issuer nor the Investment Manager has taken any action nor (to the best of its
knowledge and belief) have any steps been taken or legal proceedings been started or
threatened against either of them for its winding-up, dissolution or re-organisation, for the
enforcement of any Security Interest over its assets or for the appointment of a liquidator,
supervisor, receiver, administrator, administrative receiver, compulsory manager, trustee or
other similar officer of the Issuer or the Investment Manager or in respect of any of assets of
either of them.
(j)
(k)
(l)
No misleading information
(i)
Any factual information provided by the Issuer in connection with the Sukuk
Documents was true and accurate in all material respects as at the date it was
provided or as at the date (if any) at which it is stated.
(ii)
Any financial projections or statements made or provided by the Issuer in connection
with the Sukuk Documents have been prepared on the basis of recent historical
information and on the basis of reasonable assumptions.
(iii)
No information has been given or withheld which results in the information provided
by the Issuer in connection with the Sukuk Documents being untrue or misleading in
any material respect.
Financial statements
(i)
Its Financial Statements were prepared in accordance with the Saudi Arabian
Companies Regulations and in accordance with the accounting standards generally
accepted in the Kingdom of Saudi Arabia.
(ii)
Its Financial Statements fairly represent its financial condition and operations during
the relevant financial year.
(iii)
There has been no Material Adverse Effect on the business or financial condition of
the Issuer since the publication of the last Financial Statements.
Consents
There are no licences, consents, registrations or approvals (governmental or otherwise)
necessary on the part of the Issuer or the Investment Manager that have not been or will not
be obtained by the date of the Investment Agency Agreement, and to the extent necessary,
maintained in connection with the execution, delivery, performance, validity and
enforceability of the Sukuk Documents to which the Issuer or the Investment Manager is
party.
(m)
Compliance with Laws
Each of the Issuer or the Investment Manager has complied in all respects with all laws to
which it may be subject, if failure to so comply would materially impair its ability to perform
its obligations under the Sukuk Documents to which it is a party.
(n)
Tax Affairs
Each of the Issuer and the Investment Manager has, to the extent applicable:
(i)
promptly filed all tax returns required to be filed by it in any jurisdiction; and
29
(ii)
7.
promptly paid all Taxes payable by it or, if any Tax is being contested in good faith
and by appropriate means, adequate provision exists for payment of that Tax.
Undertakings
The undertakings in this Condition 7 will remain in force from the date of the Investment
Agency Agreement for so long as any amount is outstanding under any Sukuk Document.
(a)
General Undertakings
(i)
Notification of default
The Issuer shall notify the Sukukholders’ Agent of any Event of Default (and the
steps, if any, being taken to remedy it) promptly upon becoming aware of its
occurrence.
(ii)
Pari passu ranking
The Issuer shall ensure that all payments and obligations by the Issuer and the
Investment Manager under any Sukuk Document to which it is a party rank:
(iii)
●
in priority to any distributions (by way of profits, dividends or otherwise) by the
Issuer to its shareholders or by the Investment Manager to the Issuer (as the case
may be); and
●
at least pari passu with the claims of all the unsecured and unsubordinated
creditors of the Issuer or the Investment Manager (as the case may be).
Insurance
The Issuer shall take out and maintain or cause to be taken out and maintained
Islamic Takaful insurance in respect of its assets and activities in such amounts,
covering such risks, and on such terms as customary in The Kingdom of Saudi Arabia
by a prudent person engaged in business of the same or a similar nature to the Issuer.
(iv)
Compliance with laws
The Issuer shall comply, and shall procure compliance by the Investment Manager,
with all laws to which the Issuer or the Investment Manager (as the case may be) may
be subject, if failure to so comply would materially impair the ability of the Issuer or
the Investment Manager (as the case may be) to perform its obligations under the
Sukuk Documents to which it is a party.
(v)
Tax Affairs (Issuer)
The Issuer shall, to the extent applicable:
(vi)
(i)
promptly file all tax returns required to be filed by it in any jurisdictions; and
(ii)
promptly pay all Taxes or, if any Tax is being contested in good faith and by
appropriate means, maintain adequate provision for payment of that Tax.
Tax Affairs (Investment Manager)
The Issuer shall, to the extent applicable, procure that the Investment Manager:
(i)
promptly files all tax returns required to be filed by the Investment Manager
in any jurisdiction; and
30
(ii)
(vii)
promptly pays all Taxes payable by the Investment Manager or, if any Tax is
being contested in good faith and by appropriate means, maintain adequate
provision for payment of that Tax.
Incurrence of Financial Indebtedness by the Investment Manager
The Issuer shall ensure that the Investment Manager does not incur any Financial
Indebtedness (excluding any liability of the Investment Manager under any Sukuk
Document to which the Investment Manager is a party).
(b)
Negative Undertakings
The Issuer undertakes to the Sukukholders that:
(c)
(i)
Disposals, etc.: it shall not enter into a single transaction or a series of transactions
(whether related or not) and whether voluntary or involuntary to sell, lease, transfer or
otherwise dispose (a “Disposal”) of any of its assets except any Disposal made in the
ordinary course of the Issuer’s business or in connection with the Sukuk Documents;
(ii)
Change of business: it shall procure that no substantial change is made to the general
nature of the business of the Issuer from that carried on at the date of the Investment
Agency Agreement; and
(iii)
Security: it shall not create or permit to subsist any Security Interest over any of its
assets that would result in the aggregate amount of its Total Assets (as defined in
Condition 7(d)(ii)) to which no Security Interest is attached being less than 1.25 times
greater than the aggregate amount of its unsecured Financial Indebtedness (excluding
any Financial Indebtedness junior to the Sukuk).
Information Undertakings
(i)
Financial statements
The Issuer shall supply to the Sukukholders’ Agent:
(ii)
●
as soon as the same become available, but in any event within 120 days after the
end of each of its financial years, its audited consolidated financial statements for
that financial year in English and Arabic; and
●
as soon as the same become available, but in any event within 60 days after the
end of each half of each of its financial years its consolidated financial statements
for that financial half year in English and Arabic.
Miscellaneous
The Issuer shall supply to the Sukukholders’ Agent:
●
upon request, all documents dispatched by the Issuer or the Investment Manager
to its shareholders or creditors (or any class of them) generally at the same time
as they are dispatched;
●
promptly upon becoming aware of them, the details of any litigation, arbitration
or administrative proceedings which are current, threatened or pending against
the Issuer or the Investment Manager, and which might, if adversely determined,
have a Material Adverse Effect; and
●
promptly, such further information regarding the financial condition, business
and operations of the Issuer as the Sukukholders’ Agent may reasonably request.
31
(d)
Financial Undertakings
(i)
(ii)
The Issuer undertakes to the Sukukholders that at all times whilst any of the Sukuk
are outstanding:
●
the Shareholders’ Equity shall not be less than US$2,300,000,000;
●
its ratio of Total Liabilities to Total Assets shall not exceed 0.65:1; and
●
its Current Ratio shall not be less than 1.1:1.
For the purpose of the foregoing:
“Current Assets” means the aggregate amount of the Issuer’s cash and cash
equivalents, net accounts receivable, projects under construction, developed lands,
prepaid expenses and short term investments;
“Current Liabilities” means the aggregate amount of the Issuer’s obligations (other
than contingent obligations) for the payment or repayment of money on demand or
within a year from the date of computation, whether actual or contingent;
“Current Ratio” means Current Assets divided by Current Liabilities;
“Financial Indebtedness” means any indebtedness for or in respect of:
●
moneys borrowed;
●
any amount raised by acceptance under any acceptance credit facility;
●
the amount of any liability in respect of any lease contract which would be
treated as a finance or capital lease in accordance with the Saudi Organization
for Certified Public Accountants Generally Accepted Accounting Principles;
●
any amount raised under any other transaction (including any Shari’ah
compliant financing or purchase agreement, sale and sale back or sale and
leaseback agreement) having the commercial effect of a borrowing;
●
the amount of any liability in respect of any guarantee for any of the items
referred to in the above paragraphs,
provided always that, for the avoidance of doubt, any indebtedness in respect of
deposits made by potential or actual purchasers of real estate of the Issuer in the
ordinary course of its day to day real estate and development activities shall not
constitute Financial Indebtedness
“Indebtedness” means any indebtedness in respect of any person on any date (and
without duplication) for or in respect of:
●
any Financial Indebtedness of such person;
●
the amount of any liability of such person to pay the deferred and unpaid
purchase price of property, assets or services, which purchase price is due
more than 45 days after the earlier of the date of placing such property in
service or taking delivery and title thereof or the completion of such services;
32
●
the principal component or liquidation preference of all obligations of such
person with respect to the redemption, repayment or other repurchase of any
preferred stock;
●
all indebtedness of any other person secured by a Security Interest granted by
such person on any of its assets (the value of which, for these purposes, shall
be determined by reference to the balance sheet in respect of the latest half
year period of the person providing the Security Interest) of such person,
whether or not such indebtedness is assumed by such person;
●
all indebtedness of other persons guaranteed by such person to the extent
such Indebtedness is guaranteed by such person; or
●
the amount of any liability in respect of any guarantee for any of the items
referred to in the above paragraphs;
“Shareholders’ Equity” means, at any date, the capital, statutory reserves, general
reserves, treasury stock and retained earnings of the Issuer; and in addition, to the
extent accounted for as equity in accordance with the Saudi Organization for
Certified Public Accountants Generally Accepted Accounting Principles, the equity
element with respect to any financial instrument;
“Total Assets” means, at any date, the total book value of all assets, plus accumulated
depreciation and amortization, of the Issuer, prepared in accordance with the Saudi
Organization for Certified Public Accountants Generally Accepted Accounting
Principles; and
“Total Liabilities” means the aggregate of all Indebtedness of the Issuer and all other
obligations of the Issuer for the payment or repayment of money, whether present or
future.
8.
Periodic Distributions
(a)
Periodic Distribution Dates:
Subject to Condition 5(b) (Investment Agency) and
Condition 10 (Payments), the Investment Manager shall, through the Payments Administrator,
distribute to the Sukukholders pro rata a distribution in relation to the Sukuk on each Periodic
Distribution Date equal to the applicable Periodic Distribution Amount. If any Periodic
Distribution Date is not a Business Day, it shall be postponed to the following Business Day.
In these Conditions:
“Periodic Distribution Amount” means, for each Periodic Distribution Period, an amount
calculated as follows:
P x (S + M) x D
360
where:
P
=
the aggregate Nominal Amount of such Sukuk as are current on the Transfer
Record Date immediately preceding the last day of such Periodic Distribution
Period;
D
=
the actual number of days in such Periodic Distribution Period;
S
=
the three-month SIBOR for such Periodic Distribution Period; and
33
M
(b)
=
the Margin
Determination of three-month SIBOR: The three-month SIBOR for each Periodic
Distribution Period shall be determined by or on behalf of the Payments Administrator, in
accordance with the following provisions:
(i)
the Payments Administrator will determine the Screen Rate at approximately
11.00 a.m. (Saudi time) on the second Business Day before the first day of each
Periodic Distribution Period (the “Periodic Determination Date”) and such Screen
Rate shall be the value of the three-month SIBOR for the forthcoming Periodic
Distribution Period; or
(ii)
if the Screen Rate is unavailable, the Payments Administrator will:
(A)
request the principal office in the Kingdom of Saudi Arabia of each of the
Reference Banks or any substitute reference bank in the Saudi interbank
market appointed by the Payments Administrator, to provide a quotation of
the rate at which deposits in Saudi Arabian Riyals are offered by it in the
Saudi interbank market at approximately 11.00 a.m. (Saudi time) on the
Periodic Determination Date to prime banks in the Saudi interbank market for
a period equal to the relevant Periodic Distribution Period and for a amount
equal to the aggregate Nominal Amount of the Sukuk and, so long as at least
two of the Reference Banks provide such rates, the arithmetic mean of such
rates (rounded if necessary to the fifth decimal place, with 0.000005 rounded
upwards) as calculated by the Issuer shall be the value of SIBOR for the
forthcoming Periodic Distribution Period; and
(B)
if SIBOR cannot be determined in accordance with the above provisions, the
value of SIBOR for the forthcoming Periodic Distribution Period applicable
to the Sukuk during such Periodic Distribution Period shall be as determined
on the preceding Periodic Determination Date.
(c)
Publication: The Payments Administrator will cause the Screen Rate and the Periodic
Distribution Amount determined by it, together with the relevant Periodic Distribution Date,
to be notified to the Issuer and the Sukukholders’ Agent and each stock exchange on which
the Sukuk are then listed, if applicable, as soon as practicable after such determination but in
any event not later than the first day of the relevant Periodic Distribution Period. Notice
thereof shall also promptly be given to the Sukukholders. The Payments Administrator will
be entitled to recalculate any Periodic Distribution Amount (on the basis of the foregoing
provisions) without notice in the event of an extension or shortening of the relevant Periodic
Distribution Period.
(d)
Cessation of Accrual: No further amounts will be payable on any Sukuk from and including
its due date for redemption unless, upon due presentation, payment in respect of the Sukuk is
improperly withheld or refused or unless default is otherwise made in respect of payment, in
which event such amounts payable on the Sukuk shall continue to be due and payable and the
Issuer shall have an obligation to pay the Late Payments Amount on such delayed payments
to the Sukukholders’ Agent.
(e)
Calculation of Distribution in respect of Periodic Distribution Default Amounts: When a
distribution is required to be calculated in respect of a period less than a full Periodic
Distribution Period, it shall be calculated on the basis of the actual number of days elapsed in
such period and an actual/360 basis.
(f)
Notifications: All notifications, opinions, determinations, certificates, calculations, quotations
and decisions given, expressed, made or obtained for the purposes of this Condition by the
Payments Administrator shall (in the absence of wilful misconduct, fraud or manifest error)
34
be binding on the Issuer, the Sukukholders’ Agent and the Sukukholders and (subject as
aforesaid) no liability to any such person will attach to the Payments Administrator in
connection with the exercise or non-exercise by it of its powers, duties and discretions under
this Condition.
9.
Purchase of Sukuk
(a)
Purchase: The Issuer may at any time purchase Sukuk in the open market or otherwise and at
any price agreed between the Sukukholder and the Issuer.
(b)
Cancellation: All Sukuk, if any, so purchased by the Issuer shall be cancelled and may not be
reissued or resold.
(c)
Partial Liquidation of the Sukuk Assets: Upon purchase and cancellation of any Sukuk by the
Purchaser, a pro rata portion of the Sukuk Assets relating to the Sukuk purchased and
cancelled by the Issuer shall be liquidated by the Investment Manager and the proceeds of
such liquidation shall be transferred to the Issuer.
10.
Payments
(a)
General: Payments under the Sukuk shall be made by wire transfer to a Saudi Arabian Riyal
account maintained by the payee with a bank in the Kingdom of Saudi Arabia as notified in
writing to the Registrar and the Payments Administrator not later than 11.00 a.m. (Saudi time)
one Business Day prior to the date of the relevant payment.
(b)
Payments subject to Applicable Laws: All payments in respect of the Sukuk are subject in all
cases to any applicable fiscal or other laws and regulations in the place of payment. Except as
provided in Condition 15 (Taxation), no deductions or expenses shall be charged to the
Sukukholders in respect of such payments.
(c)
Payments on Business Days: Payment instructions will be initiated for value on the due date,
or, if the due date is not a Business Day, for value on the first following Business Day. A
Sukukholder shall not be entitled to any distribution or other payment in respect of any delay
in payment resulting from the due date for a payment not being a Business Day.
(d)
Transfer Record Date: Each payment in respect of the Sukuk will be made to the person
shown as the Sukukholder in the Register at the opening of business in the place of the
Registrar’s specified office on the Transfer Record Date.
(e)
Payments Administrator: All payments to the Sukukholders by the Issuer shall be made
through the Payments Administrator. In acting under the Payments Administration
Agreement and in connection with the Sukuk, the Payments Administrator acts as agent of the
Issuer and does not assume any obligations towards or relationship of agency for or with any
of the Sukukholders. The Issuer reserves the right at any time to vary or terminate the
appointment of the Payments Administrator and to appoint a successor Payments
Administrator; provided, however, that the Issuer shall at all times maintain a Payments
Administrator in the Kingdom of Saudi Arabia. Notice of any change of the Payments
Administrator or in its specified office shall promptly be given to the Sukukholders’ Agent.
11.
Dissolution of Sukuk
On payment of all amounts due under the Sukuk Documents in circumstances specified in
paragraphs (a) and (b) below, the Investment Agency shall be dissolved and the Sukuk
redeemed by the Issuer cancelled.
(a)
Scheduled Dissolution
Unless previously redeemed, or purchased and cancelled (including upon the occurrence of
an Event of Default Date), the Sukuk will be redeemed on the Expiry Date and subject to
35
Condition 4(b) (Status; Limited Recourse), each Sukukholder shall receive its pro rata share
of the Sukuk Settlement Amount. On payment of all amounts due under the Sukuk
Documents, the Investment Agency will be dissolved and the Sukuk purchased by the Issuer
cancelled.
(b)
Early Redemption
The Sukuk may be redeemed at the option of the Issuer on any Periodic Distribution Date (the
“Early Redemption Date”) in whole, but not in part, at any time, on giving not less than 30
nor more than 60 days’ notice (an “Early Redemption Notice”) to the Sukukholders in
accordance with Condition 17 (Notices) (which notice shall be irrevocable), and subject to
Condition 4(b) (Status; Limited Recourse), each Sukukholder shall receive its pro rata share
of the Sukuk Settlement Amount upon the occurrence of a Tax Event, provided, however, that
prior to the publication of any Early Redemption Notice, the Issuer shall deliver to the
Sukukholders’ Agent a certificate signed by two officers of the Issuer stating that the
conditions precedent to the right of the Issuer to so redeem the Sukuk have occurred. The
Sukukholders’ Agent shall be entitled to accept such certificate and opinion as sufficient
evidence of the satisfaction of the conditions precedent set out above and shall not be required
to make any further enquiry into such circumstances and shall not incur liability to any person
(including any Sukukholder) as a result of relying on such certificate. Any such certificate
shall be conclusive and binding on each Sukukholder who, by virtue of its subscription,
purchase or holding of any Sukuk, be deemed to have accepted such early redemption on the
Early Redemption Date.
12.
Events of Default
The occurrence of any of the following events and circumstances shall constitute an “Event
of Default”:
(a)
Non-payment of the Periodic Distribution Amount: the amount distributed to Sukukholders
on any Periodic Distribution Date in accordance with Condition 5(b) (Investment Agency) is
less than the Periodic Distribution Amount for the relevant Periodic Distribution Period and
such shortfall remains unpaid in full five (5) Business Days after its due date (except as a
result of an administrative or technical error) and occurs as a direct result of the Issuer’s
wilful default or gross negligence in performing its obligations under the Sukuk Documents;
or
(b)
Breach of Guarantee: the Issuer fails to fulfil its obligation to pay any Distribution Shortfall
Restoration Amount under the Guarantee when due and payable and such default continues
for a period of five (5) Business Days; or
(c)
Breach of other obligations: the Issuer (whether in its capacity as Issuer or as Investment
Agent) defaults in the performance or observance of any of its other obligations under or in
respect of the Sukuk or the Sukuk Documents and (except in any case where the failure is
incapable of remedy when no continuation or notice as is hereinafter mentioned will be
required) such default remains unremedied for thirty (30) days after written notice thereof,
addressed to the Issuer by the Sukukholders’ Agent has been delivered to the Issuer, provided
that for the purpose of this paragraph (c) no breach of the Underlying Value Conditions shall
be deemed to have occurred as long as no events and circumstances described in Conditions
12(a) and/or 12(b) have occurred; or
(d)
Material adverse change: any event or series of events occurs which, in the opinion of the
Sukukholders’ Agent (acting reasonably), has a Material Adverse Effect unless the
circumstances giving rise to the material adverse change are remedied within 30 Business
Days after notice is given to the Issuer of such circumstances; or
36
(e)
Misrepresentation: any representation or statement made or deemed to be made by the Issuer
in any Sukuk Document or any other document delivered by or on it behalf under or in
connection with any Sukuk Document is or proves to have been incorrect or misleading in
any material respect when made or deemed to be made, unless the circumstances giving rise
to the misrepresentation are remedied within 30 days of the Sukukholders' Agent giving
notice of the misrepresentation to the Issuer; or
(f)
Cessation of business: either the Issuer or the Investment Manager suspends, ceases or
threatens to suspend or cease to carry on all or substantial part of its business; or
(g)
Litigation: Any litigation, arbitration or administrative proceeding is current or pending to
restrain performance by the Issuer or the Investment Manager of its obligations under the
Sukuk Documents or which, if adversely determined, has or could have a material adverse
effect; or
(h)
Unsatisfied judgment: one or more judgment(s) or order(s) for the payment of an amount in
excess of SAR 50 million (or its equivalent in any other currency or currencies), whether
individually or in aggregate is rendered against the Issuer and continue(s) unsatisfied and
unstayed for a period of thirty (30) days after the date(s) thereof or, if later, the date therein
specified for payment; or
(i)
Cross Default: if any of the following events occur: (i) any Financial Indebtedness of the
Issuer is not paid when due nor within any applicable grace period; (ii) any Financial
Indebtedness of the Issuer is declared to be or otherwise becomes due and payable prior to its
specified maturity as a result of an event of default (however described); (iii) any
commitment for any Financial Indebtedness of the Issuer is cancelled or suspended by a
creditor of the Issuer, as a result of an event of default (however described); (iv) any creditor
of the Issuer becomes entitled to declare any Financial Indebtedness of the Issuer due and
payable prior to its specified maturity as a result of an event of default (however described)
and has not waived such entitlement within 14 days from becoming entitled to do so,
provided in each case that no Event of Default will occur under this paragraph if the
aggregate amount of Financial Indebtedness or commitment for Financial Indebtedness is less
than SAR 50 million (or equivalent in any other currency or currencies).
(j)
Insolvency: (i) the Issuer or the Investment Manager becomes insolvent or is unable to pay its
debts as they fall due; (ii) an administrator or liquidator is appointed over the whole or at least
25 per cent. of the undertaking, assets and revenues of the Issuer or the Investment Manager
(or application for any such appointment is made) and such appointment is not discharged
within thirty (30) days; (iii) the Issuer or the Investment Manager takes any action for a
readjustment or deferment of any of its obligations or makes a general assignment or an
arrangement or composition with or for the benefit of its creditors (including any arrangement
under the Settlement to Avoid Bankruptcy Law) or declares a moratorium in respect of any of
its Indebtedness or any Indebtedness Guarantee given by it; or (iv) the Issuer or the
Investment Manager ceases or threatens to cease to carry on all or at least 25 per cent. of its
business (otherwise than for the purposes of, or pursuant to, an amalgamation, reorganisation
or restructuring whilst solvent approved by an Extraordinary Resolution); or
(k)
Winding up of the Issuer or the Investment Manager: an order is made or an effective
resolution is passed for the winding up, liquidation or dissolution of the Issuer or the
Investment Manager (otherwise than for the purposes of, or pursuant to, an amalgamation,
reorganisation or restructuring whilst solvent approved by an Extraordinary Resolution); or
(l)
Analogous event: any event occurs under the laws, regulations or rules of the Kingdom of
Saudi Arabia has an analogous effect to any of the events referred to in paragraphs (d)
(Unsatisfied judgement) to (k) (Winding up of the Issuer or the Investment Manager) above;
or
37
(m)
Failure to take action: failure to take, fulfil or do any action, condition or thing at any time
required to be taken, fulfilled or done in order to: (i) enable the Issuer and the Investment
Manager lawfully to enter into, exercise its rights and perform and comply with its obligations
under and in respect of the Sukuk or the Sukuk Documents; and (ii) ensure that those
obligations are legal, valid, binding and enforceable; or
(n)
Unlawfulness: it is or becomes unlawful for the Issuer to perform any or all of its obligations
under or in respect of the Sukuk or the Sukuk Documents or for any other party to any Sukuk
Document to perform any or all of its obligations under that document; or
(o)
Non-Effectiveness of Sukuk Assets: it is or becomes unlawful for the Issuer to perform any of
its material obligations under the Sukuk Assets or any documents relating to the Sukuk
Assets, or any Sukuk Assets or documents relating to the Sukuk Assets are held by a court not
to be legally effective or the Issuer or the Investment Manager repudiates or evidences an
intention to repudiate any document relating to the Sukuk Assets.
(p)
The Investment Manager fails to invest the proceeds of the sale of the Sukuk in Ijara contracts
within two Business Days and Murabaha contracts within 30 days after the date of the
Investment Management Agreement.
(q)
Whilst any Sukuk are outstanding and within 30 days after the expiry or termination of any
Sukuk Contract, the Investment Manager fails to reinvest the proceeds of that expired or
terminated Sukuk Contract in replacement Sukuk Contract(s).
If an Event of Default occurs and is continuing, the Sukukholders’ Agent will as soon as is
reasonably practicable after it receives notice thereof give notice of the occurrence of such
Event of Default to the Sukukholders requiring them to indicate within a period of up to
fifteen (15) days, or such other date as is notified to Sukukholders by the Sukukholders’
Agent (the “Exercise Period”) whether they wish to exercise their rights pursuant to the
Investment Agency Agreement to require the Investment Manager to pay them their pro rata
share of the Sukuk Settlement Amount and, if applicable, to require the Issuer to pay them
their pro rata share of the Value Restoration Amount pursuant to the Guarantee. Any
Sukukholder may then deliver a notice (an “Event of Default Notice”) within such Exercise
Period to the Sukukholders’ Agent calling for its pro rata share of the Sukuk Settlement
Amount and, if applicable, its pro rata share of the Value Restoration Amount.
The Sukuk in respect of which an Event of Default Notice is so delivered may not be
transferred until after the expiry of the Exercise Period and only to the extent the Investment
Manager has paid the relevant Sukuk Settlement Amount and, if applicable, the Issuer has
paid the relevant Value Restoration Amount, during such Exercise Period in accordance with
the Conditions. If the Sukukholders’ Agent receives an Event of Default Notice, the
Sukukholders’ Agent shall promptly give notice to the Investment Manager, the Issuer and
the Payments Administrator that such an Event of Default Notice has been received,
specifying the Event of Default referred to therein (but so that such notice shall only be given
in relation to the first Purchase Notice received in respect of any Event of Default). If the
Sukukholders’ Agent receives Event of Default Notices from the Required Sukukholders
within the Exercise Period, then the Sukukholders’ Agent shall promptly deliver to the
Investment Manager and the Issuer an exercise notice (the “Exercise Notice”) so notifying
the Investment Manager and the Issuer (with a copy to the Sukukholders) and, provided that
the Event of Default in respect of such Exercise Notice is continuing, the Investment Manager
immediately pay to Sukukholders their pro rata share of the Sukuk Settlement Amount in
respect of the Sukuk current as of the date of that Exercise Notice (the “Event of Default
Date”) and, if applicable, the Issuer shall, pursuant to the Guarantee, immediately pay to
Sukukholders their pro rata share of the Value Restoration Amount in respect of the Sukuk
current as of such date.
38
13.
Enforcement and Exercise of Rights
(a)
The Sukukholders’ Agent shall not be bound in any circumstances to take any action against
the Issuer under any Sukuk Document to which the Issuer is a party unless directed or
requested to do so: (i) by an Extraordinary Resolution; or (ii) in writing by the Required
Sukukholders and in either case then only if it shall be indemnified and/or secured to its
satisfaction by the Issuer, against all liabilities to which it may thereby render itself liable or
which it may incur by so doing.
(b)
No Sukukholder shall be entitled to proceed directly against the Issuer unless: (i) the
Sukukholders’ Agent, having become bound so to proceed, fails to do so within sixty
(60) days of becoming so bound and such failure is continuing; and (ii) the relevant
Sukukholder (or such Sukukholder together with the other Sukukholders who propose to
proceed directly against the Issuer ) holds at least twenty-five (25) per cent. of the aggregate
face value of the Sukuk then current on such date. Under no circumstances shall the
Sukukholders’ Agent or any Sukukholders have any right to cause the sale or other
disposition of any of the Sukuk Assets, and the sole right of the Sukukholders’ Agent and
Sukukholders against the Issuer shall be to enforce the obligation of the Issuer to pay them
their pro rata share of the Distribution Shortfall Restoration Amount or the Value Restoration
Amount when due and payable, which are unsecured and unsubordinated obligations of the
Issuer.
(c)
A written resolution signed by or on behalf of the Sukukholders of not less than two-thirds of
the aggregate Nominal Amount of the Sukuk as are current as of such date shall be valid and
effective as a duly passed Extraordinary Resolution.
(d)
The foregoing paragraphs in this Condition 13 (Enforcement and Exercise of Rights) are
subject to this paragraph. Without prejudice to any liability that the Issuer might have under
the Guarantee, except pursuant to these Conditions, no Sukukholder shall be entitled to
petition or to take any other steps against the Issuer, Investment Manager or the
Sukukholders’ Agent in respect of the Sukuk or the Sukuk Assets.
14.
Meetings of Sukukholders; Modification
(a)
Meetings of Sukukholders: The Declaration of Agency contains provisions for convening
meetings of Sukukholders to consider any matter affecting their interests, including the
sanctioning by the Extraordinary Resolution of a modification of the Sukuk, these provisions
or any relevant provision of the Declaration of Agency, subject to also obtaining the Issuer’s
approval. Such a meeting may be convened by the Issuer and shall be convened by the Issuer
upon the request in writing of Sukukholders holding not less than one-tenth of the aggregate
face value of such of the Sukuk as are current as of such date. The quorum at any meeting
convened to vote on an Extraordinary Resolution will be two or more persons holding or
representing at least half of the aggregate face value of such of the Sukuk as are current as of
such date or, at any adjourned meeting, one-quarter of the aggregate face value of such of the
Sukuk as are current as of such date.
An Extraordinary Resolution requires the affirmative vote of at least one more Sukukholder
than half of those represented in the relevant meeting in order for it to be passed. Any
Extraordinary Resolution duly passed at any such meeting shall be binding on all
Sukukholders, whether present or not.
(b)
Modification: The Declaration of Agency provides that the Sukukholders’ Agent may agree,
without the consent of the Sukukholders, to any modification (subject to certain exceptions as
provided in the Declaration of Agency) of, or to any waiver or authorisation of any breach or
proposed breach of, any of these Conditions or any of the provisions of the Declaration of
Agency, or may determine that an Event of Default, shall not be treated as such which in any
such case, in the opinion of the Sukukholders’ Agent, is not materially prejudicial to the
39
interests of the Sukukholders or to any modification of any of these Conditions or any of the
provisions of the Declaration of Agency which is (in the opinion of the Sukukholders’ Agent)
of a formal, minor or technical nature or which is made to correct a manifest error or to
comply with mandatory provisions of law. Any such modification, waiver, authorisation or
determination shall be binding on the Sukukholders and, unless the Sukukholders’ Agent
agrees otherwise, any such modification shall be notified to the Sukukholders as soon as
practicable thereafter in accordance with Condition 17 (Notices).
In connection with the exercise by it of any of its powers, authorities or discretions (including,
but without limitation, any modification, waiver, authorisation or substitution), the
Sukukholders’ Agent shall have regard to the interests of the Sukukholders as a class and, in
particular, but without limitation, need not have regard to the consequences of such exercise
for individual Sukukholders resulting from their being for any purpose domiciled or resident
in, or otherwise connected with, or subject to the jurisdiction of, any particular territory and
the Sukukholders’ Agent shall not be entitled to require, nor shall any Sukukholder be entitled
to claim, from the Issuer or any other person any indemnification or payment in respect of any
Tax consequence of any such exercise upon individual Sukukholders.
15.
Taxation
All payments or distributions in respect of the Sukuk by or on behalf of the Issuer shall be
made free and clear of, and without withholding or deduction for or on account of, any Taxes,
unless the withholding or deduction of such Taxes are required by the applicable laws, in
which case the Issuer and the Payments Administrator shall be entitled to make a deduction or
withholding from any payment which it makes under this Sukuk Documents for or on account
of any present or future taxes, duties or charges if and to the extent so required by applicable
law, in which event the Issuer and/or the Payments Administrator shall make such payment
after such withholding or deduction has been made and shall account to the relevant
authorities for the amount so withheld or deducted. In that event, the Issuer shall pay such
additional amounts to Sukukholders who have their tax residency in the Kingdom of Saudi
Arabia as would result in the receipt by such Sukukholders of such amounts as would have
been received if no such withholding or deduction had been required. References herein to
the Periodic Distribution Amount and any other amounts payable to the Sukukholders shall
include any additional amounts so payable pursuant to this Condition 15 (Taxation).
16.
Indemnification and Liability of the Sukukholders’ Agent
(a)
The Declaration of Agency contains provisions for the indemnification of the Sukukholders’
Agent in certain circumstances and for its relief from responsibility, including provisions
relieving it from taking action unless indemnified and/or secured to its satisfaction, in
particular, in connection with the exercise of any of its rights in respect of the Sukuk Assets.
The Sukukholders’ Agent shall in no circumstances take any action unless directed to do so in
accordance with Condition 13 (Enforcement and Exercise of Rights), and then only if it shall
have been indemnified and/or secured to its satisfaction by the Issuer.
(b)
The Sukukholders’ Agent makes no representation and assumes no responsibility for the
validity, sufficiency or enforceability of the obligations of the Issuer under any Sukuk
Document to which the Issuer is a party and shall not under any circumstances have any
liability or be obliged to account to the Sukukholders in respect of any payment which should
have been made by the Issuer or on its behalf, but is not so made, and shall not in any
circumstances have any liability arising from the Sukuk Assets other than as expressly
provided in these Conditions or in the Declaration of Agency.
(c)
The Sukukholders’ Agent is exempted from: (i) any liability in respect of any loss or theft of
the Sukuk Assets (including any cash forming part of the Sukuk Assets); (ii) any obligation to
insure the Sukuk Assets or any cash forming part of the Sukuk Assets; and (iii) any claim
arising from the fact that the Sukuk Assets (including any cash forming part of the Sukuk
40
Asset) are held by or on behalf of the Sukukholders’ Agent or on deposit, unless such loss or
theft arises as a result of gross negligence or wilful misconduct of the Sukukholders’ Agent.
17.
Notices
All notices to the Sukukholders will be valid if sent to them by registered mail to their
respective addresses in the Register. Any such notice shall be deemed to have been given on
the fifth day after the date of mailing. In addition, notices of any meetings of Sukukholders
shall be published in a daily newspaper with circulation in the locality of the Issuer’s head
office at least 25 days prior to the date set for the initial meeting and at least 30 days prior to
the date set for any adjourned meeting.
18.
Governing Law and Jurisdiction
(a)
Governing Law: The Sukuk Documents and the Sukuk are governed by, and are to be
construed in accordance with, the laws and regulations of the Kingdom of Saudi Arabia.
(b)
Jurisdiction: The Committee for the Resolution of Securities Disputes (the “Committee”)
shall have exclusive jurisdiction to hear and determine any suit, action or proceedings, and to
settle any disputes, which may arise out of or in connection with the Sukuk or the Sukuk
Documents and, for such purposes, all relevant parties (including, the Issuer and the
Sukukholders) irrevocably submit to the jurisdiction of the Committee. No suit, action or
proceedings which may arise out of or in connection with the Sukuk or the Sukuk Documents
may be filed or brought outside the Kingdom of Saudi Arabia and no court or any judicial
authority outside the Kingdom of Saudi Arabia shall have jurisdiction to hear any such claim.
41
6.
USE OF PROCEEDS
The proceeds of the sale of the Sukuk will be applied by the Issuer as Investment Agent through the
Investment Manager to form a single portfolio of investments consisting of Ijara and Murabaha
contracts in accordance with the Investment Plan, including a requirement to invest the proceeds from
the Sukuk into Sukuk Assets generating returns at least equal to the Periodic Distribution Amount and
a requirement for the Investment Agent and the Investment Manager to ensure satisfaction of the
Underlying Value Conditions. Such Ijara contracts will be effective within two Business Days and
Murabaha contracts will be effective within 30 days after the date of the Investment Management
Agreement. The Ijara contracts will at all times thereafter constitute a minimum of 51 per cent. (by
value) of such investment portfolio.
42
7.
SAUDI ARABIAN REAL ESTATE SECTOR
7.1
Economic Background
The Kingdom of Saudi Arabia (the “Kingdom”) is one of the largest free market economies in the
Middle East and North Africa. The Kingdom has a record of economic stability and has a modern
infrastructure. It possesses more than 20 per cent. of the world’s proven petroleum reserves. In
addition to being the largest oil exporter in the world, Saudi Arabia’s geographic location allows it
access to export markets in Europe, Asia and Africa and it is the world’s 17th largest exporter and
35th largest importer. It has an expanding domestic market and an expected annual population growth
of around 4 per cent.
Geography
Saudi Arabia occupies an area of 1,960,582 sq km and borders Iraq, Jordan, Kuwait, Oman, Qatar,
UAE, and Yemen. It is also linked by a bridge to Bahrain. The Kingdom has five geographical
regions:
●
Eastern Province, the industrial heart of Saudi Arabia’s oil fields and associated industries,
containing the cities of Jubail, Al Khobar, Dhahran and Dammam;
●
Central Province, containing the city of Riyadh, the capital and the seat of the government;
●
Western Province, bordering the Red Sea and containing the holy cities of Makkah and Madinah,
the major commercial city of Jeddah and the industrial city of Yanbu;
●
Northern Province, a sparsely populated region containing the cities of Tabuk and Hail; and
●
South West Province, a mountainous region containing the city of Abha and the port of Jizan.
Most of Saudi Arabia consists of arid or semi-arid land. Uninhabitable desert covers nearly half the
country. According to 2005 statistics, only 1.67 per cent. of Saudi land is classified as arable, and
only 0.09 per cent. of the country’s land is planted to permanent crops.
Political Overview
The central institution of the Kingdom is the monarchy with the Holy Quran as its constitution. It is
governed in accordance with the principles of Islamic law (Shari’ah). The King governs with the
assistance of a Council of Ministers, also called the Cabinet. There are twenty two ministries in the
Kingdom and each ministry specializes in distinct aspects of the government. The King is also
advised by the legislative body called the Consultative Council (also known as the Majlis Al-Shura).
The main functional role of the Consultative Council is to propose new laws and amend existing ones.
It consists of 150 members who are appointed by the King.
Provinces and Regional Governance
For administrative purposes, the Kingdom of Saudi Arabia is divided into 13 provinces or regions.
Each region is led by a governor assisted by a deputy governor. The Governor reports to the Minister
of the Interior. Each province has its own council that advises the governor and deals with the
development of the province. Each region has its own capital city as follows:
●
Riyadh Region: Riyadh;
●
Makkah Region: Holy City of Makkah;
●
Madinah Region: Holy City of Madinah;
●
Qasim Region: Buraidah;
●
Asir Region: Abha;
43
●
Tabouk Region: Tabouk;
●
Hail Region: Hail;
●
Northern Border Region: Arar;
●
Jizan Region: Jizan;
●
Najran Region: Najran;
●
Al-Baha Region: Al-Baha; and
●
Al-Jouf Region: Sikaka.
The following picture represents a map the Kingdom showing its segmentation into the respective
provinces:
Overview of Legal System
Legislation in the Kingdom is made by resolution of the Cabinet and the Shura Council and is ratified
by royal decree. All legislation must be compatible with the principles of Shari’ah. Legislation is
enacted in various forms, the most common of which are royal orders, royal decrees, Council of
Ministers’ resolutions, ministerial resolutions and ministerial circulars.
The court system in the Kingdom consists of two main branches, Shari’ah courts and the Board of
Grievances. These are complemented by several special adjudicative committees which have been
established by ministerial or royal decrees.
The Shari’ah courts generally have jurisdiction over all civil claims, except for claims the jurisdiction
of which has been specifically reserved to one of the other adjudicatory bodies (most notably the
Board of Grievances).
The Board of Grievances has jurisdiction over all disputes to which the Government is a party.
Notably, its jurisdiction includes the enforcement of foreign judgements and arbitral awards.
44
Membership of International Organisations
The Kingdom is a member of various organisations including, inter alia, the United Nations, the Arab
League, the International Monetary Fund, the World Bank, the Islamic Development Bank, the World
Trade Organisation (WTO), the Organisation of Petroleum Exporting Countries, and the Organisation
of the Islamic Conference.
After 12 years of negotiations, in December 2005 Saudi Arabia became the 149th member of the
WTO. Saudi Arabia enacted over 40 new trade-related laws, established nine new regulatory bodies,
and signed 38 bilateral trade agreements in order to prepare for its membership.
Saudi Arabia has made major commitments in many trade-related areas in order to support its
membership bid, including tariff reduction, the opening of the service sectors to greater foreign
participation, and to implement all WTO rules upon membership without recourse to transition
periods. In light of WTO requirements, Saudi Arabia is now accordingly committed to encouraging
foreign investment opportunities, a greater transparency in trade issues, legal recourse for trade
partners, an intellectual property rights environment and an elimination of technical barriers to trade.
Saudi Arabia also agreed to join several sector initiatives upon accession to lower tariffs and other
trade barriers for telecommunications services, information technologies, pharmaceuticals, civilian
aircraft and parts, and chemicals.
The Kingdom’s membership of the WTO can be viewed as broadly positive for the economy. Whilst
there is no single agreement or commitment to the WTO that dramatically affects the economy, the
cumulative impact of the very many incremental changes are perceived as being generally supportive
of economic expansion.
Gulf Cooperation Council
The Gulf Co-operation Council (the GCC) was formed in 1981, to provide a basis for the economic
integration of the Gulf States. The members are Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the
United Arab Emirates (UAE). On 1 January 2003 the GCC member states implemented a customs
union.
The GCC has recently announced plans to move toward further economic integration, and to study the
possibility of monetary and economic union, which was recently stated to be possible as early as
2010.
Economic Overview
Preliminary date of the Central Department of Statistics and Information (CDSI) indicates that GDP at
current prices (including import duties) recorded a growth rate of 7.1 per cent. to Riyals 1,430 billion
in 2007. The non-oil sector GDP grew by 4.5 per cent. to Riyals 840.4 billion, constituting 45.6
per cent. of total GDP. The non-oil private sector GDP went up by 8 per cent. to Riyals 403.8 billion
and that of the government sector by 4.2 per cent. to Riyals 228.9 billion. The oil sector GDP grew
by 8 per cent. to Riyals 778.4 billion, constituting 54.4 per cent. of GDP at current prices.1
1
Source: Saudi Arabian Monetary Agency “SAMA” annual report 2008.
45
The following chart shows percentage by which each economic sector contributed to the creation of
GDP in 2007:
Contribution of Economic Sectors to GDP in 2007
Non-oil
Government
Sector
16.70%
28.90%
54.40%
Oil Sector
Non-oil Private
Sector
The following chart shows contribution of the respective economic activities to the GDP:
Contribution of Economic Activities to GDP in 2007*
(At current prices)
50.00%
50%
40%
32.50%
30%
20%
9.60%
4.60%
10%
2.70%
0.90%
0%
M ining and Quarrying A ctivity
Services A ctivity
M anufacturing A ctivity
Co nstructio n & B uilding A ctivity
A griculture A ctivity
Electricity, Gas and water A ctivity
High oil prices have been the major factor in the economic growth of Saudi Arabia. This oil bonanza
resulted in GDP growth of over 100 per cent. between 2000 and 2007, with the Kingdom now
accounting for nearly half of the GCC’s US$790bn GDP.
46
The following chart shows development of the nominal GDP of the Kingdom in the period shown:
Saudi Nominal GDP (US$bn)
1,400
1,200
1,000
800
600
400
200
0
2000
2001
2002
2003
2004
2005
Saudi
2006
2007
2008f
2009f
GCC
Source: Country Overview by Merrill Lynch (Sep-08 Issue)
As a result of this significant GDP growth and oil wealth, the Kingdom is a net domestic creditor (28
per cent. of GDP). In terms of foreign assets, it is amongst the largest net creditors, ahead of Russia
but behind Kuwait and Abu Dhabi, as a proportion of GDP. However, Fitch estimates that, in
absolute terms, the Kingdom’s foreign assets are second only to China.
Under the stressed scenario of oil prices falling to US$30 per barrel, Fitch expects the Government of
the Kingdom to be able to draw down on its large external assets for up to a decade.2
The following table shows GDP figures of the Kingdom for the periods indicated:
GDP US$ (bn) .....................
GDP % Change ...................
Crude Oil Price US$............
2000
189
4.90%
27.39
2001
183
(3.17)%
23.00
2002
189
3.28%
22.81
2003
215
13.76%
27.69
2004
251
16.74%
37.66
2005
316
25.90%
50.04
2006
357
12.97%
58.30
2007
381
6.72%
64.20
Sources: IMF/Saudi Arabia Monetary Agency Annual Report, Statistical Appendix
In 2007, the Kingdom was ranked by the IMF as having the 41st highest GDP per capita in the world.
The 42nd Annual Report of Saudi Arabia Monetary Agency (“SAMA”) states that the Kingdom aims
to double its GDP per capita by 2024.
The following table shows GDP per capita figures of the Kingdom for the periods indicated:
GDP Per Capita (US$ ´000).....................
2005
13.00
2006
14.20
2007
15.70
2008f
17.90
2009f
19.30
Sources: SAMBA Saudi Economy, April 2008 issue
Further policy aims of the Kingdom include diversifying the economy away from the oil and gas and
government sectors, providing more job opportunities to Saudi nationals and improving structural
resilience to external shocks.
Fiscal policies are expansionary and focused on growth, and there are several very large projects that
are expected to assist in growing and diversifying the economy (some are described further below).
These projects are mainly in the energy and infrastructure sector.
Saudi Arabia has a prudent monetary policy and healthy banking system.
2
Source: Country Overview, September 2008 Issue by Merrill Lynch.
47
The following table show CPI inflation rate, crude oil production and natural gas production for the
periods indicated:
CPI Inflation (% Change, Average)........
Crude Oil Production (m b/d) .................
Natural Gas Production (m boe/d) ..........
2005
0.70
9.40
1.20
2006
2.20
9.10
1.20
2007
4.10
8.70
1.30
2008
9.90
9.20
1.40
2009f
5.80
9.40
1.40
Sources: SAMBA Saudi Economy, April 2008 issue
Oil Prices
As of December 2008, WTI (West Texas Intermediate) closed at $31 per barrel. The oil prices are
expected to decline even further as world oil demand keeps contracting. Pursuant to recent estimates
from OPEC3, the global demand might fall by 580,000 barrels per day in 2009, whilst its previous
estimate was for demand to contract by 180,000 barrels per day. Such estimates are supported by the
IEA (International Energy Agency) estimates4 that demand for oil in 2009 will fall by 980,000 barrels
per day. Cuts in productions that have been implemented by OPEC member countries in 2008 did not
have any significant impact on the oil prices.
Inflation
The strong economic performance of the Kingdom during times of high oil prices resulted in an
inflation rate of up to 11.1%. Historically, Saudi inflation has been quite low (1.0 per cent. to 2.0
per cent. from 2000 to 2006). The average inflation as measured by the CPI was 9.9 per cent. in 2008,
as opposed to 4.1 per cent. in 2007 and 2.3 per cent. in 2006. The rental prices of real estate had a
significant upward influence in rising inflation levels in 2008.
For 2009, the average inflation is forecasted at 5.8 per cent. and is expected to decline starting in the
second quarter of the year. Among other things, real estate prices are expected to decrease, in
particular commercial office space due to an oversupply and lower demand.5
Construction and Development
Construction on a stand-alone basis remains one of the largest non-oil sectors in Saudi Arabia and the
recent surge in oil prices has led to increased government and private sector contracting, further
boosting the construction industry.
The government has targeted growth in the construction sector at an annual rate of 6.7 per cent. for
the period 2005-10 and, to this effect, has made public announcements regarding US$624 billion in
upcoming development projects, including the following major developments:
Construction of three new cities
Construction of three new cities: the King Abdullah Economic City, to be constructed in the northern
areas of Jeddah at a cost of around US$26.6 billion, and the smaller economic cities in Hail and
Medinah.
Construction of two Saudi ARAMCO refineries
Construction of two Saudi ARAMCO refineries each costing US$6 billion with Conoco Philips
(Yanbu) and Total Company (Jubail), Saudi ARAMCO’s new US$8 billion petrochemical complex
near Ra’s Tannourah. ARAMCO alone accounts for US$133 billion of the projects planned during
2006-2010.
Construction of Landbridge railway
3
Source: Survey SABB Index Q1.
Source: Survey SABB Index Q1
5
Source: Survey SABB Index Q1
4
48
Construction of Landbridge railway across the Kingdom, the first ever rail link between the Red Sea
and the Arabian Gulf, with a cost of around US$2.8 billion.
Demographics and Employment
Estimates issued by the Central Department of Statistics and Information indicates that the Kingdom’s
total population stood at 24 million in 2007, of which 17.7 million were Saudis, constituting 73
per cent. of total population, and 6.5 million were non-Saudis, representing 27 per cent. of total
population.6 The population is very young, with approximately 67 per cent. of the population under
30 years of age.
Currently unemployment is estimated to be around 11 per cent. of the male workforce, and official
rates show a gradual rise which has affected predominantly the younger workforce.
Unemployment rate among Saudis
14.00%
12.00%
10.00%
9.66%
10.35%
10.97%
11.52%
12.02%
11.05%
8.34%
8.00%
6.00%
4.00%
2.00%
0.00%
2001
2002
2003
2004
2005
2006
2007
Source: SAMA Annual Report 2008
According to the statistics of the Ministry of Labour for 2007, total labour force working in the
private sector in the Kingdom stood at 5.8 million, with Saudis constituting 13.1 per cent. and
non-Saudis 86.9 per cent.
The government has been making efforts to counter this through labour policies designed to increase
the number of Saudis nationals active in the private and public sector workforce. These policies,
whereby employers are to meet progressive targets regarding the number of Saudi employees on their
payroll, have had some success. Recent employment studies show a growth in Saudi nationals
employed in both the state and private sector.
The younger segment of the population is expected to join the work-force in coming years. A further
policy objective is to address housing requirements for the lower segment of the population.
Exchange Rate
The Saudi Arabian Riyal has been maintained at an exchange rate, as set by the Saudi Arabian
Monetary Agency, of SAR 3.75 to US$1 since 1986.
Currency matters are an issue for local business. With 77 per cent. of respondents not expecting the
Saudi Arabian Riyal to be revalued in the next two quarters, market rumours and speculation seem to
have subsided, at least for the foreseeable future (for next two quarters). With regard to unified
currency due in 2010, 43 per cent. believe it will be pegged against Dollar, 15 per cent. expect it to be
free floating and 42 per cent. anticipate the common currency would be based on a basket of
currencies.
6
Source: SAMA Annual Report 2008.
49
Interest Rate Development
Since September 2007, the US Federal Reserve cut its Federal Funds Target rate (FFTR) by 425bps to
1.0 per cent., while over the same period the Saudi reverse repo rate has been reduced by 300bps to 2
per cent. Since March 2004, the first repo rate cut in the Kingdom came in October 2008 in the
aftermath of the worsening global financial crisis when SAMA reduced its repo rate by 150bps to 4.0
per cent.7
Interest rates on the Saudi Arabian Riyal deposits in Saudi Arabia declined in 2007, in line with the
general trend of interest rates in the international financial markets and following downward
adjustments in SAMA’s reverse repo rates. The average interest rate for three-month Riyal deposits
declined by 164 basis points to 3.15 per cent. during 2008 as compared with the decline of 246 basis
points to 2.79 per cent. in the US dollar deposit interest rate during 2008. As a result, in 2008, the US
dollar rate was 36 basis points lower than the Saudi Arabian Riyal rate, compared to 46 basis points
higher US dollar rate in 2007.8
The following table shows the development of the 3-month inter-bank interest rates on the Saudi
Arabian Riyal and US Dollar deposits for the periods indicated:
2002
2.23
1.71
0.52
SAR Deposit..............................................
US$ Deposit ..............................................
Difference..................................................
2003
1.63
1.11
0.52
2004
1.73
1.53
0.20
2005
3.76
3.49
0.27
2006
5.02
5.22
(0.20)
2007
4.79
5.25
(0.46)
2008
3.15
2.79
(0.36)
The following charts shows development of the 3-month inter-bank interest rates on the Saudi
Arabian Riyal and US Dollar deposits for the period shown:
Interest Rates on SAR & US$ Deposits
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2002
2003
2004
2005
SAR Deposit
2006
2007
2008
US$ Deposit
Source: SAMA Annual Report 2008 & Bloomberg
Stock Market
The Saudi stock market was informal until the early 1980’s when the government embarked on
forming a regulated market for trading together with the required systems. In 1984, a Ministerial
Committee composed of the Ministry of Finance and National Economy, Ministry of Commerce and
Saudi Arabian Monetary Agency (“SAMA”) was formed to regulate and develop the market. SAMA
was the government body charged with regulating and monitoring market activities until the Capital
Market Authority was established in July 2003 under the Capital Market Law by Royal Decree No.
(M/30). The Capital Market Authority is the sole regulator and supervisor of the capital market, it
issues the required rules and regulations to protect investors and ensure fairness and efficiency in the
market.
7
8
Source: Saudi Economic Overview – January 2009 by Global Investment House Research.
Source: SAMA’s 44th Annual Report 2008 and Bloomberg.
50
The prevailing financial crisis had a negative impact on the Saudi stock market, resulting in a 52.6 per
cent. loss of its capitalization in 2008 despite 16 new listings. The following table illustrates the
performance of the Tadawul All Share Index Performance since January 2008:
Tadawul All Share Index Performance
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
Source: Tadawul & Global Research
Petro-chemical industry lost 66.1 per cent. while the banking sector lost 53.1 per cent. in 2008, pulling
down the entire index. At the same time, the telecommunication sector, the third largest constituent of
the index, accounting for 14.4 per cent. of total market capitalization, experienced a decline of 36.0
per cent. The market capitalization, including the new listings, stood at US$246 billion as of 31
December 2008, compared to US$519 billion at the beginning of 2008.
The following table illustrates the evolution of the Saudi stock market capitalization between from
2003 to 2008 (showing two main boom and bust cycles):
Market Cap (US$ bn)
700
600
500
400
300
200
100
0
2003
2004
2005
2006
2007
2008
Credit Rating
The Kingdom enjoys solid credit ratings at a sovereign-issuer level from all three internationally
recognised credit rating agencies and has recently received positive review by the IMF in its latest
country review.
The following table shows current credit ratings awarded by the respective rating agencies:
Long-term foreign currency .....................................................................................
Outlook.....................................................................................................................
51
S&P
AAStable
Fitch
AAStable
Moody´s
Aa3
Positive
7.2
Overview of the Real Estate Sector in the Kingdom of Saudi Arabia
Introduction
The real estate and construction sectors have played a key role in the Saudi economy and over the last
decade consistently contributed towards the country’s real GDP. It is one of the largest non-oil
sectors in the economy. The construction sector is growing fast and the historically high oil prices in
the recent years led to an increase in government contracting. The value of construction contracts
awarded over the last two years is expected to generate significant construction activity throughout
the next three years.
The following chart shows construction and real estate sectors as a percentage of GDP in the period
from 1990 to 2005:
Source: SAMA – Annual statistics
The housing sector is a large part of the real estate and construction sector. In recent decades, growth
in the sector was driven by a very rapid population growth, urbanization, rising per capita income,
upgrading requirements of traditional houses, as well as increasingly liberal financing facilities
extended by the government funded Real Estate Development Fund (REDF).
More than 60 per cent. of Kingdom’s population is concentrated in the provinces of Makkah, Riyadh
and Eastern Province.
The following chart show distribution of the Kingdom’s population among the provinces:
Population Distribution by Location (in '000)
7000
6000
5000
4000
3000
2000
52
Northern
Border
Joaf
Baha
Najran
Hail
Tabuk
Kassem
Jazan
Madinah
Assyear
Eastern
Province
Riyadh
0
Makkah
1000
Source: Central Department of Statistics & Information
Future growth depends, amongst other things, on the size of the population and its growth, average
family size, per capita income and available financing facilities. Growth is expected to be
significantly influenced by a rapidly growing urban population, and a chronic housing undersupply,
especially in the affordable sectors.
Both the government and the private sector are mobilising resources to meet the housing
requirements. Government planning is articulated through formal periodic development plans,
discussed further below.
Structure of the Real Estate market
The real estate market can be divided into three types:
●
raw land;
●
housing; and
●
commercial units.
By value, market participants estimate that housing comprises 75 per cent. of the market. In terms of
building permits (an indicator of volume), housing comprises 91 per cent. of the market.
The development process starts by the government releasing land to a limited pool of investors, who
either develop the land, or sell it to other developers or wholesalers. Large developers may hold on to
land for several years. Development is predominantly done by the private sector.
During the 2007, the construction sector employed 38.9 per cent. of the total workforce in Saudi
working in private sectors
The following chart shows distribution of workforce among the industry areas:
Distribution of Manpower in the Saudi Private Sector during
2007
Agriculture, forests, hunting and
fishing
Mining, oil, gas and quarrying
11.30%
Manufacturing industry
0.90%
7.10%
1.30%
1.90%
11.00%
Electricity, w ater and gas
2.30%
0.50%
Construction
Wholesale and retail trade
Transport, storage and
telecommunication
24.80%
Finance, insurance, real estate
services and business
38.90%
Community and personal social
services
Other activities
Source: SAMA annual report
53
Current Housing Stock
According to the NCB Research9, the housing stock in the Kingdom is currently estimated to be over
4.5 million units, consisting of mainly the following types:
●
detached villas – these are the most popular among affluent classes and are generally funded by
REDF loans or private savings;
●
apartments – these are built by government, real estate developers and are generally funded by
government or private investors;
●
duplexes - rented floors of either villas or houses;
●
housing compounds – these are mostly private owned, cater to expatriates and are funded by
private companies or ministries; and
●
traditional housing – these are becoming less popular due to changing demographic structure and
life styles. They have generally been funded by collective family savings.
There are three key geographic areas in which residential development is concentrated:
●
Central Region (Riyadh);
●
Eastern Region (Al-Khobar, Dammam & Dahran); and
●
Western Region (Jeddah, Makkah and Madina).
The last review of housing stock in the kingdom in 2004 showed the following regional distribution of
housing stock:
45.00%
40.00%
35.00%
30.00%
Houses
Apartments
Villa
Floor in Villa/House
25.00%
20.00%
15.00%
10.00%
5.00%
f
ja
u
Al
Al
ba
ha
ra
n
N
aj
Ja
za
n
r
Fr
on
tie
ai
l
H
th
er
n
N
or
r
As
i
e
in
c
Ta
bu
k
Al
Pr
ov
Ea
st
er
n
qa
s
im
ah
a
un
aw
ar
Al
m
na
h
Al
m
ad
i
M
ak
ka
h
Al
m
uk
a
ra
m
Ar
riy
a
d
0.00%
Source: Kingdom of Saudi Arabia Ministry of Economy and Planning Central Department of
Statistics (Census Data 2004)
9
Source: Report on Saudi Arabia’s Real Estate Sector (June 2008) by NCB.
54
Expected Future Residential Housing Demand
Market Analysis of the Housing Sector
The residential housing market is fundamentally driven by:
●
population growth;
●
housing stock replacement and vacancy rate;
●
urbanisation;
●
occupancy rates;
●
employment and income;
●
house prices; and
●
availability of financing for purchase or construction
Population
Saudi Arabia’s population is currently estimated to be around 24.4 million. Over the last four
decades, it has experienced rapid population growth at an annual growth average rate of
approximately 4 per cent. While this growth has been more than double the international average,
fertility rates have recently dropped, with the average fertility rate estimated by the UN to be just
under 4.1 children per Saudi family for the period 2000-2005. Nevertheless this is still considered to
be relatively high in comparison to the global average of 2.6 children per family.
The following chart shows development of the Kingdom’s population in the period shown:
Saudi Population (million)
25
20
15
10
5
0
1974
1977
1980
1983
1986
1989
1992
1995
Saudi
Non-Saudi
1998
2001
2004
2007
Source: SAMA
Average life expectancy in Saudi Arabia was around 52 years in the 1970s. Today, an individual is
expected to live to an average age of 73. The World Bank estimates that Kingdom’s population will
reach 37.2 million by 2025 and almost 50 million by 2050.
55
The following chart shows the distribution of the population by age group:
Pupolation distribution by age group (in mid 2007)
(in Thousand)
2,500
2,000
1,500
1,000
500
80 & over
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
0
Source: SAMA Annual Report 2008
The population of the Kingdom is fairly diverse when broken down by nationality given the fact that
around 6 million are foreign nationals. The expatriate population is expected to remain stable, as a
consequence of the government’s labour policies designed to increase the number of Saudi nationals
in the public and private sector, described earlier.
The population is predominantly young, and a large number of young, predominantly male workers
are expected to enter the workforce in the short to medium term. In turn, this rapid growth has
increased national demand for housing units in Saudi Arabia. The demand for housing will increase
in the next decade as an increasingly large number of young people reach marrying age.
The following table shows population broken down into groups according to the age range:
Age Range
0-30 years ................................................................................................................................................................................
30-60 years ..............................................................................................................................................................................
60 years onward ......................................................................................................................................................................
Proportion of
Population
60.2%
36.5%
4.3%
Source: Central Department of Statistics & Information (2007)
Housing Stock Replacement & Vacancy Rates
The housing stock in the Kingdom has a comparatively lower unit lifespan of only 30 years compared
to an average lifespan of around 90 years for European housing stock.
Up to 15 per cent. of houses were unoccupied. This rate is considered to be high when compared to
international rates of between 3 and 5 per cent. The government’s view was that this was primarily
caused by affordability issues. An increasing lack of supply is expected in the affordable bracket.
Urbanisation
The majority of the population in Saudi Arabia live in or around the major cities, currently standing at
around 88 per cent. of the population. The Saudi administration anticipates this proportion to reach to
91 per cent. by 2015.
The administration has reported an undersupply of residential properties in the major cities and
Riyadh itself is expected to grow from its present size of 800 square kilometres to over 1,800 square
kilometres in the next few decades. Its population is expected to grow from its current size of over
4.25 million to 10.5 million by 2022. The chambers of commerce of Jeddah and Riyadh have
estimated that the cities require another 1.0 and 1.5 million housing units respectively over the next
15 years.
56
Occupancy Rates
Current industry forecasts are that housing occupancy rates will fall from the 5.7 persons per
household figure registered in 2004 to around 5.1 persons per household by 2020.
The following table shows occupancy rates in the Kingdom:
Total Population .......................................................................
Saudi .........................................................................................
Non-Saudi.................................................................................
Occupied Houses......................................................................
Household size (No of persons) ...............................................
1992
16,948,388
12,310,053
4,638,335
2,788,413
6.068
2004
25,735,938
20,159,862
5,576,076
3,990,559
5.682
Annual
Growth
3.54%
4.20%
1.55%
3.03%
(7.00)%
Annual
Change
732,296
654,151
78,145
100,179
(0.40)
Source: Ministry of Planning, Industry Research
All other things being equal, a decline in occupancy rates will contribute to increased demand for
housing stock.
House Prices
There is no central registry of land in the Kingdom and land prices are not therefore centrally tracked,
although it is generally acknowledged that prices vary greatly between cities and regions. Recent
estimates place the average price of an affordable residential unit (approximately 150 square metres)
at SAR 400,000 (US$107,000). Prices for villas also vary widely by region, but tend to start at
SAR 1 million (US$267,000). House prices have risen at an average of approximately 13.7 per cent.
per year from 2002 to 2005.
Income, Affordability and Availability of Financing
Samba has estimated that the average monthly income in 2006 was SAR 10,360 (US$2,750) for Saudi
nationals and that currently around 40-45 per cent. of a person’s monthly income is spent toward
housing needs. Non-nationals generally receive a much lower wage, and live in shared rental
accommodation. Income also varies widely by region with average wages in the Central Province
being as much as 50 per cent. higher than the Eastern Province.
The vast majority of residential construction in the Kingdom is financed through cash sales.
The REDF, has been an important financier of the residential sector, having so far financed in total
around 610,000 units which represent 13 per cent. of the entire housing stock in the Kingdom.
Between 2000 and 2004 it financed 60,000 of the 300,000 units reported to be constructed or under
construction. However the demand for loans exceeds the capacities of REDF, which is suffering from
a considerable backlog of financing applications. In February 2008, 450,000 applications were
waiting for processing by REDF (according to Saudi Gazette).
57
The following chart shows development of number of applications to REDS in the period shown:
REDF Outstanding Loans (SAR Millions)
75,000
74,000
73,000
72,000
71,000
70,000
69,000
68,000
67,000
66,000
65,000
2002
2003
2004
2005
2006
2007
Q1 2008 Q2 2008
Source: SAMA Annual Report
Private sector financing for house purchases by financial institutions does exist, but is currently
limited by the fact that banks are prohibited from legally owning the deeds to a property except where
it has been acquired for business use. In addition, current regulations limit monthly instalments to a
third of the customer’s monthly income. Hence financing is generally unsecured and of shorter tenors
than seen internationally. The government plans are encouraging the further development of private
sector finance. In the current development plan, the government included a new law designed to
create a framework in which appropriate security may be taken for the finance provided. This law is
currently in its final approval stages.
Around 10 per cent. of all new residential properties are financed through home funding from private
financial institutions. However, industry estimates are that the number of residential units purchased
using home financing from private financial institutions will increase to a range between 15,100 and
34,000 residential units per year by 2010.
58
Demand Analysis
Government Demand Analysis for Housing Sector
The government current estimates for current, replacement and new demand for housing during the
period 2005-2010 broken down by region are as follows:
Demand in Saudi by region
250
(in '000 units)
200
150
100
50
0
Riyadh
Makkah Medinah Qassim
East
Region
New Demand
Assir
Tabuk
Replacement Demand
Hail
Northern
Borders
Jezan
Current Unmet Demand
Najran
Baha
Jouf
Total
Source: Eighth Development Plan, Ministry of Economy and Planning
Dar Al-Arkan’s Analysis of the Demand in the Housing Sector
Assuming the Saudi population will reach 34.5 million by 2024 (slightly less than that predicted by
the World Bank) and the actual person per room figure will fall from to 2.1 in 2005 to 1.8 in 2024, it
estimates that 4.25 million new housing units need to be built in the Kingdom over this period.
This will increase the stock of occupied housing units from around 3.99 million units in 2004 to
8.25 million units by 2024.
This gives a long-term average demand for new housing units of approximately 210,000 annually
from 2005 until 2024. Saudi citizens will require 2.75 million units, or 65 per cent. of the total, while
non-Saudis will require 1.5 million units, or 35 per cent. of the total.
The production by both public and private sectors, as well as charitable foundations, based on
historical growth of 3 per cent. in residential units, would have reached 3.22 million units by 2024,
which averages 160,000 units a year.
This translates into an annual shortfall of about 50,000 residential units despite expectations of
continuous government support.
As a result, Dar Al-Arkan believes that a considerable opportunity exists for established residential
developers to play a key role in developing turnkey affordable residential units in key markets
throughout Saudi Arabia, by bridging the gap between traditional residential expectations (large
segmented accommodation) and the limited budget available for the purchase of housing units.
59
The following chart shows expected housing requirements according to demand component in the
period from 2005 to 2024:
Saudis ........................................................
Non-Saudis ................................................
Total ..........................................................
Population
Growth
Demand
1,808,229
744,083
2,552,312
Housing Gap
Deficiency
414,261
492,018
906,279
Units
Replacement
Demand
398,738
197,292
596,030
Vacancy
Replacement
Demand
134,574
66,586
201,160
Total
2,755,802
1,499,979
4,255,781
Source: “Housing Requirements”, Ministry of Economy and Planning
The requirement for residential units between 2005 and 2024 by type is shown in the graph below.
The majority of units required are apartments, reflecting a changing preference among housing types.
It is estimated that apartments will constitute 48 per cent. of housing units in 2024, as opposed to 38
per cent. in 2004. This is partly due to the young population in the country, as many Saudis will enter
the job market and income sensitivity will lead this segment of the population to settle for more
affordable housing.
The following chart shows required housing broken down into groups according to the type:
Housing Required by type
3%
19%
Traditional
Villa
Floor w ithin a villa or traditional
47%
20%
Apartment
Others
11%
The following table shows expected total population requirements for housing in the period from
2005 to 2024:
Total population ´000 (by end of each
stage).....................................................
New population .........................................
Bedrooms needed ......................................
Total required residential units .................
Total required stock (old and new stock)..
Housing stock via growth in residential
units ´92-´94 .........................................
Market under-supply (difference in both
stocks above) ........................................
Gap % between supply & demand............
2005-2009
Projection
2010-2014
Projection
2015-2019
Projection
2020-2024
Projection
Total
25,327
2,798
2,347
1,027
5,017
28,317
2,990
2,443
1,063
6,080
31,442
3,125
2,511
1,089
7,169
34,530
3,088
2,491
1,077
8,246
34,530
12,001
9,792
4,256
26,512
4,626
5,363
6,217
7,207
7,210
(391)
(8)%
(326)
(5)%
(235)
(3)%
Source: “Housing Requirements”, Ministry of Economy and Planning
60
(87)
(1)%
(1,039)
(13)%
Government Policy and Planning Environment 2005-2009
The Kingdom’s Eighth Development Plan has set the goal of providing housing for every family in
the Kingdom and in particular increasing the ownership rate of housing by Saudi families to about 80
per cent. by 2020 (55 per cent. in 2004).
The plan focuses on the following policies:
●
enhancing the private sector’s role through participation of banks and real estate funding
institutions, along with the issuance of laws and regulations governing these activities;
●
ensuring coverage by housing programs of all the Kingdom’s regions along with placing due
emphasis on small and medium size towns, particularly those near to major cities;
●
reducing construction and maintenance costs of housing units and reviewing building codes and
regulations in a way that would help reduce costs and increase the supply of land plots and
housing units;
●
diversifying the sources of governmental and non-governmental finance and support, and
promoting the private sector’s role in the development of the housing sector;
●
improving the management of residential land plots, regulating supply of such lands and
providing general infrastructure and services together with ensuring strict measures regarding
distribution of granted land plots; and
●
providing housing for low and limited income groups and expansion in charitable housing
projects.
The Plan sets out the following targets to be met by 2009:
●
construction of about one million housing units;
●
provision of 280 million square metres of residential land plots in urban areas;
●
the private sector construction of about 875,000 housing units of the total demand for housing, of
which 225,000 units will be supported by the government;
●
provision, by REDF, of about 75,000 loans with a value of SAR 22,500 million (US$6.0 billion)
for construction of about 90,000 housing units;
●
construction, by the Ministry of Social Affairs and charitable institutions and associations of
about 35,000 social housing units in the various regions of the Kingdom;
●
completion and issuance of the Saudi Building Code and commencing its application; and
●
establishment of an integrated housing information base for all segments of society and
preparation of housing policy and relevant housing studies, research and surveys.
61
8.
DESCRIPTION OF DAR AL-ARKAN REAL ESTATE DEVELOPMENT COMPANY
8.1
Overview
History and Background
Dar Al-Arkan Real Estate Development Company (“Dar Al-Arkan”), a publicly listed company, is a
leading real estate development company in the Kingdom of Saudi Arabia, specialising in residential
real estate. Dar Al-Arkan’s specializes in the development of master-planned lifestyle residential
communities offering developed land parcels, apartments and villas.
Based in Riyadh, Dar Al-Arkan was established in 1994 by six prominent business families with
significant real estate development experience in response to the increasing demand for quality
housing from the rapidly growing Saudi population. From July 2002 to January 2004, Dar Al-Arkan
operated as a limited liability company with a capital base of SAR 140 million (US$37 million).
Dar Al-Arkan increased its capital to SAR 5.40 billion (US$1.44 billion) through a private placement
in the domestic market in 2004 while converting to a partnership limited by shares. Subsequent to the
private placement, Dar Al-Arkan converted to a joint stock company in 2005. In December 2007, Dar
Al-Arkan listed its shares on the Saudi Stock Exchange (Tadawul All Share Index) under the
symbol 4300.
Dar Al-Arkan’s issued capital as of 31 December 2008 stood at SAR 7.2 billion (US$1.92 billion)
divided into 720 million shares of par value of SR 10 each (US$2.67). The capital was increased
significantly in 2008 by issuing 180 million bonus shares of par value of SR 10 each to its current
shareholders. This non cash issuance was financed through retained earnings. The founding
shareholders currently own approximately 56.6 per cent. of Dar Al-Arkan.
The progression of Dar Al-Arkan from a small real estate developer to one of the largest in the
Kingdom is a result of consistent growth since its inception. Coupled with significant growth and
expansion during the last five years, Dar Al-Arkan was well positioned to capitalise on the economic
boom in the Kingdom. During this period, Dar Al-Arkan substantially increased the scale of its
activities, both in terms of number and size of projects. Increasingly, Dar Al-Arkan is one of the
leading providers of master-planned lifestyle communities from the private sector in the Kingdom’s
market.
Dar Al-Arkan’s rapid growth corresponds to a clear shortfall in the supply of housing units and an
increasing demand for residential real estate in the Kingdom, particularly within the middle-income
segment of the market. Further, the Kingdom has a relatively young population (particularly among
Saudi nationals) and growth rates are high. It is estimated that in 2005 about 37 per cent. of the
population was below the age of 15.56 per cent. below the age of 25 and almost 61 per cent. below the
age of 30. Population growth is expected to remain high and therefore Dar Al-Arkan’s management
expects the rate of new household formation to continue to rise for the foreseeable future.
As of 31 December 2008, Dar Al-Arkan had total assets of SAR 20.16 billion (US$5.38 billion), with
shareholders’ equity of SAR 11.74 billion (US$3.13 billion). Total revenues and net income reached
SAR 5.61 billion (US$1.50 billion) and SAR 2.35 billion (US$627 million), respectively.
Dar Al-Arkan currently retains an “A-“ corporate credit rating with a stable outlook from Capital
Intelligence Ltd.
In addition to its head office in Riyadh, Dar Al-Arkan has offices and branches across the Kingdom,
including Mecca, Jeddah and Madinah. In total, Dar Al-Arkan has seven branches and employs a
staff of 421.
62
Summary of Key Stages of Dar Al-Arkan’s Development
Stage I (1994 to 1999): Dar Al-Arkan’s primary focus during the initial years was the development of
basic infrastructure on raw land parcels (site improvements such as water, power, drainage, roads and
pavements etc.) and re-zoning, an activity which accounts for a significant value addition to its
projects and overall revenues. Residential construction operations were primarily confined to either
construction of a limited number of residential units (at a completion rate of one residential unit per
week, primarily in the Central region) or handling public and private real estate development
contracts. During this period Dar Al-Arkan undertook monitoring of market dynamics, developing its
business processes as well as conducting extensive market research. By 1999, Dar Al-Arkan’s total
revenues had reached SAR 249 million (US$66.3 million) with net income of SAR 70 million
(US$18.7 million).
Stage II (2000 to 2004): Dar Al-Arkan’s business expanded to the Western and Eastern regions. As a
result of extensive market research undertaken by Dar Al-Arkan, there was a gradual shift toward
focusing on managing the development of residential units in the high growth middle market segment.
A significant expansion of Dar Al-Arkan’s activities was achieved during this period following the
completion of 37 development projects comprising approximately 2,300 residential units. In addition,
Dar Al-Arkan developed nine million square metres of undeveloped land for residential purposes.
Stage III (2005-November 2007): Dar Al-Arkan operates in all three of the major regions of the
Kingdom (i.e., Eastern, Western and Central) and is rapidly expanding its geographical footprint. Dar
Al-Arkan is focused (i) on the development of raw land for residential utilisation by other developers
or individuals and (ii) large scale residential projects, building master-planned lifestyle residential
community development - a “one stop shop” for the end users, i.e., including both land and residential
units (villas, apartments and attached units providing customers options to choose from various
designs and layouts).
Stage IV (December 2007-2008): In December 2007, Dar Al-Arkan has offered the equivalent of
11.01 per cent. of its then outstanding shares to the public through an Initial Public Offering. The IPO
was successful due to two main factors, first being Dar Al-Arkan’s strong reputation in the Saudi
market and second was the timing of the IPO. Dar Al-Arkan has managed to attract more than 400
per cent. of the required SAR 3.33 billion (US$888 million) through the IPO. Dar Al-Arkan’s IPO
was ranked as one of the top ten IPOs in Q4 2007 in the EMEA (Europe, Middle East and Africa)
region by Reuters and IPO of the year by the Banker Magazine.
Dar Al-Arkan is now operating on a larger scale than in the past and believes it is now leading the
way in the Kingdom in the design, project management and construction of master-planned lifestyle
residential communities. Such communities are developed over large parcels of land and include
social as well as public service utilities, leisure space, sporting facilities and other amenities. Dar
Al-Arkan believes that the amenities provided to the residents of these communities are unique in the
Kingdom and add significant value to its overall projects. These amenities are either developed by
Dar Al-Arkan or outsourced to third party developers. According to Dar Al-Arkan, it is well placed to
implement its business plan due to an experienced management team, successful track record in
land/site procurement in strategic locations within the Kingdom and strategic alliances with renowned
(affiliated and non-affiliated) companies (see “Strategic Alliances” below).
Business Focus
Dar Al-Arkan currently focuses on three core products:
●
Land Development - Purchasing, pooling, and developing infrastructure on raw land parcels
(“Land Projects”);
●
Master-Planned Lifestyle Communities – consisting of residential development: Construction of
villas, apartments and attached units (“Residential Projects”) and commercial development:
Construction of retail and commercial buildings (“Commercial Developments”); and
63
●
Property Management - Leasing and management of residential, retail and commercial units.
Land Projects
Dar Al-Arkan purchases and develops large parcels of raw land, including developing the water and
sewage infrastructure, electricity and other utilities, as well as paving streets and sidewalks.
Subsequently, Dar Al-Arkan sells Land Projects primarily to other real estate developers or through
on-site real estate sales offices to individual buyers.
During the process, Dar Al-Arkan constantly reviews its current level of raw land available and
disposes off those which it considered being non-core and where it is believed that the potential
appreciation in value has been achieved.
The following chart shows Dar Al-Arkan’s financial performance in the area of land projects:
Financial Performance - Land
SAR '000
60.00%
5,000,000
4,500,000 48.87%
4,000,000
49.50%
49.16%
52.41%
3,500,000
50.00%
40.00%
3,000,000
30.00%
2,500,000
2,000,000
20.00%
1,500,000
1,000,000
10.00%
500,000
0.00%
0
2005
2006
2007
2008
Revenue
Cost of Sales
Gross Margin as % of revenue
Dar Al-Arkan’s Gross Margin for land projects remained stable in 2006 compared to 2005, as Dar
Al-Arkan managed to keep the revenues at a constant level. In 2008, Dar Al-Arkan’s Gross Margin
saw a steady growth with revenues soaring at SAR 4.62 billion (US$1.23 billion). The large volume
of land development and Dar Al-Arkan’s ability to efficiently develop such lands was a significant
contributor to such results.
Residential Projects
Dar Al-Arkan retains a portion of saleable plots (i.e., developed plots) within certain projects for the
construction of master-planned lifestyle communities.
Increasingly, Dar Al-Arkan is shifting its focus from land development projects to the development of
master-planned residential communities offering end-users land parcels, villas and apartments.
Currently, Dar Al-Arkan has five Residential Projects under development with a total investment
value of around SAR 9.5 billion (US$2.5 billion) comprising more than 7,000 residential units
covering more than eight million square meters.
64
Dar Al-Arkan’s senior management considers the following factors to be critical to enable Dar
Al-Arkan to achieve its expansion goals:
●
internal (i.e., experienced sponsors and senior management) and external (i.e., strategic alliance
partners) capabilities to undertake and execute the development of large scale projects;
●
strong current capitalisation and access to various sources of funding including capital markets,
bank lines and real estate funds; and
●
a proven track record with concerned municipalities throughout the Kingdom of executing its
projects in a timely and efficient manner and in accordance with municipal rules and regulations.
The following chart shows Dar Al-Arkan’s financial performance in the area of residential projects:
Financial Performance - Residential
SAR '000
60.00%
1,400,000
1,200,000
46.76%
47.21%
47.69%
50.00%
1,000,000
42.76%
40.00%
800,000
30.00%
600,000
20.00%
400,000
10.00%
200,000
0
0.00%
2005
2006
2007
2008
Revenue
Cost of Sales
Gross Margin as % of revenue
The construction material costs has seen dramatic increase worldwide during the last few years, which
forced most real-estate companies to incur higher construction costs and therefore resulted in the
reduction of their profit margins. Moving forward, Dar Al-Arkan’s management expects that Dar
Al-Arkan’s scale of operations will enable it to realise further reductions in and optimisation of costs,
and therefore mitigating the downward pressure on Dar Al-Arkan’s operating margins.
Revenue from residential projects has seen a steady growth of 14.39 per cent. and 14.81 per cent. for
2006 and 2007 respectively, which was due to the large number of units been sold in addition to the
natural increase in residential units prices. Revenues from the sale of residential properties were
SAR 990.38 million in 2008, a 25.04 per cent. decrease from the SAR 1,321.18 million of 2007. The
revenue decrease is mainly due to the lower number of units sold in 2008 which stood at 1,101 units
compared to the 1,220 units sold in 2007. The reduction is due to the mix of units sold in 2008,
whereby Dar Al-Arkan started selling apartments at Al Qasr project which caters to the lower bracket
of the middle income market.
The construction cycle from raw land to fully developed Residential Projects ranges between three
and five years. Dar Al-Arkan does not retain any control over the type of construction undertaken on
land parcels once sold to the end buyer as the concerned municipalities exert the relevant controls
65
pertaining to zoning violations, as well as to uniformity in neighbourhoods and the construction of
related superstructures.
Business Model
Dar Al-Arkan is one of the leading residential real estate developers in the Kingdom involved in
developing master-planned lifestyle residential communities. Dar Al-Arkan’s business operations
consist of six phases.
The following table provides a brief guidance of the workings of Dar Al-Arkan’s operations:
Phase
Inputs
Phase One
●
Land
Acquisition
●
Criteria of land
selection (legal &
financial due
diligence)
Land procurement
process
●
Land investment
proposal (feasible
investment option)
Phase Two
●
Project
Planning
Project
Organisation
●
Project
implementation
strategy &
procedure
●
Project
management
strategy &
procedures
●
Resource
allocations
●
Procurement of
relevant approvals
Phase Three
●
Site
Development
Regulatory
approvals
●
Design & lay out
●
Site clearance
●
Filling &
compaction
●
Land planning
Decision makers
●
Senior
Management
●
Investment
Committee
●
Executive
Committee
●
Senior
Management/
Turner
●
Executive
Committee
●
Senior
Management/
Turner
●
Executive
Committee
66
Outputs
Type of Project
Asset of
legitimate
ownership & high
development
potential justified
by feasible
investment
proposal
Land Project
Project model
with allocated
resources &
effective operation
plan
Land Project
Semi-developed
land plots
Land Project
Phase
Inputs
Phase Four
●
Land
Development
Materials &
technology
●
Pavement &
pedestrians
●
Landscaping
●
Installation of
utilities
●
Sub contracting of
development
Phase Five
Superstructure
Phase Six
Finishing/
Decoration
Begin construction of
residential units,
including:
●
Design
construction plan
●
Materials &
technology
●
Testing & trouble
shooting
Completion of
residential units,
including:
●
Cladding
●
Ceramic & wood
work
●
Mechanical and
electric work
●
Plastering &
painting
●
Internal & external
finishing
Decision makers
Outputs
Type of Project
●
Senior
Management/
Turner
Fully developed
land plots
Land Project
●
Senior
Management/
Turner
Semi-developed
residential units
Residential
Project
●
Senior
Management/
Turner
Fully developed
residential units
Residential
Project
Phase One
Dar Al-Arkan considers the land acquisition phase to be the most important phase in its production
model and the one which has allowed Dar Al-Arkan to differentiate itself from its competitors. In the
Kingdom today, land is sold by primary owners of land (i.e., high net-worth individuals and owners of
large parcels of land) to a select group of buyers including both real estate developers and other
investors. Dar Al-Arkan is considered one of the preferred buyers of land from such sources due to its
solid reputation and track record. The process is facilitated by the fact that the government’s housing
policies are aimed at encouraging further private sector building of residential units. This position
allows Dar Al-Arkan to purchase large parcels of raw land directly from primary sources, rather than
in the secondary market where premiums would apply, presenting a potential detriment to Dar
Al-Arkan’s profitability (on a project by project basis). Furthermore, by purchasing raw land, Dar
67
Al-Arkan has the ability and flexibility to shape each project to maximize profitability in light of the
applicable criteria, such as market conditions, location, topography of land and relevant municipality
rules and regulations.
Dar Al-Arkan sources land acquisition through two main avenues:
●
Solicitations (invitation to purchase land) – Dar Al-Arkan regularly receives invitations to
purchase land parcels throughout the country. Dar Al-Arkan analyses each invitation to ascertain
the location of the land (i.e., preferred location in the suburbs and open land in order to develop
large communities), size and potential for development in line with Dar Al-Arkan’s vision and
strategy of developing master-planned lifestyle residential communities.
●
Dar Al-Arkan’s research and development – Dar Al-Arkan continuously undertakes research
and development to identify areas within the Kingdom which could benefit from master-planned
residential community developments and, once identified, Dar Al-Arkan proceeds to search for
the appropriate land parcel for acquisition and development purposes.
Over the years, Dar Al-Arkan has developed a methodical land acquisition process involving internal
checks and balances, including oversight and input from Dar Al-Arkan’s Investment Committee (as
defined below), as well as legal, financial and non-financial due diligence. This process includes the
following steps:
●
internal pre-feasibility exercise to study all aspects of the land including, but not limited to,
location, topography and the proposed utilisation of the land;
●
review of land deeds to ensure that the data contained therein is correct;
●
review urban plan to analyse and evaluate land location through a micro comparative analysis of
distinct locations indicated in the relevant plan;
●
macro comparative analysis of land location within the neighbourhood to assess its credentials
compared to other locations with a view to achieving maximum commercial and social benefits;
●
review of all government and public institution publications related to the relevant land areas,
which provide information on land utilisation, including nature, background, present state and
future plans;
●
conduct investigative and interrogative interviews with municipalities, local notary publics and
reputable master planners;
●
undertake a thorough investigation of real estate offers for both developed and undeveloped land
in the relevant area;
●
cross check consequent findings with Dar Al-Arkan’s database to confirm viability of rates and
terms and conditions;
●
high level site inspection by Dar Al-Arkan’s senior management for each project location;
●
preparation of final report containing findings of above process, related technical and
socio-economic analysis, and recommendations enabling effective decision making on the part of
Dar Al-Arkan’s senior management and Investment Committee; and
●
based on the final report, Dar Al-Arkan conducts intensive negotiations with the vendors,
including a final visit to the project site.
Subsequent to the procurement of the land, Dar Al-Arkan commissions a full feasibility study to
confirm the expected return from a proposed investment project. The study considers all aspects of
the project: technical, institutional, social, commercial, financial and economic.
68
Phase Two
Dar Al-Arkan launches the project planning phase as soon as raw land has been acquired following
completion of Phase One. This phase is considered to be preparatory in nature, allowing Dar
Al-Arkan to devise a strategy and operational plans and procedures for implementing the considered
project while allocating the appropriate resources.
Phase Three
With all the preparations relating to the project in place, Dar Al-Arkan initiates the master-planning
phase by preparing plans for site improvements necessary to get the land zoned for residential and
commercial purposes.
Based on these plans, Dar Al-Arkan obtains the necessary
government/municipality approvals. One of the requirements for obtaining such approvals is to
allocate a minimum of 33 per cent. of the land site to the region or municipality concerned to
accommodate mosques, schools, park areas and other public amenities. In addition to this, Dar
Al-Arkan allocates a portion for infrastructure developments, such as roads and pavements. The
portion required for infrastructure varies from project to project depending on location; however, on
average an allocation of approximately 10 per cent. of the relevant land site is made for this purpose.
Once all the necessary approvals are in place, Dar Al-Arkan’s sub-contracts the actual construction
work to a reputable construction company or consortium of contractors through an open tender
process. The selection process is based on standard criteria and is overseen and evaluated by Dar
Al-Arkan’s senior management, as well as the Investment Committee. The selected sub-contractor(s)
undertake the necessary site clearance, design, lay-out and land planning, resulting in semi-developed
land plots.
Phase Four
During this phase, Dar Al-Arkan oversees the land development process ranging from application of
materials and technology to landscaping and installation of utilities, including close monitoring of the
appointed sub-contractors. At the end of this process, Dar Al-Arkan is the owner of fully developed
land plots. From a business perspective, Dar Al-Arkan is now able to make one of the following two
decisions:
●
either to sell all of the developed plots as Land Projects to other developers or individuals through
on-site sales; or
●
to allocate a portion of such plots for sale as Land Projects and utilise the remaining plots for its
own Residential Projects.
These decisions vary on a project by project basis and are based on several factors, including market
conditions, topography, location and profitability. This process is undertaken by senior management
with contributions and oversight from the Executive and Investment Committees, as well as Turner
Construction (as defined below). It should be noted that with regard to Land Projects, Dar Al-Arkan
is planning to steadily increase the development of Residential Projects as part of its overall portfolio.
This is in accordance with Dar Al-Arkan’s strategy to build master-planned lifestyle residential
communities.
In terms of production cycle, it typically takes between one and two years for Dar Al-Arkan to
develop a site. The timetable depends on the size of the site and its topography, as well as other
requirements, mainly relating to the relevant soil characteristics.
Phase Five
For the majority of plots allocated for Residential Projects, Dar Al-Arkan undertakes to construct the
appropriate superstructure – namely, the construction of residential units on the developed but as yet
vacant land (the remaining developed land is utilised for other purposes such as municipality,
commercial and leisure purposes). Phase Five includes developing a design and construction plan
69
with an architectural firm and sub-contracting the construction of the Residential Projects to external
construction companies. Dar Al-Arkan ensures TCQ (time, cost and quality) of Residential Projects
by retaining the design and planning together with the architectural firm to have oversight over the
relevant construction company, along with Dar Al-Arkan and Turner Construction. This ensures that
the construction of Residential Projects occurs according to designs and plans as set forth by the
architectural firm and any deviations must be approved by the same, as well as Dar Al-Arkan and
Turner Construction. At the conclusion of this phase, Dar Al-Arkan is in possession of
semi-developed residential units.
Phase Six
The final phase relates to finishing and decoration of the semi-developed units, which includes
cladding, ceramic and woodwork, mechanical and electric work, plastering and painting and internal
and external decorative work. The end result is a fully developed and finished residential unit.
8.2
Sales and Marketing
Marketing Strategy for Land Projects
Dar Al-Arkan adopts several strategies to sell its Land Projects (Phase Four stage):
●
Dar Al-Arkan sets up a sales & marketing office at the Land Project site to cater to customers on a
walk-in basis. This office is operated and managed by mid-level Dar Al-Arkan employees,
compensated on a salary/commission basis.
●
Dar Al-Arkan also retains a direct sales team of around sixteen employees based in Dar
Al-Arkan’s branch offices around the country (again compensated on a salary/commission basis),
which sells Land Projects to its clientele of high-net worth individuals.
●
Dar Al-Arkan also sells Land Projects through local real estate agents/brokers.
agents/brokers are compensated directly by the buyer.
●
Finally, Dar Al-Arkan occasionally sells land through public auctions held on-site. Such auctions
are actively pre-marketed and well attended by local high net-worth investors. Dar Al-Arkan
undertakes an extensive due diligence exercise prior to determining (based predominantly on
profitability) if and what portion of any specific Land Projects is sold through the public auction
avenue.
Such
The majority of Land Projects are sold either at the on-site marketing offices or through the direct
sales team.
Marketing Strategy for Residential Projects
A key consideration for Dar Al-Arkan pursuant to Phases Five and Six relates to the marketing and
sales of the Residential Project units. There are three stages during which Dar Al-Arkan may opt to
market and sell a Residential Project unit to the end buyer:
●
Off-Plan – just after the land development phase (i.e., Phase Four) and beginning of Phase Five;
or
●
Pre-Finished – during Phase Five when approximately 75 per cent. of the relevant unit has been
completed; or
●
Finished (fully developed) – after completion of Phase Six.
Dar Al-Arkan’s determination as to the number of Residential Projects to be allocated to each option
depends on market conditions, location and projected margins. Decisions are made by senior
management with contributions and oversight from the Executive and Investment Committees.
70
Historically, on average Dar Al-Arkan has sold Residential Projects in the following proportions:
Stage
Off-Plan ...................................................................................................................................................................................
Pre-Finished.............................................................................................................................................................................
Finished ...................................................................................................................................................................................
Proportion of
Total Sales
10%
20%
70%
However, moving forward, Dar Al-Arkan may increasingly sell off-plan and pre-finished residential
units as the Kingdom housing market matures and becomes more familiar with the concept of
master-planned lifestyle residential communities.
Dar Al-Arkan sells the majority of its Residential Project units through sales offices set up on-site
designed to cater to the walk-in clients or leads obtained via Dar Al-Arkan’s central call centre. All
prospective customers are handled by a sales team (separate from the Land Projects sales team)
responsible for operating and managing the on-site sales offices and compensated on a
salary/commission basis. Such sales are facilitated by heavy marketing campaigns undertaken by Dar
Al-Arkan in respect of each Residential Project via various media channels, including television,
newspaper and magazine advertisements, the Internet and billboards throughout the Kingdom.
Additionally, Dar Al-Arkan sells a small number of Residential Projects through real estate agencies,
some of which are internationally recognised firms.
Contracting
Dar Al-Arkan’s main focus is to act as a residential real estate developer which involves awarding and
managing work performed by several contractors and sub-contractors during the construction phase.
The two main types of contractors involved in Dar Al-Arkan’s projects are structural (including
construction companies and designers and architects) and plumbing, mechanical, electrical and
finishing contractors. In recent years, with the assistance of Turner, Dar Al-Arkan has developed an
in-house rating system to ascertain the expertise and qualifications of contractors in its database. Dar
Al-Arkan has developed this database by inviting the majority of the contractors operating in the
Kingdom to submit to Dar Al-Arkan’s internal rating system and become part of the database.
Criteria relating to the internal rating system include: financial review, previous projects undertaken
and completed, feedback from previous clients and site visits.
Dar Al-Arkan sends invitations to all contractors meeting a certain threshold pursuant to its internal
rating systems to bid for providing services on a project by project basis. All interested contractors
follow up with bids, which are assessed and analysed by Dar Al-Arkan’s senior management (as
defined below) and Turner and preliminary recommendations are made to the Executive Committee
(as defined below). The final decisions on awards are made by the Executive Committee.
Dar Al-Arkan’s analysis and decision making process revolves around three main factors: time, cost
and quality (“TCQ”). Dar Al-Arkan utilises TCQ to determine what proportion of any given project
will be allocated to a contractor and for which specific services. Dar Al-Arkan’s goal (in particular
relating to large scale projects) is to avoid concentration risk and to award contracts to at least a
couple of contractors for each specific task.
Participation Financing
Historically, Dar Al-Arkan has financed a substantive number of its projects through “outside
investors”. These investors were given the opportunity to participate in Dar Al-Arkan’s projects by
contributing toward a specific project to be developed on a given site prior to the purchase of the
project land. Dar Al-Arkan’s reliance on such participations has been steadily diminishing as it now
has access to diversified sources of funds. Dar Al-Arkan has financed a total of 14 projects through
participations for a total value of SAR885 million (US$236 million).
71
Credit Sales
Credit is extended on sales of land projects to a select group of Dar Al-Arkan’s credit worthy clients.
For detailed information on Dar Al-Arkan’s credit policy, please refer to the discussion in Dar
Al-Arkan Financial Review and Analysis section.
8.3
Strategy
Dar Al-Arkan’s aim is to further entrench its position as the leading residential real estate developer in
the Kingdom by focusing on its core competencies: Land Projects and Residential Projects. The
strategy is to increasingly move toward Residential Projects in order to meet the increasing backlog of
good quality middle market housing in the Kingdom, in particular turn-key housing units where
profitability is similar to Land Projects. In addition to this, Dar Al-Arkan will continue to develop
and sell Land Projects in order to cater to a selection of its customers preferring to purchase fully
developed land plots. Dar Al-Arkan’s core strategy emphasises the fact that Land Projects and
Residential Projects go “hand in hand” and the existence of each on a project by project basis will
continue to prove to be beneficial for Dar Al-Arkan. During the next few years, Dar Al-Arkan’s
development of Residential Projects shall incrementally increase in comparison to Land Projects.
Dar Al-Arkan plans to sustain its leadership position by focusing on the middle income residential
housing development and intends to continue to lead the development of master-planned lifestyle
residential communities in the Kingdom. Market research indicates that such integrated community
developments (with a broad range of amenities and easy access to highways) are likely to be in great
demand over the foreseeable future.
Dar Al-Arkan intends to enhance its research and execution capabilities to ensure the smooth
implementation of housing development strategies, involving a constant review of emerging trends,
ensuring application of innovative construction techniques in its product mix and utilisation of quality
building materials by its sub-contractors. This strategy would enable Dar Al-Arkan to attract the
middle-income demographic group as this group is attracted by the combination of good design and
affordability. Affordability of Dar Al-Arkan’s products will be enhanced by increasing the efficiency
of its planning and construction processes and by adherence to international best practices by its
sub-contractors. This initiative will be supplemented by Dar Al-Arkan’s effort to strengthen its
marketing and sales activities throughout the different stages of project development.
Dar Al-Arkan is currently reviewing its existing strategy and conceptualizing effective strategic plan.
To that effect, Dar Al-Arkan developed a strategic plan as well as the related implementation,
monitoring and periodical review processes. Capitalizing on the conclusions drawn from the research
and the subsequent strategic analysis, the strategic consultant has recommended diversification of the
investment base in order to mitigate possible risks that might be generated by focusing on one market
segment or a limited number of market segments. Based on the recommendations, the strategic
objectives have been identified as being the business model, shareholders, customers, market,
employees and operations, which are achievable by adopting the following initiatives:
Business Model
●
Dar Al-Arkan must strive to be the developer of choice for major landowners, developers and the
government;
●
diversify across the Kingdom geographically to be seen as a partner of choice in emerging and
established cities; and
●
must also diversify sectors to be the partner of choice in commercial, recreational, retail, leasing
sectors etc.
Shareholders
●
maximize shareholder value through rapid growth and high profitability;
72
●
efficiently aggregate large amounts of capital at low cost; and
●
create a balanced portfolio of leased income and for sale properties to mitigate cyclicality risk and
yield returns equal to leading US-based real estate company.
Customers
●
provide highest value for unique and unparalleled living experience;
●
enable easy independent living for customers, especially Saudi mothers;
●
support customers with their home-buying/financing needs;
●
build extraordinary government relations;
●
provide exceptional property management and community and services; and
●
retain tenants.
Markets
●
develop a large national portfolio of residential and commercial leased income properties.
Employees
●
establish Dar Al-Arkan as the employer of choice for highly competent employees driven by a
customer centred vision;
●
attract, retain and develop talented investment professionals and property managers;
●
achieve high level of labour force productivity in construction; and
●
minimize employee turnover.
Operations
●
create strong scouting, investment and divesting capabilities for different sorts of properties;
●
must possess a very high velocity of asset deployment, along with a fast time to market and high
delivery reliability; and
●
become a regional leader in quality and cost, alongside effective and reliable project and property
management capability.
8.4
Strategic Alliances
Affiliated Partners
●
Kingdom Instalment Company
As part of Dar Al-Arkan’s evolution and in order to facilitate its real estate development business, Dar
Al-Arkan’s founders established Kingdom Instalment Company (“KIC”) in 2001 with an initial
capital base of SAR 70 million (US$18.7 million) to provide mortgage financing to Dar Al-Arkan’s
customers. The need to establish KIC was due to the limited availability of mortgage finance
companies in the Kingdom.
KIC is a privately-owned company with a strong track record in providing mortgage finance. It was
the first entity in the Kingdom to offer a long-term (20 year) fixed-rate housing finance product and in
July 2006 issued the first mortgage backed Sukuk in the Kingdom.
By the end of 2006, KIC had financed an average of 14 per cent. of the buyers purchasing properties
in projects developed by Dar Al-Arkan. Moving forward, Saudi Home Loans (see below for
73
description) is expected to act as the “preferred provider of housing finance” for all real estate projects
developed by Dar Al-Arkan, enhancing the affordability of Dar Al-Arkan’s products.
●
Saudi Home Loans
Dar Al-Arkan has executed a shareholders’ agreement with Arab National Bank, KIC and the
International Finance Corporation (“IFC” - the private sector arm of the World Bank) to set up the
largest specialized housing finance institution in the Kingdom called Saudi Home Loans (“SHL”)
with a capital of SAR 2 billion (US$533 million).
SHL was launched in December 2007 with the objective of providing different mortgage financing
products which includes mortgage backed securities in the Kingdom. These financing products are all
according to the Shari’ah guidelines targeting middle to lower income Saudi population looking to
buy their own homes. SHL has recently extended its target customers to include expatriates.
Non-Affiliated Partners
As part of its expansion, Dar Al-Arkan has established several strategic partnerships which have
contributed significantly to Dar Al-Arkan’s growth in a short span of time. Three of such partnerships
that helped raising Dar Al-Arkan’s profile in domestic as well as regional markets are as follows:
●
Turner Construction (U.S.A.) (Turner) – Dar Al-Arkan entered into a “knowledge transfer”
agreement with Turner Construction in 2005 through which Dar Al-Arkan benefits from Turner’s
vast expertise relating to project management needs. Turner is an international construction
management consulting firm established more than 100 years ago. Under the terms of the
agreement, Turner provides Dar Al-Arkan with:
Project management:
●
overall management and administration of the development working in close coordination
with all project participants; and
●
assistance with all phases relating to the “production model”, ranging from land acquisition to
construction.
Financial Planning:
●
packaging and developing priority projects on optimal financial and commercial terms;
●
evaluating prospective investment opportunities as they arise; and
●
establishment of a strong financial footing that enables Dar Al-Arkan to be established as a
solid sustainable development company.
People Management:
●
●
secondment of Turner staff on an interim basis, as well as the recruitment and training of
permanent staff;
●
knowledge transfer to Dar Al-Arkan’s employees to further enhance in-house capabilities;
and
●
identify training requirements.
Cluttons (U.K.) – in 2005, Dar Al-Arkan entered into an agreement with Cluttons, a leading
surveyor and property consultant, primarily to restructure Dar Al-Arkan’s marketing and sales
functions. Cluttons is a private partnership which was founded in the U.K. in 1765. The firm
started operations in the Middle East in 1976 and has become one of the leading firms of
chartered surveyors and property consultants in the region. The firm has representative offices in
74
the Kingdom, Bahrain, Oman and UAE employing 50 staff, including 15 qualified property
consultants.
Cluttons assisted Dar Al-Arkan in the following areas:
8.5
●
development of an overall marketing strategy and a complete working model based on the
review and analysis of market research studies (undertaken for Dar Al-Arkan by independent
market researchers) and accounting for Dar Al-Arkan’s projects in progress and expected
projects;
●
evaluation of Dar Al-Arkan’s existing real estate sales and marketing teams, as well as their
hierarchy, in order to establish structural flexibility and permeability;
●
assistance with any required restructuring of Dar Al-Arkan’s sales and marketing
departments, and improving the communication between both departments;
●
implementation of Cluttons’ recommendations and employee training;
●
identification of the customers’ projected residential needs;
●
designation of products that meet customer demand and financial capabilities; and
●
emphasise Dar Al-Arkan’s commitment to customer satisfaction.
Competitive Advantages
Market Position and Name Recognition
Since its inception in 1994, Dar Al-Arkan has capitalised on its early mover advantage to become a
market leader in the highly fragmented middle income residential segment. Dar Al-Arkan has
managed to build a significant name in the Kingdom market due to its consistent track record of
delivering quality residential products at affordable prices. Today, Dar Al-Arkan’s senior
management believes Dar Al-Arkan is well placed to maintain its position as the leading land and
residential project developer in the Kingdom for the foreseeable future.
Master-planned Lifestyle Community Developments
Dar Al-Arkan has pioneered the concept of master-planned lifestyle residential community
developments in the Kingdom in response to growing demand and is the only local private sector
developer with the capacity, expertise (both in-house and through its strategic alliances) and product
mix to undertake and execute mega projects. Dar Al-Arkan intends to develop not just residential
projects, but rather to create entire master-planned lifestyle residential communities, which include a
broad range of amenities. Such amenities include recreational facilities, retail space, restaurants and
cafes, community centres, mosques and local government offices. Additionally Dar Al-Arkan ensures
that all infrastructure improvements necessary to support the residential and commercial communities
including road work, sewer and water, utilities, landscaping etc. are provided.
Dar Al-Arkan engages in all seven activities undertaken by real estate developers in the Kingdom:
●
development;
●
consulting;
●
investment;
●
maintenance;
●
construction;
●
management; and
75
●
financing (through Saudi Home Loans).
Access to Land
Due to its reputation and proven track record, Dar Al-Arkan has access to raw land directly from high
net-worth individuals and land banks, thus increasing its ability to develop large parcels of land in the
most flexible and profitable manner according to market conditions, location and other relevant
factors.
Growth through Product Innovation
Dar Al-Arkan regularly upgrades its product portfolio through product extensions and innovative
packaging solutions. For example, Dar Al-Arkan has recently introduced, in certain projects, the
“build your own home” package, which allows potential home owners to choose the specifications for
their new homes, while still benefiting from the economies of scale and cost efficiencies provided by
Dar Al-Arkan. The package has been well received in the market.
Strong Financial Performance
Dar Al-Arkan has continued to increase profits since inception and has managed to maintain the
liquidity it requires to finance its expansion. Dar Al-Arkan’s strong financial performance, coupled
with improving operational efficiencies, means that Dar Al-Arkan is well positioned to capitalise on
emerging opportunities in the market.
Experienced Management Team
Dar Al-Arkan has an experienced and qualified management team which has considerable expertise
and industry knowledge of Kingdom’s real estate market (see “Board & Senior Management” below
for brief biographies). Dar Al-Arkan applies highly selective measures of human resource
recruitment, providing both external and on-the-job training. Dar Al-Arkan has a competitive
compensation scale that has enhanced employee performance and minimized employee turnover.
Track Record with Regulators
Dar Al-Arkan has a proven track record in complying with the requirements of the various regulatory
bodies. This has resulted in the further strengthening of its relationships with various regulators,
helping Dar Al-Arkan to obtain approvals for its projects in a timely manner.
Research and Development
Since its inception, Dar Al-Arkan has invested significantly in its research and development process.
This has led to significant business growth and to better capitalisation on market opportunities.
During the last five years, Dar Al-Arkan has invested more than SAR 20 million (US$5.3 million) in
research and development. It has also commissioned research, covered business and management
reviews on the real estate development and the real estate finance market. Dar Al-Arkan plans to
allocate approximately SAR 5 million (US$1.3 million) per annum to support research and
development and continue developing its strategy and business in a systematic manner.
Strategic Alliances
The acquisition of technical assistance and transfer of knowledge through strategic alliances with well
established international firms such as Turner (project management) and Cluttons (strategic
marketing) forms an integral part of Dar Al-Arkan’s overall strategy. Furthermore, Dar Al-Arkan’s
affiliation with KIC and SHL completes the circle for Dar Al-Arkan as a developer. According to Dar
Al-Arkan’s management, such alliances have resulted in improving efficiencies in both production
and sales and are expected to play a significant role in the future growth of the organisation.
76
Low Production Costs
The concept of developing master-planned lifestyle residential communities results in economies of
scale and efficiencies, which in turn are passed on to consumers in the form of a reduction in the
prices for Residential Projects, making Dar Al-Arkan’s products more competitive. These
efficiencies are realised during various stages of the production process, most notably the design
stage, where Dar Al-Arkan selects the most cost efficient project designs, and at the raw material
selection stage, where large production volumes result in considerable savings. In addition, the direct
sourcing of bulk materials ensures quality standards and achieves best pricing, whilst the volume of
construction contracts ensures competitive bids from contractors, enabling Dar Al-Arkan to benefit
from “lowest bidder” rates and optimal payment terms.
Systems and MIS
Dar Al-Arkan has invested heavily in developing state of the art information technology systems for
the purpose of organising production operations, as the management believes that such systems
enhance Dar Al-Arkan’s overall performance. Dar Al-Arkan uses a robust oracle-based enterprise
resource planning tool (which includes a sophisticated property management module), as well as
Primavera, an engineering and project management application.
Quality Assurance
Management believes that Dar Al-Arkan is the first company in the real estate development sector in
the Kingdom to apply quality management systems in order to ensure high product quality and
customer satisfaction. Dar Al-Arkan was the first company in its sector to obtain an ISO 9001
Certification.
After Sales Support
Dar Al-Arkan offers a one year free maintenance program to home owners, in addition to the statutory
warranties on the structure of the building for a period of ten years, and various other after sales
services that have contributed to attracting and retaining potential customers.
8.6
Dar Al-Arkan Projects
Residential Projects
The following table shows Dar Al-Arkan’s residential projects that are currently under construction:
Main Projects
Al-Tilal .......................................
Al-Qaser Project .........................
Al-Qaser Project – Mall .............
Shams Ar-Riyadh .......................
Residential units in progress as of 31 December 2008
Total paid
up to
Completion
31/12/08
Location
Units
%
(SAR’000)
Medinah
500
294,719
79%
Riyadh
3,051
1,517,035
84%
Riyadh
1
369,020
39%
3,200
1,301,382
Riyadh
20%
6,752
3,482,156
Expected
completion
date
2009
2009
2010
2012
Total
expected cost
(SAR’000)
375,000
1,800,000
950,000
6,360,000
9,485,000
As of 31 December 2008, Dar Al-Arkan had five projects under construction. The four main projects
had a total investment value of approximately SAR 9.5 billion (US$2.5 billion), about SAR 3.5 billion
(US$929 million) of which have already been invested. The total area relating to these projects in
progress was approximately eight million square metres. The majority of these projects are based in
Riyadh with one in Madinah and there are a total of 6,752 units under construction in these projects.
77
Ongoing Residential Projects
Al Tilal
The project is located in southern Medina, south of Hijra Road. The site is located in the Bani
Bayyada Area and to the west is Mount Ayr which overlooks the project. The project is only
7 kilometers away from the Holy Prophet Mosque and covers 2,138,738 square meters of developed
land. One of the distinguishing features of the development is that it falls partially within the Haram
zone boundaries. Strong desire exists among Muslims to reside within these boundaries compared to
other parts of Medina. The Haram area boundary line passes through the site from the east to west
and divides the project to two sections, north and south. The first phase of this project consists of
500 residential villas only with a total estimated cost of SAR 375 million (US$100 million) and was
completed at 79 per cent. as of 31 December 2008.
Al-Qasr
Al-Qasr is located in Al-Swaidi suburb of Riyadh and is not only a landmark project for Dar
Al-Arkan, but the Kingdom as a whole. The project acts as a pilot for other master-planned lifestyle
residential community developments being undertaken by Dar Al-Arkan. Al-Qasr showcases Dar
Al-Arkan’s capabilities and creativeness in undertaking such a large scale project, with a total built-up
area of 914,017 square metres aiming to provide its customers with an international quality residential
environment, including modern lifestyle amenities, such as public parks, green belts, shopping malls,
entertainment areas, coffee shops etc.
Al-Qasr is divided into five zones and will comprise of approximately 3,051 residential units, retail
facilities and one commercial mall. The development is designed to cater to the middle income
segment of the population and to house approximately 13,000 people. Al-Qasr comprises four types
of individual villas, with a range of styles and sizes, as well as 16 types of apartments.
Due to the scale of the project and expected high number of inhabitants, Dar Al-Arkan is also
developing its first commercial mall as part of the Al-Qasr project in zone 5. The land area for the
mall is 65,196 square metres, while the built up area will be 167,878 square metres. The total
expected investment value for the mall is SAR 950 million (US$253 million). The total area available
for leasing is 76,000 square metres on an expected total of four levels, as well as parking zone in the
basement. The tenant mix will include department and retail stores, cafes/restaurants and a
hypermarket. The expected completion date of the mall is during the second half of 2010.
Shams Ar-Riyadh
Shams Ar-Riyadh (formerly known as Al-Riyadh View) is located in Riyadh’s Al-Dariyia district and
is one of the largest residential projects ever initiated in the Kingdom, comprising a total area of
5.6 million square metres. The project will include 3,200 villas built on an area of approximately
1.2 million square metres with a total expected investment value of SAR 6.4 billion (US$1.7 billion).
Notable features relating to Shams Ar-Riyadh include higher land altitude, wide roads with pedestrian
pavements and scenic landscaping. The project includes allocated areas for sports, social and cultural
activities, and public service facilities, as well as space for commercial purposes of approximately
472,868 square metres. The expected completion date will be during the first half of 2012.
Upcoming Projects
In accordance with its strategy and expansion plans, Dar Al-Arkan intends to launch one additional
major master-planned lifestyle residential community development in 2009. The development is
based in the Western province of the Kingdom and will cover a total land area of approximately
3 million square meters. The product mix for the project shall include land parcels, commercial areas,
as well as residential units (i.e., villas, apartments and attached units).
78
The total investment value is expected to exceed SAR 7.5 billion (US$2 billion) and be completed by
the end of 2013.
Ongoing Land Development Projects
Qasr Khozam
Dar Al-Arkan recently launched the Qasr Khozam Project in Jeddah which aims to turn the city centre
of Jeddah into one of the most influential and attractive cities in the Arab world where twenty-first
century skyline will embrace the historical and religious nature of the area. The Project is a
joint-investment between Dar Al-Arkan and Jeddah Development and Urban Regeneration Company,
a company owned by the municipality of Jeddah. The first phase of the Project, which covers almost
four square kilometres will last over six years.
Dar Al-Arkan is committed to the Land Development phase of the Project and expects to sell the land
parcels once infrastructure is completed.
8.7
Shareholders and Related Parties
Shareholders
The following table shows Dar Al-Arkan’s shareholders’ structure immediately after the initial public
offering that took place in December 2007, and is intended to demonstrate the ownership of the
founding shareholders:
Name of Shareholder
Al Arkan Building Co. Ltd. ...................................................................................
Manazel for Construction Co.................................................................................
Yousuf Abdullah Al Shalash..................................................................................
Kingdom Installment & Trading Co. .....................................................................
Eamar Al Byader Dev. & Trading Co. ..................................................................
Hathlol Saleh Al Hathlol........................................................................................
Khalid Abdullah Al Shalash ..................................................................................
Majed Abdul Rahman Al Qaseem .........................................................................
Tariq Mohamed Al Jarallah ...................................................................................
Abdul Aziz Abdullah Al Shalash...........................................................................
Majed Romy Al-Romy...........................................................................................
Abdul Kareem Hamad Al Babtain .........................................................................
Other Shareholders.................................................................................................
Total .......................................................................................................................
Status
Founder
Founder
Founder
Founder
Founder
Founder
Founder
Founder
Founder
Founder
Founder
Founder
-
Ownership
Percentage
8.48%
7.91%
7.78%
7.69%
7.56%
6.91%
6.74%
5.36%
4.32%
3.63%
2.33%
1.30%
30.00%
100.00%
No of Shares
of SAR 10
each
45,767,052
42,703,092
41,994,542
41,527,936
40,828,027
37,328,482
36,377,988
28,929,574
23,330,301
19,597,453
12,598,363
6,999,090
162,018,100
540,000,000
Dar Al-Arkan’s issued capital as of 31 December 2008 stood at SAR 7.2 billion (US$1.92 billion)
divided into 720 million shares of par value of SAR 10 each (US$2.67). Dar Al-Arkan increased its
capital base significantly in 2008 by issuing 180 million bonus shares of par value of SR 10 each to its
current shareholders. This non cash issuance was financed through retained earnings.
The following table shows Dar Al-Arkan’s shareholders’ structure as of 31 December 2008,
indicating the major shareholders owning 5 per cent. or more of Dar Al-Arkan’s shares:
Name of Holders
Khalid Abdullah Al Shalash ...................................................................................................................................................
Al Arkan Building Co. Limited ..............................................................................................................................................
Manazil for Construction Co...................................................................................................................................................
Yousuf Abdullah Al Shalash...................................................................................................................................................
Hathlol Al Saleh Hathlol.........................................................................................................................................................
Kingdom Installments & Trading Co. ....................................................................................................................................
Eamar Al Byader Dev. & Trading Co. ...................................................................................................................................
Majed Abdul Rahman Al Saseem...........................................................................................................................................
Other Shareholders..................................................................................................................................................................
Total ........................................................................................................................................................................................
Source: Tadawul, as of 15 February 2009.
79
Ownership
Percentage
9.1%
8.4%
7.9%
7.7%
6.9%
5.7%
5.6%
5.3%
43.4%
100.0%
A brief description of each corporate shareholder holding more than 5 per cent. in Dar Al-Arkan is set
out below (see “Board and Senior Management” for descriptions relating to the individual
shareholders holding a stake of more than 5 per cent.):
Related Parties
Dar Al-Arkan is affiliated to a group of companies which are also under the common ownership and
control of certain individuals listed above. A description of such companies holding more than 5
per cent. in Dar Al-Arkan is set out below:
Al-Arkan Building Company Limited
Al-Arkan Building Company Limited was established in August 2000 with a capital of
SAR 1.41 million (US$375,000) and focuses on general contracting and procurement of raw land for
development and sales. It became a Dar Al-Arkan shareholder in 2003 and at present holds 8.4
per cent. of Dar Al-Arkan’s shares.
Manazel for Establishment & Construction Company
Manazel for Establishment & Construction Company (“Manazel”) was established in May 2001 by
Dar Al-Arkan’s founders in response to the absence of experienced and dedicated private sector
housing contractors. Manazel was set up with an initial capital of SAR 1.4 million (US$373,333) and
focuses on the general contracting of buildings, roadwork, dam works and sewage networks.
Historically, Manazel has been awarded contracts to provide construction services on several of Dar
Al-Arkan projects through an open tender process. Manazel’s share of Dar Al-Arkan’s construction
work, however, has decreased recently as the projects are much larger in scale and beyond Manazel’s
capacity. Manazel became a shareholder of Dar Al-Arkan in 2004 and holds 7.9 per cent. shares of
Dar Al-Arkan.
Kingdom Instalment Company (KIC)
KIC became a shareholder in Dar Al-Arkan in 2004 (see “Strategic Alliances” above for a more
detailed description relating to KIC) and at present holds 5.7 per cent. of Dar Al-Arkan’s shares.
Eamar Al-Byader for Development and Trade Company
Eamar Al-Byader for Development and Trade Company (“Eamar”) was established in March 2003
with a capital of SAR 700,000 (US$186,667). Eamar focuses on the purchase of land, general
contracting, and the construction of roads, airports, and dams, in addition to wholesale trade. It
became a shareholder of Dar Al-Arkan in January 2004 and currently holds 5.6 per cent. of Dar
Al-Arkan’s shares.
80
8.8
Board of Directors and Committees
The following chart shows the structure of the Dar Al-Arkan’s corporate bodies:
General
Assembly
Shariah
Committee
(Under Formation)
Board of
Assembly
Executive
Committee
Audit
Committee
Nominations &
Remuneration
Investment
Committee
Board of Directors
The Dar Al-Arkan’s Board of Directors is entrusted with management of Dar Al-Arkan ’s business. It
consists of nine members who are appointed by a regular general meeting for a period not exceeding
three years. However, the shareholders have resolved that, as an exception, the current Board of
Directors will be allowed to serve for a term of five years.
The following table shows a list of current members of the Board of Directors:
Name
Yousef Abdullah Al-Shelash ..........................................
Hathloul Saleh Al-Hathloul ............................................
Abdul Aziz Abdullah Al-Shelash ...................................
Khalid Abdullah Al-Shelash ...........................................
Majed Romi Soliman Al-Roumi .....................................
Tarek Mohammad Ali Al-Jarallah ..................................
Majed Abdul Rahman Al-Gassim...................................
Abdul Karim Hamad Al-Babtain ....................................
Abdullatif Abdullah Al-Shalash......................................
Majid Al Sayed Bader Al-Refai......................................
Ayman Abdullah Boodai ................................................
Capacity
Chairman
Member
Member
Member
Member
Member
Member
Member
Member – the managing director
Member
Member
Set forth below are brief biographies of each member of the Board of Directors of Dar Al-Arkan:
Mr. Yousef Abdullah Al Shelash
Mr. Al Shelash (41 years old), a Saudi national and chairman of the board, is the founder of Dar
Al-Arkan and has a proven entrepreneurial track record coupled with considerable experience in the
real estate development industry. Mr. Al Shelash holds a bachelor degree in Islamic Jurisprudence
from Imam Mohammed bin Saud University in Riyadh and a Masters degree in Procedural Systems
from the Riyadh Institute of Administration. He is also the Chairman of the following entities:
●
Eamar Al-Byader;
●
Madarat Co.;
●
Kingdom Instalment Company; and
●
Unicorn Investment Bank, B.S.C. (c).
81
Mr. Hathloul Saleh Al Hathloul
Mr. Al Hathloul (44 years old), a Saudi national, is a co-founder of Dar Al-Arkan. He has 20 years of
experience in real estate financing and investing. He is also a board member of the following
organisations:
●
Kingdom Instalment Company; and
●
Unicorn Investment Bank, B.S.C. (c).
Mr. Khalid Abdullah Al Shelash
Mr. Al Shelash (40 years old), a Saudi national, is a co-founder of Dar Al-Arkan. He has extensive
experience in building and construction planning as well as real estate development. Mr. Al Shelash
is a graduate of the King Fahad Security Academy and is also a member of the following
organisations:
●
Chairman of European Real Estate Company; and
●
Board Member of Manazel Construction Company.
Mr. Majed Romi Soliman Al Roumi
Mr. Al Roumi (42 years old), a Saudi national, has extensive experience in the real estate evaluation
and investment activities. He has made a significant contribution in improving the operations of the
Real Estate Investment Department of Dar Al-Arkan by developing and creating several real estate
investment tools. Mr. Al Roumi is a graduate of the Teacher’s Collage of Riyadh and is a member of
the following entities:
●
Chairman of Gamat and Company; and
●
Board Member of Eamar Al-Byader.
Mr. Abdul Karim Hamad Al Babtain
Mr. Al Babtain (42 years old), a Saudi national, has considerable experience in business management
acquired through running numerous private investment firms. Mr. Al Babtain holds a bachelor degree
in Islamic Jurisprudence from Imam Mohammed bin Saud University in Riyadh and is a board
member of following entities:
●
Taka Communications;
●
Al-Babtain Holding Company; and
●
Al-Babtain Power and Telecommunications.
Mr. Abdul Aziz Abdullah Al Shelash
Mr. Al Shelash (47 years old), a Saudi national, has extensive experience in real estate development
and has developed numerous projects in the Western Region of Saudi Arabia. Mr. Al Shelash holds a
bachelor degree in Islamic Studies from Imam Mohammed bin Saud University in Riyadh and is a
board member of the following entities:
●
Madarat Company; and
●
Gamat Company.
82
Mr. Tarek Mohammed Ali Al Jarallah
Mr. Al Jarallah (39 years old), a Saudi national, has extensive experience in real estate development
as well as real estate valuation. He holds a bachelor degree in management from King Saud
University in Riyadh. Mr. Al Jarallah is:
●
Chairman of Ceramic World Company; and
●
Board Member of Nama Al-Sahrah Company.
Mr. Majed Abdul Rahman Al Gassim
Mr. Al Gassim (36 years old), a Saudi national, holds a Bachelors degree in Islamic Studies from
Imam Mohammed bin Saud University in Riyadh. He is also a Board Member of Nama Al-Sahrah
Company.
Mr. Abdullatif Abdullah Al-Shalash
Mr. Al Shelash (37 years old), a Saudi national, has significant experience in finance and technology
and has been with Dar Al-Arkan since its inception. Mr. Al Shelash is a holder of a bachelor degree
in organisation leadership and supervision from Purdue University, USA and an MBA from Findly
University, USA. He is also the managing director of Dar Al-Arkan and a board member of the
following entities:
●
Unicorn Investment Bank, B.S.C. (c); and
●
Eamar Al-Byader.
Mr. Majid Al Sayed Bader Al-Refai
Mr. Majid Al Refai (51 years old) is a Kuwaiti national and has extensive experience in Islamic
financial institution building, developing and executing Islamic investment products and financial
services, building world class management teams, establishing credible Islamic Shari’ah scholar
boards, developing and executing marketing and funds mobilization strategies, all in the Islamic
financial institutional field and based on western financial market standards. Mr. Majid Al Refai is
the founder, managing director and chief executive officer of Unicorn Investment Bank B.S.C. (c)
Bahrain. Founder of Majestic Global Investments Ltd. “MGI” in 1994
Mr. Majid Al Refai holds a bachelor degree in Chemical Engineering and Master of Science in
Finance from USA.
Mr. Ayman Abdulla Boodai
Mr. Ayman Boodai (53 years old) is a Kuwaiti national and has considerable experience in financial
analysis, portfolio management, investment and strategic planning. Mr. Ayman Boodai is the
chairman & managing director of the Securities House Company (Kuwait), vice chairman of Al Aman
Investment Company (Kuwait), board member of Trustees - Gulf University for Technology.
Mr. Ayman Boodai holds a diploma in Banking Studies from Institute of Banking Studies Kuwait
(1979).
83
Committees
Executive Committee
The Executive Committee comprises of three board members.
follows:
Its major responsibilities are as
●
to meet on a weekly basis to evaluate commitments and progress of various projects as well as to
monitor and evaluate the land acquisition and investment process in conjunction with the
Investment Committee and senior management;
●
to monitor and evaluate the overall performance of Dar Al-Arkan and resolve any issues of
production progress, action plans, resource allocations, etc.;
●
to review and resolve any outstanding financial and administrative issues; and
●
to take corrective measures in order to ensure that Dar Al-Arkan achieves its periodical targets.
Audit Committee
The Audit Committee comprises of three members who are elected by the Board of Directors. Its
major functional responsibilities are as follows:
●
audit financial transactions to ensure compliance with predetermined budget and accounting
systems;
●
monitor internal control systems, processes and related policies to ensure their effective
functioning, in addition to monitoring risk;
●
monitor compliance with quality control processes;
●
ensures economic viability of various sources of funding as well as compliance of such sources to
Islamic finance principles; and
●
instantaneous reporting to appropriate levels of management on any significant control failure or
weakness identified.
Nominations & Remuneration Committee
The Nomination and Remuneration Committee is responsible for nominating board members and
comprises three members as selected by the general assembly. The major functional responsibilities
of this committee are as follows:
●
Conduct annual reviews of capabilities and scope of responsibilities relating to board membership
and to report on the same regularly;
●
Recommending appropriate changes/modifications to (including but not limited to) compensation
structures and nomination procedures;
●
Report on any conflict of interest and recommend remedial actions; and
●
Develop clear policies and criteria for rewarding board members.
Investment Committee
The Investment Committee comprises of five members chosen from within the Board of Directors.
Its major responsibilities are as follows:
●
Monitor investments and adherence to investment management policies, including but not limited
to land acquisition, etc.;
84
●
Review all key agreements, contracts and commitments prior to Dar Al-Arkan making any key
investments;
●
Study investment applications and make necessary recommendations;
●
To facilitate the overall investment procedure; and
●
To evaluate investment performance on a regular basis.
Shari’ah Committee (under formation)
The Shari’ah Committee will comprise of three members and each member shall be respected and
well recognised Islamic scholar. The expected formation date is during 2009. Its major functional
responsibilities shall be as follows:
●
to ensure that Dar Al-Arkan acts in compliance with the rules and regulations of Shari’ah in
respect of all contracts, agreements and transactions;
●
to approve financial operations and trading mechanisms in order to ensure their compliance with
Shari’ah;
●
to review all of Dar Al-Arkan’s activities and agreements to ensure that they comply with
Shari’ah;
●
to limit any activities which might conflict with Shari’ah; and
●
to bring to the attention of the Executive Committee any and all actions which do not adhere to
Shari’ah.
8.9
Senior Management
Senior management of Dar Al-Arkan is composed of highly qualified and skilled professionals,
usually with vast experience in the field of real estate development. Each member of the senior
management has a clearly defined portfolio of responsibilities and they perform their tasks under the
leadership and oversight of the Managing Director.
The following table shows a list of current members of the senior management:
Name
Mr. Abdullatif Abdullah Al Shalash
Saud Abdulaziz Al Gusaiyer
Benoit Bellerose
Duncan Smith
Position
Managing Director
General Manager
Chief Financial Officer
Building Development and Construction
Manager
Sales and Marketing Manager
Information Technology Manager
Property Development Manager
Property Management Manager
General Legal Counsel
Corporate Communications Manager
Phillip Perkins
Olayan H. Alotaibi
Anton Gouwsventer
Abdulrahman Al Dakheel
Abdullah Murad
Dr. Abdulrahman Salem Alkheraigi
Set forth below are brief biographies of each member of the senior management of Dar Al-Arkan:
Mr. Abdullatif Abdullah Al Shalash – Managing Director
See above for Sheikh Al Shalash biography.
85
Saud Abdulaziz Al Gusaiyer – General Manager
Mr. Al Gusaiyer is a Saudi national and occupied numerous positions over 22 years. He joined Dar
Al-Arkan in 2004. He worked for the Royal Commission for Jubail & Yanbu (Bechtel management)
as Director of projects Department. Then he worked for FAMA Holding Company as General
Manager for Projects and Development for a period of 10 years. He also worked in the fields of
pre-cast concrete, design, production and marketing. During that period, he gained considerable
diversified experience through working in technical as well as management fields. Mr. Al Gusaiyer
holds a B.Sc. of architecture from King Saud University.
Mr. Benoit Bellerose – Chief Financial Officer
Mr. Bellerose, who joined Dar Al-Arkan in 2008, holds a bachelor degree in accounting and finance
from Quebec University, Canada and is a certified chartered accountant. Prior to joining Dar
Al-Arkan, Mr. Bellerose was Vice President Finance and Control for MCI/WorldCom’s operations in
Europe, Middle East and Africa. In his 20 years of experience in the finance world, he held various
positions in Canada, Brazil, Western and Eastern Europe.
Mr. Duncan Smith – Building Development and Construction Manager
Mr. Smith has over 22 years of experience specializing in development and construction of master
planned communities in North America. Formerly the Primary Qualifier and Vice President of Viera
Builders in the USA. Mr. Smith holds a Active Certified General Contractors License in the US, as
well as a certificate as a Environmental Protection Agency- SWPPP Inspector, and is a current
member of the following organizations- Department of Business and Professional Regulation, General
Contractors Association, National Home Builders of America and My Safe Florida Home
Mr. Phillip Perkins – Sales and Marketing Manager
Mr. Perkins holds a Master degree in Real Estate Marketing from Columbia University, NY as well as
a Master degree in Urban Planning from UCLA. Mr.Perkins cumulates more than 15 years of
experience in marketing and sales. Prior to joining Dar Al-Arkan, Mr.Perkins was Vice-President of
Sales Marketing for Ryland Homes (California) and held similar senior positions for other large
national builders in USA such as Centex and KB Home.
Mr. Olayan H. Alotaibi – Information Technology Manager
Mr. Alotaibi joined Dar Al-Arkan in 2004. Mr. Alotaibi holds a Masters degree in Computer Science
from Ball State University at Muncie, Indiana, U.S.A. and a B.Sc. in Computer Information Systems
from Arkansas State University at Jonesboro, Arkansas, USA. He worked at Makshaff Services
Limited as Information Technology Manager, and at the Saudi Arabian Department of Customs
Information Centre in the areas of Systems Development, Database Administration and Information
Systems Management, for 8 and 13 years, respectively.
Mr. Anton Gouwsventer – Property Development Manager
Mr. Gouwsventer joined Dar Al-Arkan in 2008. Mr. Gouwsventer has a 20 year track record in real
estate development, with his education leading him to advanced studies in project management from
the University of Cape Town. Prior to joining Dar Al-Arkan, Mr. Gouwsventer served as Managing
Director for Assetline Consulting where he managed the development of suburban residential areas,
marinas, signature golf courses, eco-resorts, and leisure and retail projects.
Mr. Abdulrahman A. Al Dakheel – Head of Property Management Dept.
Mr. Abdulrahman has joined Dar Al-Arkan in November 2008. Prior to joining Dar Al-Arkan, he
worked from 1999 to 2008 as Regional Property Director at Savola Group Real Estate Division, being
responsible for six malls of the Savola Group. From 1998 to 1999, he was also General Manager at
Fafa Advertizing Agency and from 1987 to 1998, he was Regional Manager at Panda Retail Division,
86
being responsible for seven Panda supermarkets in the Eastern Division. Mr. Abdulrahman is
member of Middle East Council of Shopping Centers and International Council of Shopping Centers.
Mr. Abdullah Murad – General Legal Counsel
Mr. Murad holds a Masters degree in comparative law from Tulane University at New Orleans,
Louisiana, USA. Prior to joining Dar Alarkan, Mr. Murad was Vice President of SEDCO Legal
Department a leading wealth management company in Saudi Arabia. In addition, he serves as Dar
Al-Arkan’s Corporate Secretary. He joined Dar Alarkan after 18 years in corporate and private law
practice with an international law firm and Saudi Civil Aviation Authority and Jeddah Chamber of
Commerce. An advocate, licensed to practice law before all municipal jurisdictions of Saudi Arabia,
he is a partner in Fallata & Murad law firm. An Associate of the American Bar Association (ABA),
he is also a Fellow of the Saudi Institute of Arbitrators, the Kingdom.
Dr. Abdulrahman Salem Alkheraigi – Corporate Communications Manager
Dr. Alkheraigi has joined Dar Al-Arkan in 2008. He holds a doctorate degree from the School of
Journalism and Mass Communications at the University of Wisconsin, USA. He obtained his Masters
in Mass Communications from Denver University, USA. Prior to joining Dar Al-Arkan,
Dr. Abdulrahman was Senior Public & Media Relations Officer for the Organization of the Petroleum
Exporting Countries (OPEC), as well as Senior Information Officer for OPEC Fund for International
Development in Vienna, Austria. Dr. Abdulrahman also worked as Assistant Professor of
International and Intercultural Communications at King Saud University from 1990-2000.
8.10
Employees
The following chart shows distribution of Dar Al-Arkan’s employees broken down into groups
according to their respective location as of 31 December 2008:
Employee distribution by location - 31 December 2008
Al-kobar,
1.32%
Jeddah, 4.95%
Medina, 7.59%
Mecca, 7.92%
Riyadh, 78.22%
Dar Al-Arkan’s head count as of 31 December 2008 stood at 421 employees, with almost 80 per cent.
of its workforce located in Riyadh where its headquarters are located. Dar Al-Arkan saw its
workforce grow steadily over the past few years as the head count has increased from 256 employees
in 2003 to 421 as of 31 December 2008. These figures are exclusive of third party consultants and
constructors.
87
Most of Dar Al-Arkan’s employees have been with Dar Al-Arkan for just over three years, primarily
reflecting Dar Al-Arkan’s strong growth during the past few years. The turnover at Dar Al-Arkan has
been stable over the past three years standing at approximately 10 per cent.
Dar Al-Arkan’s rapid growth in revenues and the scale of its activity is equally reflected by the
increment in the strength of its General & Administration Expenses as well as the Production &
Development work force. The 2006 head count in the above mentioned departments rose by 74
per cent. and 45 per cent. respectively compared to 2003. The increment in human resources has not
only positively supplemented Dar Al-Arkan’s growth but has significantly increased employee
productivity.
The following chart shows the development of the number of Dar Al-Arkan’s employees over the past
4 years:
Employee distribution by department - 31 December 2008
500
450
380
400
436
405
421
350
300
250
200
238
184
145
194
187
158
137
150
100
98 100
51
97
53
50
0
2005
2006
G&A
2007
Sales
88
Production
2008
Total
9.
FINANCIAL REVIEW AND ANALYSIS
The following discussion and analysis of Dar Al-Arkan’s financial condition and results is based upon
and should be read in conjunction with the annual consolidated financial statements as of
31 December 2005, 2006 and 2007 each of which was audited by Talal Abu-Ghazaleh & Co. and the
annual consolidated financial statements as of 31 December 2008 jointly audited by Deloitte &
Touche Bakr Abulkhair & Co. and Talal Abu-Ghazaleh & Co.
9.1
Revenue Analysis
Dar Al-Arkan, one of the leading residential real estate developers in the Kingdom of Saudi Arabia,
has two main business segments:
●
Residential development (“Residential Projects”); and
●
Land development (“Land Projects”).
The following chart shows a breakdown of the revenues by industry segment:
Revenue Breakdown by Segment
SAR '000
5,000,000
4,620,393
4,500,000
4,000,000
3,500,000
3,604,756
3,190,785
3,201,836
3,000,000
2,500,000
2,000,000
1,500,000
1,006,032
1,321,177
1,150,751
990,375
1,000,000
500,000
0
2005
2006
2007
Residential Projects
2008
Land Projects
In line with the large expansion in the Saudi residential real estate market, Dar Al-Arkan experienced
a significant growth in its business since 2005, leading to an equally significant growth in both
revenues and gross profits. In 2006, 2007 and 2008, both Residential Projects and Land Projects
segment results improved on the back of increased development activities as well as unit prices
increase experiencing annual revenue growth rates of around 3.71 per cent., 13.17 per cent. and 13.90
per cent. respectively.
Revenue, Net Income and Operating Cash Flows
The following table shows development of revenue, net income and operating cash flows over the
period show:
SAR ‘ 000
Revenue ......................................................................................
Net Income .................................................................................
Net Income %.............................................................................
Operating Cash Flows ................................................................
Residential Units Sold................................................................
Land Area Sold (m²)...................................................................
2005
4,196,817
1,775,472
42.31%
(2,743,725)
1,246
3,417,547
2006
4,352,587
1,813,950
41.68%
821,784
1,320
4,226,123
2007
4,925,933
2,008,574
40.78%
9,649,908
1,220
4,302,372
2008
5,610,768
2,356,247
42.00%
2,766,161
1,101
7,488,643
Dar Al-Arkan has achieved in revenues a cumulative annual growth rate (CAGR) of 10.2 per cent. for
the period from 2005 to 2008. Such strong revenue growth has been achieved mainly due to the rapid
89
expansion of Dar Al-Arkan projects and the continuous strong demand for such high quality projects
in the Kingdom.
Despite the worldwide increasing costs in the real estate industry, Dar Al-Arkan’s management was
able to keep a good control over the overall costs which contributed to healthy profit margins of 41
per cent. in 2007 and 42 per cent. in 2008. Thus profits have seen flourishing growth of 11 per cent.
and 17.3 per cent. in 2007 and 2008 respectively where 2008 net income is SAR 2.4 billion
(US$613 million). Some pressure was put on gross margin as the overall cost of construction has
increased in the last year, however Dar Al-Arkan believes that most of the cost increase can be
transferred to customers.
Revenue and Sales Contribution
The following table shows a development of the revenue sources according to the industry segment
over the period shown broken down by industry segment:
SAR ‘ 000
Residential Projects ..................................................................
Land Projects............................................................................
2005
1,006,032
3,190,785
4,196,817
Contribution to total sales %
Residential Projects ..................................................................
Land Projects............................................................................
23.97%
76.03%
2006
1,150,751
3,201,836
4,352,587
26.44%
73.56%
2007
1,321,177
3,604,756
4,925,933
26.82%
73.18%
2008
990,375
4,620,393
5,610,768
17.65%
82.35%
Over the last few years, Residential Projects revenue has contributed to approximately 23.7 per cent.
of Dar Al-Arkan’s total revenues and maintained an average gross margin of 46 per cent. over the
period. The remaining balance of the revenues is made up by Land Projects sales that averaged
approximately 76.3 per cent. of total revenues for each of the last three years. The gross margin of
Land Projects has also been relatively unchanged at 50 per cent. over the last three years.
As of 31 December 2008, Residential Projects represented approximately 17.65 per cent. of Dar
Al-Arkan’s overall revenues for the current year. The reduction is due to the mix of units sold in
2008, whereby Dar Al-Arkan started selling apartments at our Al Qasr project which caters to the
lower bracket of the middle income market. Dar Al-Arkan long-term strategy is to substantially
increase the Residential Projects revenues without neglecting Land Projects operations in order to
achieve a better revenue distribution.
Residential Projects Revenue
Residential Projects Sales Analysis
The following table shows development of residential projects sales over the period shown:
SAR ‘ 000...................................................................................
Residential units sold .................................................................
Residential area sold ..................................................................
Weighted average selling price/sq.m. (SAR).............................
2005
1,006,032
1,246
482,310
2,086
2006
1,150,751
1,320
515,670
2,232
2007
1,321,177
1,220
517,156
2,556
2008
990,375
1,101
297,200
3,331
Most of Dar Al-Arkan’s projects generate revenue over more than one financial period due to an
average project completion cycle of three to five years. The construction is normally split over
2-3 phases, with each phase being sold once completed. Dar Al-Arkan also increased the magnitude
of its projects whereby each of its new projects is planned to comprise over 1,000 residential units the necessary agreements with contractors and suppliers have been put in place to ensure a smooth
construction phase absent of any supplies shortages.
90
The following chart shows financial performance of Dar Al-Arkan in the area of residential projects:
Financial Performance - Residential
SAR '000
60.00%
1,400,000
1,200,000
46.76%
47.21%
47.69%
50.00%
1,000,000
42.76%
800,000
40.00%
30.00%
600,000
20.00%
400,000
10.00%
200,000
0.00%
0
2005
2006
2007
2008
Revenue
Cost of Sales
Gross Margin as % of revenue
Volume of Units
In 2008, Dar Al-Arkan completed and sold 1,101 units and booked SAR 990 million
(US$264 million) of revenue. Revenue from the sale of Residential Projects increased from
SAR 1.15 billion (US$307 million) in 2006 to over SAR 1.32 billion (US$352 million) in 2007
despite a reduction in the number of Residential units sold from 1,320 units in 2006 to 1,220 units in
2007. However, the decrease in revenue from the sale of residential projects in 2008 is directly
related to the timing of delivery of units in its master-planned communities, which typically have a
longer development cycle than Residential Projects only. Attributing factors for the increase in
activity are as follows:
●
availability of funds:
the capital increase of SAR 5.33 billion (US$1.42 billion) to
SAR 5.4 billion (US$1.44 billion) in 2004 allowed Dar Al-Arkan to expand its operations. Since
then, Dar Al-Arkan has further diversified its sources of funding by tapping domestic banks
(obtaining credit facilities) as well as international capital markets through two issuances of
Sukuk;
●
market conditions: as mentioned, the Saudi residential real estate sector continues to witness a
very strong expansion, especially in the high-mid level segment targeted by Dar Al-Arkan;
●
legislative environment: laws adopted in 2002-2003 allowing non-Saudis to own property in
Saudi Arabia have contributed to increased demand;
●
financing facilities: the burgeoning Saudi home finance market is steadily developing and in the
process making residential assets more accessible to a larger portion of the population; and
●
technology and management: the improved technologies and methods adopted by Dar Al-Arkan
(a direct result of its strategic alliances with leading global real estate experts) have contributed to
shortening the average project completion time in addition to further enhancing the quality of
residential units sold by Dar Al-Arkan.
91
Price per unit
The price per unit increased by 24 per cent. in 2007 when compared to 2006, whilst it reduced slightly
in 2008. The 2008 reduction is mainly due to the mix of units sold, as Dar Al-Arkan started selling
apartments at Al Qasr Project.
The selling price of residential projects varies from project to project according to location, design
and the market segment targeted. The annual weighted average price per square meter increased from
SAR 1,910 (US$509) in 2004 to SAR 2,086 (US$556) in 2005 representing a growth of 19 per cent.
The average selling price per square meter increased significantly in 2008 to reach SAR 3,331
(US$882) as compared to SAR 2,556 (US$682) in 2007 which was also a 15 per cent. increase over
2006. This was a direct result from an increase in construction cost which was passed over to
customers as well as a change in the mix of units sold.
The selling price normally varies positively within the same project over time as a result of the annual
review of a project’s initial sales and the appreciation in the value of the land. Subsequent phases of
projects normally sell at higher prices as the location (as well as surrounding areas) becomes more
developed.
Revenues from the sale of residential properties were SAR 990.38 million in 2008, a 25.04 per cent.
decrease from the SAR 1,321.18 million of 2007. The revenue decrease is mainly due to the lower
number of units sold in 2008 which stood at 1,101 units compared to the 1,220 units sold in 2007.
The reduction is due to the mix of units sold in 2008, whereby Dar Al-Arkan started selling
apartments at Al Qasr project which caters to the lower bracket of the middle income market.
Land Projects Revenue
The following chart shows financial performance of Dar Al-Arkan in the area of land projects:
Financial Performance - Land
SAR '000
5,000,000
4,000,000
48.87%
49.50%
49.16%
60.00%
52.41% 50.00%
40.00%
3,000,000
30.00%
2,000,000
20.00%
1,000,000
10.00%
0.00%
0
2005
2006
2007
2008
Revenue
Cost of Sales
Gross Margin as % of revenue
Revenues from the sale of land in 2008 increased by 28 per cent. over 2007. This increase was
mainly due to the number of square meters sold which benefited from the real estate growth
experienced in 2008, especially in the first part of the year. This resulted in 7.5 million square meters
sold in 2008, compared to 4.3 million in 2007.
Land Projects sales increased from SAR 3.19 billion (US$851 million) in 2005 to SAR 3.60 billion
(US$960 million) in 2007 while the Land Projects sales in 2008 hit approximately the
92
SAR 4.62 billion (US$1.2 billion) mark. This increase of approximately 44.83 per cent. was driven
by an increase in completed projects as well as in the total area of land developed and sold. The total
number of Land Projects’ area sold increased from 3.4 million square metres to 4.3 million square
metres over the same period i.e., (2005 to 2007). The growth in sales of Land Projects stabilized in
2006, reaching SAR 3.20 billion (US$853 million), a slight increase over 2005 figures with gross
margins remaining unchanged. However, the total land area sold increased to 4.2 million square
meters (spread over 12 projects), representing a growth of 23 per cent. over 2005.
Land Projects Sales Analysis
The following table shows development of land projects sales over the period shown:
Sales (SAR ‘ 000).....................................................................
Area sold (sq.m.) ......................................................................
Weighted average selling price/sq.m.(SAR)............................
2005
3,190,785
3,417,547
934
2006
3,201,836
4,226,123
758
2007
3,604,756
4,302,372
838
2008
4,620,393
7,488,643
617
In 2008, sales of land reached 7.5 million square meters at an average price of SAR 617 (US$164.53)
per square meter which is 26.37 per cent. less than the average selling price of SAR 838 (US$223) in
2007. The average selling price of land in 2007 was 10.55 per cent. higher than the average selling
price in 2006. The decrease in unit price in 2008 is mainly due the geographical location of the land
as evidenced by the stable margins.
In general, most of the factors that contributed to the increase in Residential Projects sales have also
played a principal role in driving the sales of Land Projects. The vast majority of Dar Al-Arkan’s
Land Projects activities complement residential development and Dar Al-Arkan sells the majority of
the land area it develops to other real estate developers.
Land Projects contribution to total revenue remained at similar level between 2005 and 2008 from
76.03 per cent. to 82.35 per cent. (73 per cent. in both 2006 and 2007), as land revenues increased by
44.80 per cent. during the same period. The increase in Land Projects contribution to total revenue is
mainly due to the number of square meters sold which benefited from the real estate growth
experienced in 2008, especially in the first half of the year.
Looking forward, Dar Al-Arkan remains focused on Land Projects activities as it considers further
large developments in prime suburban areas of Riyadh, Mecca, Medina, Jeddah and the eastern
province. Dar Al-Arkan is resorting to a “mixed use” approach whereby a land parcel is acquired in
order to build residential units on part of it and to develop the rest with a view to sell it on to other real
estate developers. In this way, Dar Al-Arkan maintains a land bank which will permit it to enjoy
greater flexibility in managing its Residential Project operations whilst benefiting from the upside that
the Land Projects have to offer. In this regard, Dar Al-Arkan is aiming to achieve a revenue mix
(Residential Projects/Land Projects) of 50:50 by 2010. This mix will optimize Dar Al-Arkan’s
earnings and will allow for a higher degree of synergy between Residential Projects and Land Projects
activities. The targeted split is also influenced by the profitability of each segment (please refer to the
next section).
93
9.2
Gross Margin
The following chart shows development of the gross margin compared with revenues and cost of sale
over the period shown:
Financial Performance - Total
SAR '000
60.00%
6,000,000
48.77%
48.36%
5,000,000
48.88%
50.71%
50.00%
4,000,000
40.00%
3,000,000
30.00%
2,000,000
20.00%
1,000,000
10.00%
0.00%
0
2005
Revenue
2006
2007
Cost of Sales
2008
Gross Margin as % of revenue
During the period 2006 -2008, the total cost of sales increased at a similar rate as revenue, leaving the
gross margins almost unchanged at just over 48 per cent. as compared with 50 per cent. for 2008.
Summary of Main Cost Items
The following table shows development of the cost of sale over the period shown:
SAR ‘ 000
Cost of Sales
Residential Project Costs...........................................................
Land Project Costs ....................................................................
2005
2006
2007
2008
535,585
1,631,589
2,167,174
601,981
1,627,895
2,229,876
697,477
1,820,448
2,517,925
566,929
2,198,658
2,765,587
Costs of sales increased by 2.89 per cent., 12.92 per cent. and 9.84 per cent. in years 2006, 2007 and
2008 respectively. This increase in cost of sale was in line with a similar growth in revenue, leaving
gross margins unchanged. In 2007 and 2008, the increase in cost of sales was driven mainly by
higher costs related to residential projects that stood at SAR 697 million (US$186 million) and
SAR 567 million (US$151 million) respectively. During the same period the costs related to land
development projects increased to SAR 1.82 billion (US$485 million) in 2007 and SAR 2.20 billion
(US$587 million) in 2008, which is equivalent to 12 per cent. and 21 per cent. respectively. The
increase in cost of sales was due to the larger scale of residential and land development projects
undertaken by Dar Al-Arkan.
Residential Projects Gross Margin
The following table shows cost of sale with regard to residential projects for the period indicated:
Period
2005 ..........................................................................................
2006 ..........................................................................................
2007 ..........................................................................................
2008 ..........................................................................................
SAR millions
Cost
535.58
601.98
697.48
566.93
# of units
1,246
1,320
1,220
1,101
Area/Unit
(sq.m.)
387.000
391.000
335.246
269.356
SAR/sq.m.
1,110
1,167
1,705
1,912
The weighted average cost of sales per square meter increased from SAR 1,110 (US$296) in 2004 to
SAR 1,908 (US$509) in 2008, on the other hand constructed and sold area per unit decreased from
387 square meters to 270 square meters in 2008. This increase in cost of sales per square meter was
94
due to an increase in the cost of construction material. As Dar Al-Arkan’s projects become larger in
size and as their quality is upgraded, a larger proportion of the overall development cost is spent on
the construction component. However, it is worth noting that the increased efficiency of Dar
Al-Arkan’s operations helped maintain the absolute increase in construction costs at a minimal level
keeping gross margins constant.
Land Projects Gross Margin
The following table shows cost of sale with regard to land projects for the period indicated:
Period
2005 ..........................................................................................................................
2006 ..........................................................................................................................
2007 ..........................................................................................................................
2008 ..........................................................................................................................
sq.m. Area
3,417,547
4,226,123
4,302,372
7,488,643
SAR millions
1,632
1,628
1,820
2,199
SAR/sq.m.
total
477
384
423
294
During 2006 the cost of sales remained unchanged at SAR 1,628 million even as the total land area
developed increased from 3.4 million square meters to 4.2 million square meters, an increase of
approximately 24 per cent. As mentioned above, this is primarily due to lower cost of land purchased
as Dar Al-Arkan has shifted its focus towards development of land on the outskirts of main city areas.
Cost of sales in land projects in 2007 increased by 11.86 per cent. to reach SAR 1,820 million
(US$485 million) whilst the total area sold remained at the 2006 levels. The change is due to an
increase in price per square meter as a result of different geographical locations.
In 2008, cost of sales in land projects reached SAR 2,199 million (US$586 million), whilst the
average cost per square meter decrease by 31.7 per cent. to reach SAR 289 (US$77). The current
year’s decrease per square meter is reflective of the geographical location of the land.
On average the gross margin on a project by project basis remained largely uniform over the last three
years. The variances in gross margin across projects and regions are mainly impacted by the location
(proximity to urban areas) and the level of development activities and infrastructure added to the land.
Overall, the interplay between a decreasing cost of land and an increasing development cost coupled
with Dar Al-Arkan’s ability to transfer the overall increase to customers has largely lead to stabilising
the gross margin of the land segment.
95
Other Costs
The following chart shows Dar Al-Arkan’s operating costs breakdown for the period from 2005 to
2008:
Cost Analysis
SAR '000
1,221
100%
12,591
90%
13,310
80%
70%
60%
43,769
121,514
96,957
24,888
50%
40%
30%
20%
23,602
10%
39,086
15,658
52,675
15,206
0%
2005
Sales & Marketing expenses
2006
2007
General & Administrative expenses
2008
Participation Costs
Sales and Marketing Expenses
Sales and marketing expenses consist of the sales and marketing department’s staff salaries and other
benefits in addition to advertising and promotional activities. As a percentage of total revenue, sales
and marketing expenses were constant in 2005 and 2006 at 0.36 per cent. but increased to 0.79
per cent. and 0.94 per cent. in the years 2007 and 2008 respectively due to the launch of major
marketing campaign for Al-Qasr and Shams ArRiyadh projects during the same period. Salaries and
wages have seen similar increase due to the steady increase in staff where the salaries and wages as a
percentage of revenue increased from 0.08 per cent. in 2005 to 0.19 per cent. in 2008.
96
The following chart shows Dar Al-Arkan’s selling and marketing expenses breakdown for the period
from 2005 to 2008:
Cost Analysis - Sales & Marketing
SAR '000
100%
132
194
1,786
4,340
90%
80%
70%
7,055
7,550
20,403
26,619
60%
50%
40%
30%
1,641
1,510
354
2,240
2,628
2,563
9,307
10,878
20%
10%
3,451
4,141
2005
2006
5,350
10,484
0%
2007
2008
Others
Marketing & Advertising
Incentives, Bonuses & Professional Fee
Exhibitions & seminars
Salaries & Wages & related cost
General and Administrative Expenses
General and Administrative expenses (G&A) consist primarily of staff costs and related staff
expenses (housing allowance and rentals, travel and transportation, vacation and air tickets and bonus
and incentives) in addition to other fixed head office expenditure. For the year 2007 the G&A related
expenses increased to SAR 43.77 million (US$11.7 million) due to the increased head count and the
increased level of activities. The G&A in 2008 has experienced a similar level of increase due to the
hiring of senior executives, a general increase in salaries and costs related to the implementation of
Dar Al-Arkan’s new strategy.
Participation Costs
These costs are mainly composed of the dividends paid to co-investors in certain projects undertaken
by Dar Al-Arkan. Dar Al-Arkan has traditionally invited a small number of selected investors known
to its executive management to participate in the land development by contributing to a specific
contribution set up to develop the site. Upon completion of the project, Dar Al-Arkan distributes
dividends to these investors based on the profitability of the project.
Participation costs varied among projects between 12 per cent. and 37 per cent. depending on the
project’s nature and the actual achieved profitability. Dar Al-Arkan does not accrue annually for the
expected costs on each project and participation expenses are recorded when paid upon project
completion.
The use of co-investors provides Dar Al-Arkan with an additional funding source without having to
dilute its balance sheet capital. In 2006, however, Dar Al-Arkan started to move away from this
source of funding towards other financing structures available through domestic and international
financial institutions. This shift has started to lead the financing costs to decrease significantly from
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SAR 121.51 million (US$32.4 million) in 2005 to SAR 13.31 million (US$3.5 million) in 2006 and
SAR 12.59 million (US$3.36 million) in 2007.
In 2008, it stood at SAR 1.22 million
(US$325 million).
9.3
Analysis of Cash Flows
The following table sets out Dar Al-Arkan’s cash flows for the financial periods of 2005, 2006, 2007
and 2008:
SAR ‘ 000
From / (used in) operating activities ........................................
From / (used in) investing activities.........................................
From / (used in) financing activities ........................................
Increase / (decrease) in cash.....................................................
Cash at beginning of period .....................................................
Cash at end of period................................................................
2005
Audited
(2,743,725)
45,217
3,158,591
460,083
65,537
525,619
2006
Audited
821,784
42,218
(1,205,976)
(341,974)
525,619
183,645
2007
Audited
9,649,908
(10,852,664)
4,365,976
3,163,220
183,645
3,346,865
2008
Unaudited
2,766,161
(4,970,594)
(425,957)
(2,630,390)
3,346,865
716,475
Cash and cash equivalents of Dar Al-Arkan, as of 31 December 2008 stood at SAR 716 million
(US$190.93 million) as compared to SAR 3,346.87 million (US$892 million) as of 31 December
2007. This decrease was primarily driven by cash investments in projects under construction and real
estate assets, as well as the declaration and payment of the 2007 dividend partially offset by the new
Murabaha facilities amounting to SAR 1,235 million (US$329.33 million).
Net cash flow generated from operations stood at SAR 9,649.91 million (US$2.57 billion) in 2007
compared to SAR 821.78 million (US$219.14 million) for the 12 month period ended December
2006. The positive variance in 2007 was driven by a change in presentation of projects, whereby Dar
Al-Arkan reclassified its projects to long-term assets in order to better reflect the duration of these
projects. In 2008, cash generated by operating activities was SAR 2,766 million (US$738 million) as
Dar Al-Arkan continued to develop its projects.
Starting in 2006 Dar Al-Arkan has diversified its funding sources by raising funds through domestic
banks as well as international capital markets. This has led to Dar Al-Arkan generating a positive
cash flow of about SAR 6,000 million (US$1,600 million) from financing activities during 2007. The
positive cash flow from financing activities has provided for the cash used in operation as well as in
investing activities. Dar Al-Arkan paid dividends of SAR 1,620 million (US$432 million) in 2006,
2007 and 2008 relating to the year 2005, 2006 and 2007 respectively.
Dar Al-Arkan’s heavy investments in both project in progress and other investments has lead to an
overall use of cash in investing activities of SAR 10,853 million (US$2,894 million) in 2007, these
high use of cash in investing activities reflect the reclassification of projects to long-term assets and
are in line with the managements long-term plans to further expand in the Saudi market. In 2008 cash
flow used in investing activities was SAR 4,971 million (US$1,326 million) which will generate
higher cash flows from operations in the coming years.
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9.4
Ratio Analysis
The following chart shows return on assets, return on equity and return on capital for the periods
indicated:
Ratio Analysis
50.00%
45.00%
40.00%
37.20%
33.59%
32.88%
35.00%
32.73%
30.00%
25.00%
20.00%
16.40% 17.04%
18.26%
17.09%
20.08%
15.53%
15.00%
11.69%
10.93%
10.00%
5.00%
0.00%
2005
Return on Assets
2006
2007
Return on Equity
2008
Return on Capital
Profitability ratios for Dar Al-Arkan have shown a strong and stable performance over the last three
years driven by a well capitalized balance sheet which has led to a strong financial performance and
the realization of operation efficiencies.
The return on assets set out in the above chart weakened slightly in 2007 and 2008 due to the massive
increase in the assets base resulting from larger investments in projects which should lead to higher
profitability in the coming years. The reduction in the return on capital ratio in 2008 is directly
related to the 180 million bonus shares of par value of SR 10 each issued during the year.
Overall profitability is in a very healthy stage and moving forward into more stable profitability
growth rates.
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9.5
Balance Sheet Analysis
The following is the consolidated balance sheet of Dar Al-Arkan as at 31 December 2006,
31 December 2007 and 2008:
2006
2007
SAR millions
2008
184
481
7,936
2,531
215
77
2
11,426
3,347
484
2,132
551
1,382
7
3
7,906
716
949
1,148
121
1,737
57
4,728
88
166
2
256
11,682
1,537
75
6,348
2,234
161
113
10,468
18,374
4,318
1,120
6,773
2,978
120
127
15,436
20,164
414
45
608
1
1,067
400
108
862
1,370
1,635
171
614
2,420
Total non – current liabilities................................................................................
3
3
6,000
4
6,004
6,000
8
6,008
Shareholders’ Equity
Capital..................................................................................................................
Statutory reserve ..................................................................................................
Retained earnings ................................................................................................
Total Shareholders’ Equity ...................................................................................
Total Liabilities and Shareholders’ Equity .........................................................
5,400
3,242
1,969
10,611
11,681
5,400
3,242
2,358
11,000
18,374
7,200
3,600
936
11,736
20,164
Assets
Current Assets
Cash and cash equivalents...................................................................................
Accounts receivable, net......................................................................................
Projects under construction .................................................................................
Developed lands ..................................................................................................
Prepaid expenses and others................................................................................
Short term investments ........................................................................................
Due from Related Parties ....................................................................................
Total current assets ................................................................................................
Non-Current Assets
Investments in land and properties......................................................................
Investments in capital of other companies ..........................................................
Projects under construction .................................................................................
Developed lands ..................................................................................................
Fixed assets, net...................................................................................................
Deferred charges, net...........................................................................................
Total non-current assets ........................................................................................
Total Assets .............................................................................................................
Liabilities and Shareholders’ Equity
Current Liabilities
Murabaha Financing............................................................................................
Accounts payable.................................................................................................
Accrued expenses and others ..............................................................................
Due to Related Parties .........................................................................................
Total current liabilities ..........................................................................................
Non-Current Liabilities
Islamic Sukuk ......................................................................................................
Provision for end-of-service benefits ..................................................................
As of 31 December 2008, Dar Al-Arkan’s asset base stood at SAR 20.16 billion (US$5.38 billion),
which slightly increased when compared to 31 December 2007.
Current Assets
Cash and Cash Equivalents
Cash and cash equivalents stood at SAR 716 million (US$190.93 million) as of 31 December 2008
compared to SAR 3,347 million (US$893 million) as of 31 December 2007. This decrease was
primarily driven by cash investments in projects under construction and real estate assets, as well as
the declaration and payment of the 2007 dividend partially offset by the new Murabaha facilities
amounting to SAR 1,235 million (US$329.33 million). The 2007 balance represents an increase of
SAR 3,163 million (US$843.5 million) when compared to 31 December 2006 balance of
SAR 184 million (US$49 million), due to the successful completion of two Sukuk transactions
amounting to SAR 6,000 million (US$1,600 million), which was partially offset by the significant
investment in projects under constructions.
100
Accounts Receivables
Net account receivables (primarily representing trade receivables) reached SAR 949 million
(US$253.01 million) as of 31 December 2008. This is due to the timing of land sales for which Dar
Al-Arkan may allow reputable customers to pay over a 2 to 3 month period. Dar Al-Arkan does not
provide credit to residential customers.
Projects under construction (Short-term)
Projects under construction stood at SAR 7.94 billion (US$2.12 billion) in 2006, SAR 2.13 billion
(US$568 million) in 2007 and SAR 1.15 billion (US$306.67 million) in 2008. Short term projects in
progress represent payments incurred on projects executed by Dar Al-Arkan for the purpose of
reselling in the short term.
Dar Al-Arkan values all of its projects and developed land at cost.
Non-Current Assets
Projects under construction (Long-term)
Projects under construction stood at SAR 6.35 billion (US$1.69 billion) in 2007 and SAR 6.77 billion
(US$1.81 billion) in 2008. Long term projects in progress represent residential projects and lands
owned by Dar Al-Arkan which will be transferred to short term projects in progress upon their
completion.
Investments in Land and Properties
It represents Dar Al-Arkan’s investments in lands and properties. Investment in lands represents
co-ownership in lands with third parties according to authenticated contracts for long term earning
upon sale or investment.
Developed Lands (Long-term)
It represents the value of the lands owned by Dar Al-Arkan which have been developed for the
purpose of projects construction.
Investments in Associates
Dar Al-Arkan invested in certain entities that are complimentary to its business and, as of
31 December 2008, stood at SAR 1,120 million (US$298.67 million). Dar Al-Arkan’s ownership in
these companies ranges from 15 per cent. to 33.34 per cent.
Liabilities and Shareholders’ Equity
Liabilities
As of 31 December 2008, Dar Al-Arkan’s total liabilities stood at SAR 8,428 million
(US$2,247 million), an increase of SAR 1,054 million (US$281 million) compared to 31 December
2007, primarily due to the SAR 1,235 million (US$329 million) additional murabahas raised in 2008.
The use of leverage by Dar Al-Arkan is still modest compared to its operations volume. Dar
Al-Arkan has typically financed some of its projects by soliciting funds from a select group of
investors and sharing the returns generated thereof. The decline in projects’ shareholders is reflective
of Dar Al-Arkan gradually moving towards tapping other optimal sources of debt through financial
institutions and other debt capital market players.
Accounts payable, comprising mainly of payables to contractors, have increased from SAR 45 million
(US$12 million) at fiscal year end 2006 to SAR 171 million (US$45.6 million) as of 31 December
2008. The increase is reflective of Dar Al-Arkan’s growth and level of activities.
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Shareholders’ Equity
Dar Al-Arkan’s issued capital as of 31 December 2008 stood at SAR 7.2 billion (US$1.92 billion)
divided into 720 million shares of par value of SAR 10 each (US$2.67). Dar Al-Arkan increased its
capital base significantly in 2008 by issuing 180 million bonus shares of par value of SR 10 each to its
current shareholders. This non cash issuance was financed through retained earnings.
Dar Al-Arkan’s increase in its capital base since 2003 allowed Dar Al-Arkan to increase the scale its
operations and undertake larger residential and land development projects.
The additional paid up capital resulting due to share premium was allocated to the statutory reserve.
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10.
TAXATION AND ZAKAT
The following is a general description of certain Saudi Arabian zakat/tax considerations relating to
the Sukuk. It does not purport to be a complete analysis of all zakat/tax considerations relating to the
Sukuk nor does it address the considerations that are dependent on individual circumstances.
Prospective purchasers of Sukuk should consult their own tax advisers to determine the zakat/tax
consequences for them of acquiring, holding and disposing of any Sukuk and receiving distributions,
payments of principal, profit and/or other amounts under the Sukuk and the consequences of such
actions under the zakat/tax regulations of the Kingdom of Saudi Arabia. This summary is based upon
the regulations in effect in the Kingdom of Saudi Arabia at the date of this Offering Circular and is
subject to any change in such regulations that may take effect after such date.
10.1
GCC Sukukholders resident in the Kingdom of Saudi Arabia
Sukukholders who are GCC nationals with permanent residence in the Kingdom of Saudi Arabia
(except for (a) a citizen of a GCC country other than the Kingdom of Saudi Arabia with a permanent
establishment in the Kingdom of Saudi Arabia and (b) a legal entity established under the law of a
GCC country other than the Kingdom of Saudi Arabia with a permanent establishment in the
Kingdom of Saudi Arabia) are not subject to Saudi Arabian corporate income tax, whether by
withholding or direct assessment, in respect of any payment or gain realized in respect of the Sukuk.
However, such a Sukukholder will be subject to zakat. This summary does not consider the extent to
which a potential Sukukholder would be liable to zakat as a consequence of acquiring, holding or
disposing of its Sukuk.
“GCC person” means (a) a citizen of any of the GCC Countries (namely, the Kingdom of Saudi
Arabia, the United Arab Emirates, the Kingdom of Bahrain, the Sultanate of Oman, the State of Qatar
and the State of Kuwait) and (b) any legal entity owned by GCC citizens and established under the
laws of a GCC country.
10.2
Non-GCC persons resident in the Kingdom of Saudi Arabia
Sukukholders who are non-GCC persons resident in the Kingdom of Saudi Arabia, as defined in
Article 3 of the Income Tax Regulation issued under Royal Decree No. M/1 dated 15/01/1425H (the
“Income Tax Regulation”), will be subject to Saudi Arabian tax.
Article 3 of the Income Tax Regulation defines Residency as follows:
(A)
A natural person is considered a resident in the Kingdom for a taxable year if he meets either
of the two following conditions:
(1)
He has a permanent place of residence in the Kingdom and resides in the Kingdom
for a total of not less than thirty (30) days in the taxable year; or
(2)
He resides in the Kingdom for a period of not less than one hundred eighty
three (183) days in the taxable year.
For the purposes of this paragraph, residence in the Kingdom for part of a day is considered
residence for the whole day, except in the case of a person in transit between two points
outside the Kingdom.
(B)
A company is considered resident in the Kingdom during the taxable year if it meets either of
the following conditions:
(1)
It is formed in accordance with the Companies Law; or
(2)
Its central management is located in the Kingdom.
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10.3
Sukukholders who are not resident in the Kingdom of Saudi Arabia
Sukukholders who are not residents in the Kingdom of Saudi Arabia (whether such Sukukholders are
Saudi Arabian nationals or not Saudi Arabian nationals including Sukukholders resident in GCC) will
be subject to withholding tax at the rate of 5 per cent. on all payments in the nature of profit in respect
of the Sukuk.
Sukukholders who are non-residents with a permanent establishment in the Kingdom of Saudi Arabia
(“PE”) (as defined in Article 4 of the Income Tax Regulation), will be subject to Saudi Arabian tax
and may, pursuant to Article 5 of the Income Tax Regulation, also be subject to a withholding tax at
the rate of 5 per cent. on all payments in the nature of profit in respect of the Sukuk.
A non-resident carrying out an activity in the Kingdom of Saudi Arabia through a licensed branch (as
defined in Article 4(b)4 of the Income Tax Regulation) is considered to have a PE in the Kingdom of
Saudi Arabia.
All payments in the nature of profit in respect of the Sukuk to a Sukukholder who has a PE in the
Kingdom of Saudi Arabia, will be part of the Sukukholder’s gross income that is subject to income
tax after deduction of allowable costs and certain other adjustments, at the current rate of 20% further
more transfer of profit to the head office is considered distribution of profit and is subject to 5%
withholding tax.
A Sukukolder, whether such Sukukholder is resident in the Kingdom of Saudi Arabia (as defined in
Article 3 of the Income Tax Regulation) or non-resident in the Kingdom Saudi Arabia (as defined in
Article 1(2)(b) of the Bylaws to the Income Tax Regulation and whether such a Sukukholder has or
does not have a PE in the Kingdom of Saudi Arabia, will be subject to capital gains tax at the rate of
20% on any gain realized on the disposal or repurchase of its Sukuk if such Sukuk were not traded in
accordance with the Capital Market Law of the Kingdom of Saudi Arabia and its implementing
regulations.
10.4
General
Sukukholders who are natural persons with or without a PE in the Kingdom of Saudi Arabia at the
time of their death will not be subject to inheritance or other taxes of a similar nature in the Kingdom
of Saudi Arabia.
Sukukholders will not be deemed to be resident, domiciled or carrying on business in the Kingdom of
Saudi Arabia solely by reason of holding any Sukuk.
Under the zakat regulations which are in effect as the date of this Offering Circular in the Kingdom of
Saudi Arabia, long-term investments in Sukuk are not deductible from the zakat base of the investor.
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11.
SUBSCRIPTION AND SALE
11.1
Application by Potential Investors
The investor presentation period for the Sukuk commences on 2/4/1430H (corresponding to
29/3/2009G) and ends on 08/07/1430H (corresponding to 01/07/2009G), unless notified otherwise by
the by the Issuer and the Joint Bookrunners and Joint Lead Managers to the potential investors (the
“Investor Presentation Period”). The Sukuk will be issued on a date (the “Closing Date”) falling
no later than 5 Business Days after the end of the Investor Presentation Period. During the Investor
Presentation Period, the Joint Bookrunners and Joint Lead Managers may solicit expressions of
interest from potential investors for acquiring the Sukuk, during which time the Issuer and the Joint
Bookrunners and Joint Lead Managers shall consult and agree on the aggregate Nominal Amount of
the Sukuk and the Margin.
Persons wishing to purchase the Sukuk will be required to submit a duly completed form (an
“Investor Application Form”) to the Joint Bookrunners and Joint Lead Managers before the end of
the Investor Presentation Period. Investor Application Forms will be available from the Joint
Bookrunners and Joint Lead Managers. Applications to purchase Sukuk for less than SAR 1,000,000
or in amounts which are not integral multiples of SAR 1,000,000 will not be accepted.
Allocation of Sukuk will be at the discretion of the Issuer and the Joint Bookrunners and Joint Lead
Managers and will be made following the end of the Investor Presentation Period. Once the allocation
of Sukuk has been completed, the Issuer will cause the Margin and the aggregate Nominal Amount,
together with the anticipated aggregate net proceeds, of the Sukuk, to be communicated to investors.
All potential investors must carefully read the Conditions prior to completing an application for the
purchase of the Sukuk since the execution of the Investor Application Form constitutes acceptance of,
and agreement to, the Conditions.
11.2
The Kingdom
Any investor in the Kingdom (a “Saudi Investor”) who acquires Sukuk pursuant to the offering
should note that the offer of Sukuk is a private placement by way of an “offer restricted to
sophisticated investors” pursuant to Article 10 of the “Offer of Securities Regulations” as issued by
the Board of the Capital Market Authority resolution number 2-11-2004 dated 20/08/1424H
(corresponding to 04/10/2004G), as amended (the “Offers of Securities Regulations”).
Accordingly, the Sukuk may be only offered to sophisticated investors, defined in the Offers of
Securities Regulations as including any of the following persons: (a) authorised persons (persons
authorized by the Capital Market Authority to carry on securities business in the Kingdom of Saudi
Arabia) acting for their own account; (b) clients of a person authorised by the Capital Market
Authority to conduct managing activities provided that the private placement offer of the Sukuk to
them is made through the authorised person, all relevant communications are made through the
authorised person and the authorised person has been engaged as an investment manager on terms
which enable it to make decisions concerning the acceptance of private placement offers of the Sukuk
on the client’s behalf without reference to the client; (c) the government of the Kingdom of Saudi
Arabia, any supranational authority recognised by the Capital Market Authority, the Saudi Stock
Exchange and any other stock exchange recognised by the Capital Market Authority or the Depositary
Centre; (d) institutions (meaning: (i) any company which owns, or which is a member of a group
which owns, net assets of not less than 50 million Saudi Riyals; (ii) any unincorporated body,
partnership or other organization which has net assets of not less than 50 million Saudi Riyals; or (iii)
any person (“A”) whilst acting in the capacity of director, officer or employee of a person (“B”)
falling within sub-paragraphs (i) or (ii) above where A is responsible for B undertaking any securities
activity) acting for their own account; (e) professional investors (meaning any natural person who
fulfils at least two of the following criteria: (i) he has carried out at least 10 transactions per quarter
over the previous four quarters of a minimum total amount of Saudi Riyals 40 million on securities
markets; (ii) the size of his securities portfolio exceeds Saudi Riyals 10 million; or (iii) he works or
105
has worked for one or more year in the financial sector in a professional position which requires
knowledge of securities investment); or (f) any other person prescribed by the Capital Market
Authority. By accepting this document and other information relating to the offering of the Sukuk,
each recipient represents that he is a “sophisticated investor” for the purpose of the Offers of
Securities Regulations.
The offer of the Sukuk is therefore exempt from the public offer requirements of the Offers of
Securities Regulations, but the Sukuk will be subject to the following restrictions on secondary market
activity pursuant to Article 17 of the Offers of Securities Regulations:
(a)
A Saudi Investor (the “transferor”) who has acquired the Sukuk pursuant to the limited offer
may not offer or sell the Sukuk to any person (referred to as a “transferee”) unless the offer
or sale is made through an authorised person and where: (i) the price to be paid by the
transferee for such Sukuk equals or exceeds SAR 1 million; (ii) the securities are offered to a
sophisticated investor; or (iii) the securities are being offered or sold in such other
circumstances as the Capital Market Authority may prescribe for these purposes.
(b)
If the provisions of paragraph (a)(i) above cannot be fulfilled because the price of the Sukuk
being offered or sold to the transferee has declined since the date of the original private
placement, the transferor may offer or sell the Sukuk to the transferee if their purchase price
during the period of the original private placement was equal to or exceeded SAR 1 million.
(c)
If the provisions of paragraph (b) above cannot be fulfilled, the transferor may offer or sell
Sukuk if he sells his entire holding of Sukuk to one transferee.
(d)
The provisions of paragraphs (a), (b) and (c) above shall apply to all subsequent transferees of
the Sukuk.
In addition, the Sukuk will not be tradable for so long as less than 51 per cent. of the Sukuk Assets (by
value) are constituted by Ijara contracts in the form referred to in the Investment Plan.
This Offering Circular may not be distributed in the Kingdom except to such persons as are permitted
under the Offers of Securities Regulations.
The Capital Market Authority does not make any representation as to the accuracy or completeness of
this Offering Circular, and expressly disclaims any liability whatsoever for any loss arising from, or
incurred in reliance upon, any part of this Offering Circular. Prospective purchasers of the securities
offered hereby should conduct their own due diligence on the accuracy of the information relating to
the securities. If you do not understand the contents of this Offering Circular you should consult an
authorised financial adviser.
11.3
General
Other than the notification of the Capital Market Authority in connection with the offering of the
Sukuk by way of limited offer, no action has been or will be taken in any jurisdiction by the Issuer or
the Joint Bookrunners and Joint Lead Managers that would, or is intended to, permit an offering of the
Sukuk, or possession or distribution of this Offering Circular or any other offering material thereto,
where action for that purpose is required. Persons into whose hands this Offering Circular comes are
required by the Issuer and the Joint Bookrunners and Joint Lead Managers to comply with all
applicable laws and regulations in relation to the purchase, offer, sale or delivery of the Sukuk, in all
cases at their own expense.
11.4
Transfers and Payments
The Sukuk will not be admitted to any trading system or platform and trading of the Sukuk will need
to be conducted through over-the-counter transactions. However, the Issuer may in the future apply
for the Sukuk to be admitted to one or more trading systems or platforms in the Kingdom when and if
such systems and platforms for the trading of debt securities are established.
106
The Registrar will maintain the Register in respect of the Sukuk in accordance with the provisions of
the Registry Agreement. Investors must either maintain an account directly with the Registrar or
through a custodian or other intermediary in order to hold the Sukuk. All the transfers shall be
effected as per Condition 3 (Register, Title and Transfers).
In addition, pursuant to Condition 10 (Payments), all payments under the Sukuk will be made to Saudi
Arabian Riyal-denominated accounts in the Kingdom as notified from time to time to the Registrar
and the Payment Administrator. Accordingly, investors will need to make appropriate arrangements
to receive payments under the Sukuk in such an account. Investors are required to consult with their
own advisers as to the requirements of setting up the accounts referred to above and must take any
necessary action in respect of opening such account themselves. Neither the Issuer nor the Joint
Bookrunners and Joint Lead Managers shall have any responsibility for ensuring that investors
comply with the correct process, regulations and requirements in relation to opening such accounts in
order to hold Sukuk and receive payments and none of them accept any liability for any loss arising
directly or indirectly as a consequence of any action or inaction in respect of setting up such accounts.
107
12.
GENERAL INFORMATION
12.1
Full Name and Address of Dar Al-Arkan
Full name of Dar Al-Arkan is Dar Al-Arkan Real Estate Development Company, a Saudi joint stock
company.
The Dar Al-Arkan’s legal address is Maathar Street, P.O. Box 105633, Riyadh 11656, Kingdom of
Saudi Arabia.
12.2
Incorporation
Dar Al-Arkan was converted from partnership limited by shares to a joint stock company by virtue of
the ministerial decision No. 1021 dated 10/6/1426H (17/7/2005 G). Its commercial registration
number is 1010160195. Dar Al Arkan’s shares are listed on Tadawul (symbol: 4300).
12.3
Share Capital
As of the date of this Offering Circular, Dar Al-Arkan has an authorised share capital of
SAR 7.2 billion represented by 720 million shares of equal value of authorised ordinary shares, with a
nominal value of SAR 10 each. All ordinary shares are paid-up in full and there are no classes of
shares other than the ordinary shares.
12.4
Authorisation of Sukuk
The issue of the Sukuk and the entry into the Sukuk Documents to which it is a party has been duly
authorised by a resolution of the board of directors of Dar Al-Arkan on 13 October 2008.
Dar Al-Arkan has obtained all necessary consents, approvals and authorisations in connection with
the issuance of the Sukuk and entry into of the Sukuk Documents to which it is a party.
12.5
No Material Adverse Change in Financial Position
Except as disclosed in this Offering Circular, since 31 December 2008 (the last day of the financial
period in respect of which the most recent audited consolidated financial statements of Dar Al-Arkan
have been prepared) there has been no significant change in the financial condition of Dar Al-Arkan
and no material adverse change in the trading position of Dar Al-Arkan.
12.6
No Material Litigation
Dar Al-Arkan is not involved in any litigation, arbitration or administrative proceedings (and to its
knowledge, no proceedings against it are pending or threatened) which may have, or have had in the
twelve months preceding the date of this Offering Circular, a material adverse effect on its financial
position.
12.7
Documents Available for Inspection
For so long as any of the Sukuk are current, copies of the following documents are available for
inspection at Dar Al-Arkan’s head office at Maathar Street, P.O. Box 105633, Riyadh 11656, the
Kingdom between the hours of 9.00 a.m. and 5.00 p.m. on each weekday other than a Thursday,
Friday or public holiday:
●
Dar Al-Arkan’s By-Laws;
●
Dar Al-Arkan’s Commercial Registration No. 1010160195;
●
the audited financial statements for the years ended 31 December 2005, 2006, 2007 and 2008; and
●
the Sukuk Documents.
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12.8
Abstract from the Articles of Association of Dar Al-Akran
Objectives of Dar Al-Arkan
The objects of Dar Al-Arkan are as follows:
●
real estate investment;
●
purchase of land, erection of buildings thereon and investment in such buildings by sale or
lease for Dar Al-Arkan’s benefit;
●
purchase and ownership of land and real estate for Dar Al-Arkan’s account;
●
general contracting for residential and commercial buildings (construction, repair, demolition
and maintenance); and
●
whole and retail trade in sanitary wares, plumbing, electrical, paints and construction
materials, stationeries and installment and cash sale of cars.
Head office of Dar Al-Arkan
Dar Al-Arkan’s head office is in Riyadh.
Term of Dar Al-Arkan
The term of Dar Al-Arkan shall be 99 calendar years, effective as of the date of issue of ministerial
resolution No. 1021 dated 10/6/1426H (17/7/2005G) declaring the conversion of Dar Al-Arkan. The
term of Dar Al-Arkan may be extended by a resolution of the extraordinary general assembly adopted
at least one year prior to the expiry of its term.
Authorized Capital
The share capital of Dar Al-Arkan is 7,200 million Saudi Arabian Riyals divided into 720 million
shares of equal value of 10 Saudi Arabian Riyals each, all of which are cash shares.
Paid Up Share Capital
The shareholders of Dar Al-Arkan have subscribed to all of the 720 million shares of Dar Al-Arkan
and paid their value representing 7,200 million Saudi Arabian Riyals in full.
Non payment of Share Value
Should a shareholder fail to pay the share value when it becomes due, the board of directors may,
after giving him notice by registered mail sent to his address stated in Dar Al-Arkan's shareholder
register, sell such share in a public auction. Nevertheless, the defaulting shareholder may, at any time
up to the day fixed for the public auction, pay up the amount due by him in addition to reimbursing
any associated expenses incurred by Dar Al-Arkan. Consequently, Dar Al-Arkan shall recover from
the proceeds of the sale such amounts as are due to it, and shall refund the balance to the shareholder.
In the event that the proceeds of sale fall short of the amounts due, Dar Al-Arkan shall have recourse
against the assets of the shareholder for the unpaid balance and shall cancel the sold share and issue
the purchaser with a new share bearing the serial number of the cancelled share, and make an entry to
this effect in Dar Al-Arkan's shareholder register.
Transfer of Shares
Shares are tradable after the issuance of their certificates. As an exception to the foregoing, any shares
for in-kind contributions as well as founders’ cash shares shall not be negotiable before the
publication of the balance sheet and the profit and loss statement for two complete financial years,
each consisting of at least twelve months, as of the date of the Minister of Commerce and Industry’s
resolution No. 7248 dated 19/7/1425H licensing the conversion of Dar Al-Arkan from a limited
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liability company to a partnership limited by shares or the approval of the Capital Market Authority.
The above provision shall also apply to such shares as the founders may subscribe for in case of
increase of capital before the expiry of the period of suspension until the end of such period. An
annotation shall placed on the share certificates indicating their type, date of conversion and the
trading prohibition period. Nevertheless, during the period of suspension, title to shares issued for
cash may, in accordance with the legal provisions for the sale of rights, be transferred from one
founder to another, or to a director who will submit them as qualification shares, or from the heirs of a
deceased founder to a third party. Shareholders who subscribed to the increase of Dar Al-Arakan’s
capital from 140 million Saudi Arabian Riyals to 5,4 billion Saudi Arabian Riyals according to the
extraordinary general assembly’s resolution, shall not be considered as founders and subsequently
shall not be subject to the above mentioned prohibition period.
Shareholders Register
The nominal shares shall be transferred by being recorded in the shareholders register which shall
contain the names of the shareholders, their nationalities, their occupations, their domicile and
address, the serial numbers of the shares and the value paid-up on such shares. An annotation of such
recording shall be made on the share certificates. The transfer of title to a share shall not be effective
vis-à-vis Dar Al-Arkan or any third party except from the date of such recording in the said register or
the completion of the transfer procedures through the Shares Information Computerized system. The
subscription or ownership of the shares by a shareholder shall mean the acceptance by the shareholder
of the By-Laws and his submission to the resolutions duly passed by the general assembly in
accordance with the By-Laws, whether the shareholder was present or absent and whether the
shareholder agreed to such resolutions or objected to them.
Increase of Capital
Once it is ascertained to be economically feasible and after obtaining the approval of the competent
authorities, the general assembly may, in an extraordinary meeting, adopt a resolution to increase Dar
Al-Arkan’s capital once or several times by issuing new shares having the same nominal value as the
original shares, provided that the original capital shall have been paid in full, with due consideration
to the requirements of the Companies Regulations. The said resolution shall specify the mode of
increasing the capital, and the shareholders shall have preemptive rights to subscribe for the new cash
shares. The shareholders shall be notified of the preemptive rights vested in them by notice to be
published in a daily newspaper addressing the capital increase resolution and the conditions of
subscription. Each shareholder shall express the desire to exercise such preemptive rights, if they so
wish, within fifteen (15) days of the publication of such notice.
The said shares shall be allotted to the original shareholders who have expressed their desire to
subscribe thereto, in proportion to the original shares owned by them, provided that the number of
shares allotted to them shall not exceed the number of new shares they have applied for. The
remaining new shares shall be allotted to the original shareholders who have asked for more than their
proportionate share, in proportion to the original shares they own, provided that their total allotment
does not exceed the number of new shares they have asked for. Any remaining new shares shall be
offered for public subscription.
Decrease of Capital
Dar Al-Arkan may, based on certain justifiable causes, decrease its capital if it proves to be in excess
of Dar Al-Arkan’s needs or if Dar Al-Arkan sustains losses. This decision must be made through a
resolution adopted by the general assembly in an extraordinary meeting, and requires approval of the
Minister of Commerce and Industry. Such resolution shall be issued only after reading the auditor’s
report on the reasons calling for such decrease, the obligations to be fulfilled by Dar Al-Arkan and the
effect of the decrease on such obligations, with due consideration to the provisions of the Companies
Regulations. The resolution shall provide for the manner in which the decrease shall be made. If the
decrease of the capital is due to it being in excess of Dar Al-Arkan’s needs, then Dar Al-Arkan’s
creditors must be invited to express their objection thereto within sixty (60) days from the date of
110
publication of the reduction resolution in a daily newspaper published in the city where Dar
Al-Arkan’s head office is located. Should any creditor object and present to Dar Al-Arkan evidentiary
documents of such debt within the time limit set above, then Dar Al-Arkan shall pay such debt, if
already due, or present an adequate guarantee of payment if the debt is due on a later date.
Board of Directors
Dar Al-Arkan shall be managed by a board of directors composed of eleven (11) members to be
appointed by the ordinary general assembly for a term of three years. As an exception to the above,
the founders appointed the first board of directors for a five year term commencing from the date of
the ministerial resolution declaring the conversion of Dar Al-Arkan, as follows:
#
Name
Position
1.
Yousef Abdullah Al-Shalash
Chairman
2.
Hathloul Saleh Al-Hathloul
Member
3.
Khalid Abdullah Al-Shalash
Member
4.
Abdulaziz Abdullah Al-Shalash
Member
5.
Tareq Mohammad Aljarallah
Member
6.
Abdulkarim Hamad Albabteen
Member
7.
Majed Romee Alromee
Member
8.
Majed Abdulrahman Alkasem
Member
9.
Abdullatif Abdullah Al-Shalash
Member
10.
Majed Bader Hashim Al-Rafa’i
Member
11.
Ahmed Abdullah Yousef Boudi
Member
Qualification Shares
Each member of the board of directors shall be a holder of a number of Dar Al-Arkan’s shares having
a nominal value of no less than 10,000 Saudi Arabian Riyals. Such shares shall be deposited in a bank
designated by the Minister of Commerce and Industry within thirty (30) days from the date of the
appointment of the director. Such shares shall be kept aside to guarantee the liability of the board
members and shall remain non-negotiable until the expiry of the period specified for hearing the
liability action provided for under Article 76 of the Companies Regulations or until a judgment is
passed on the said action. Should a member of the board of directors fail to submit such qualification
shares within the period specified therefor, his membership in the board shall be deemed null and
void.
Expiry of Membership
Membership of the board of directors shall be terminated upon the expiration of the appointment term
or the expiry of a board member’s ability to occupy such position. If the position of a board member
becomes vacant, the board may appoint a member in the vacant position temporarily, provided that
such appointment is put forward before the first meeting of the ordinary general assembly for
endorsement. The term of office of the new member designated to fill a vacancy shall only extend to
the term of office of his predecessor. In case the number of the members of the board of directors falls
below the quorum required for the proper convening of the board meetings, the general assembly shall
be called for an ordinary meeting as soon as possible in order to appoint the necessary number of
Board members.
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Powers of Board of Directors
Without prejudice to the powers conferred on the general assembly, the board of directors shall be
vested with the broadest powers to manage the business of Dar Al-Arkan and to supervise its affairs
within and outside the Kingdom of Saudi Arabia. The board shall, as an example, have the authority
to represent Dar Al-Arkan in its dealings with third parties, before Shari’ah courts, judicial agencies,
the Board of Grievances, labor offices, Labor Disputes Committees of all levels, commercial
documents committees, all other judicial and administrative tribunals of all degrees and titles, Boards
of Arbitration, Directorate of Civil Rights, Police Departments, Chambers of Commerce and Industry,
private entities and all companies and establishments; to participate in tenders, to collect entitlements
and settle obligations on behalf of Dar Al-Arkan, to raise, defend, plead, settle, acknowledge, arbitrate
and to accept and reject judgments on behalf of Dar Al-Arkan; to sign and execute all agreements,
certificates and instruments including articles of association of companies in which Dar Al-Arkan
shall participate, and to amend the same, and to sign contracts and deeds before public notaries and
other official bodies, to sign loan agreements regardless of their term, issue guarantees and mortgages;
to issue powers of attorney on behalf of Dar Al-Arkan; to sell, buy, make and accept transfers,
receive, deliver, rent, lease, collect and make payments; to open bank and credit accounts and to
withdraw and deposit from the same. The chairman and the managing director shall, jointly and
severally, have the authority to represent the board of directors in their performance of the duties
delegated to them. The board of directors may, within its authority, delegate one or more of its
directors or others with powers to exercise certain assignments. The board may prepare administrative
policies to organize the manner of operation in Dar Al-Arkan and its relations with others, setup
policies and procedures, form specialized committees and set their powers, authorities and manner of
operation.
Remunerations of the Board of Directors
Remuneration of the members of the board of directors shall consist of an annual amount of 200,000
Saudi Arabian Riyals for each director, in addition to an attendance allowance in the amount of 3,000
Saudi Arabian Riyal per meeting.
Managing Director and Secretary
The board of directors shall appoint a chairman and a managing director from among its members. A
member may not occupy the positions of both chairman and managing director at the same time. The
board of directors shall appoint a secretary from among its members or others. The term of office of
the chairman and the managing director shall not exceed their respective term of service as directors.
The term of the chairman and the managing director may be renewed.
Board Meetings
The board of directors shall be convened periodically every three (3) months upon a call by the
chairman. The chairman shall call for a meeting if so requested by any three (3) board members.
Quorum of the Board Meeting
A board meeting shall be valid only if attended by at least five (5) of its members. In the event that a
member of the board of directors gives a proxy to another member to attend the board meetings on his
behalf, then such proxy shall be given in accordance with the following:
(a)
A member of the board of directors may not act on behalf of more than one board member for
the same meeting.
(b)
A proxy shall be made in writing.
(c)
A board member acting by proxy may not vote on resolutions on which his principal is
prohibited from voting under the law.
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Board resolutions shall be adopted with the approval of the majority vote of the members present in
person or represented by proxy. In case of a tie, the chairman of the board or the director presiding
over the board in the absence of the chairman shall have a casting vote.
Minutes of Board Meetings
Board deliberations and resolutions shall be drawn in minutes to be signed by the chairman and the
secretary. Such minutes shall be recorded in a special register to be signed by the chairman and the
secretary.
General Assembly
A duly convened general assembly shall be deemed representing all the shareholders, and shall be
held in Riyadh. Each shareholder owning twenty (20) shares (or more) shall have the right to attend
the general assembly. Each Shareholder may authorize in writing another shareholder, other than the
members of the board of directors, to attend the general assembly on his/its behalf.
Ordinary General Assembly
Except for matters reserved for the extraordinary general assembly, the ordinary general assembly
shall be in charge of all matters concerning Dar Al-Arkan. The ordinary general assembly shall be
convened at least once a year, within six (6) months following the end of Dar Al-Arkan's fiscal year.
Additional ordinary general assembly meetings may be convened whenever needed.
Extraordinary General Assembly
The extraordinary general assembly shall have the power to amend Dar Al-Arkan’s By-Laws, except
for such provisions as may be impermissible to be amended under the law. Furthermore, the
extraordinary general assembly may pass resolutions on matters falling within the competence of the
ordinary general assembly under the same conditions applicable to the latter.
Manner of Convening General Assemblies
The general assembly shall be convened by the board of directors. The board of directors shall
convene a meeting of the ordinary general assembly if requested to do so by the auditors or by a
number of shareholders representing at least five percent (5 per cent.) of Dar Al-Arkan’s capital. The
summons shall be published in the Official Gazette and in a daily newspaper circulated in the city
where Dar Al-Arkan's head office is located at least twenty-five (25) days prior to the time set for
such meeting. The summons shall include the agenda of the meeting. A Copy of the notice and the
agenda shall be sent, within the period set for publication, to the Companies Department at the
Ministry of Commerce and Industry
Quorum of Ordinary General Assembly
A meeting of the ordinary general assembly shall be valid only if attended by shareholders
representing at least fifty percent (50 per cent.) of Dar Al-Arkan’s capital. If such quorum cannot be
attained at the first meeting, a second meeting shall be held within thirty (30) days following the time
set for the preceding meeting. Such notice shall be published in the manner prescribed above. The
second meeting shall be deemed valid irrespective of the number of shares represented therein.
Quorum of Extraordinary General Assembly
A meeting of the extraordinary general assembly shall be valid only if attended by Shareholders
representing at least fifty percent (50 per cent.) of Dar Al-Arkan’s capital. If such quorum cannot be
attained at the first meeting, a second meeting shall be convened in the same manner provided for
above. The second meeting shall be valid only if attended by a number of Shareholders representing at
least one-quarter (1/4) of Dar Al-Arkan’s capital.
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Voting Rights
Votes at the meetings of the ordinary and extraordinary general assemblies shall be computed on the
basis of one vote for each share represented at the meeting. Nevertheless, a shareholder may not,
whether in person or by proxy or both, have a number of votes exceeding 20 per cent. of the total
shares of Dar Al-Arkan in connection with resolutions of the ordinary and extraordinary general
assembly appointing or dismissing directors and auditors or amending Dar Al-Arkan’s By-Laws.
Voting Majorities
Resolutions of the ordinary general assembly shall be adopted by an absolute majority of the shares
represented thereat. Resolutions of the extraordinary general assembly shall be adopted by a majority
vote of two thirds (2/3) of the shares represented at the meeting. However, if the resolution to be
adopted at the extraordinary general assembly is related to increasing or reducing the capital,
extending Dar Al-Arkan’s term, dissolving Dar Al-Arkan prior to the expiry of the term specified
therefor under the By-Laws or merging Dar Al-Arkan with another company or establishment, then
such resolution shall be valid only if adopted by a majority of three-quarters (3/4) of the shares
represented at the meeting.
Shareholders’ Rights in General Assemblies
Each shareholder shall have the right to discuss the items listed in the general assembly’s agenda and
to direct questions in respect thereof to the members of the board and the auditors in this respect. The
members of the board or the auditors shall answer the shareholders’ questions to the extent that does
not expose Dar Al-Arkan’s interest to any damage. If the shareholder deems the answer to the
question unsatisfactory, then he/it may refer the issue to the general assembly and its decision in this
regard shall be conclusive and binding.
Proceedings of the General Assembly
The general assembly shall be presided over by the chairman of the board of directors or, in his
absence, the director designated by him. The chairman shall appoint a secretary for the meeting and a
canvasser. Minutes shall be written for the meeting showing the number of shareholders and the
number of votes attached to such shares, the resolutions adopted at the meeting, the number of votes
assenting or dissenting to such resolutions and a comprehensive summary of the discussions that took
place at the meeting. Such minutes shall be regularly recorded after each meeting in a special register
to be signed by the chairman of the assembly and the secretary.
The Auditor
Dar Al-Arkan shall have one auditor or more to be selected from among the auditors licensed to work
in the Kingdom of Saudi Arabia. The auditor shall be appointed annually and its compensation shall
be fixed by the general assembly. The general assembly may further reappoint the same auditor.
Inspection of Records
The auditor shall have access at all times to Dar Al-Arkan’s books, records and any other documents,
and may request information and clarification as it deems necessary. It may further check Dar
Al-Arkan’s assets and liabilities.
Auditor’s Report
The auditor shall submit to the annual general assembly a report showing how far Dar Al-Arkan has
enabled it to obtain the information and clarifications it has requested and what it has discovered of
violations of the Companies Regulations and the By-Laws and its opinion as to whether Dar
Al-Arkan’s accounts conform to the facts.
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Fiscal Year
Dar Al-Arkan’s fiscal year shall commence as on 1st January and expire on 31st December of each
Gregorian year.
Annual Accounts
The board of directors shall prepare at the end of each fiscal year an inventory of Dar Al-Arkan’s
assets and liabilities on such date, Dar Al-Arkan’s balance sheet and profit and loss account, a report
on Dar Al-Arkan’s activities and its financial position for the preceding year and its proposals as to
the distribution of the net profits. The board of directors shall perform the foregoing at least sixty (60)
days prior to the convening of the annual ordinary general assembly. The board of directors shall put
such documents at the auditor’s disposal at least fifty (50) days prior to the time set for convening the
general assembly. Such documents shall be signed by the chairman of the board of directors and a set
thereof shall be available at Dar Al-Arkan’s head office for the shareholders’ review at least twentyfive (25) days prior to the time set for convening the general assembly. The chairman of the board of
directors shall cause Dar Al-Arkan’s balance sheet, profit and loss account, a comprehensive
summary of the board of directors’ report and the full text of the auditor’s report to be published in a
newspaper circulated in the city where Dar Al-Arkan’s head office is located, and shall send copies of
such documents to the Companies Department at the Ministry of Commerce at least twenty-five (25)
days prior to the date set for convening the general assembly.
Distribution of Dar Al-Arkan’s Annual Profits
After deducting all general expenses and other costs, Dar Al-Arkan’s annual net profits shall be
allocated as follows:
(a)
Ten percent (10 per cent.) of the annual net profits shall be set aside for Zakat.
(b)
Ten percent (10 per cent.) of the annual net profits shall be set aside to form a statutory
reserve. Such setting aside may be discontinued by the ordinary general assembly when said
reserve totals one-half (1/2) of Dar Al-Arkan’s capital.
(c)
The remaining shall be paid to the shareholders provided it is not less than five percent (5
per cent.) percent of the paid-up capital.
Distribution of Profits
The profits to be distributed among the shareholders shall be paid at such place and times as
determined by the board of directors, in accordance with the instructions issued by the Ministry of
Commerce and Industry.
Dar Al-Arkan Losses
If Dar Al-Arkan’s losses total three-quarters (3/4) of its capital, then the members of the board of
directors shall call the extraordinary general assembly for a meeting to consider whether Dar
Al-Arkan shall continue to exist or be dissolved prior to the expiry of the term specified therefor
under the By-Laws. In all cases the assembly’s resolution shall be published in the Official Gazette.
Disputes
Each Shareholder shall have the right to file a liability action, vested in Dar Al-Arkan, against the
members of the board of directors if they have committed a fault which has caused some particular
damage to such shareholder, provided that Dar Al-Arkan’s right to file such action shall still be valid.
The shareholder shall notify Dar Al-Arkan of his/its intention to file such action.
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Dissolution of Dar Al-Arkan
Upon the expiry of Dar Al-Arkan’s term, or if it is dissolved prior to the time set for the expiry
thereof, the extraordinary general assembly shall, based on a proposal by the board of directors,
decide the method of liquidation, appoint one or more liquidators and specify their powers and fees.
The powers of the board of directors shall cease upon Dar Al-Arkan’s expiry. However, the board of
directors shall remain responsible for the management of Dar Al-Arkan until the liquidators are
specified. Dar Al-Arkan’s administrative departments shall maintain their powers to the extent that
they do not interfere with the powers of the liquidators.
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APPENDIX 1 — FINANCIAL STATEMENTS
INDEX
Page
Audited Consolidated Financial Statements of Dar Al-Arkan for the Year Ended
31 December 2008 (Including Comparative Data for the Year Ended 31 December 2007) ........... F-2
Audited Consolidated Financial Statements of Dar Al-Arkan for the Years Ended
31 December 2007 (Including Comparative Data for the Year Ended 31 December 2006) ......... F-22
F-1
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-9
F-10
F-11
F-12
F-13
F-14
F-15
F-16
F-17
F-18
F-19
F-20
F-21
F-22
F-23
F-24
F-25
F-26
F-27
F-28
F-29
F-30
F-31
F-32
F-33
F-34
F-35
F-36
F-37
F-38
F-39
F-40
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