When Dar Al Arkan Real Estate Development Company reported its full-year 2024 results, the headline numbers looked strong enough to justify the enthusiasm that had been building in the stock. Revenue climbed, contracted sales reached record levels, and management pointed to a land bank that stretches across Riyadh, Jeddah, and several international markets. What the results also showed, buried beneath the top-line growth, was that the gap between contracted sales and actual revenue recognition was widening. Units sold on paper are not units delivered, and in a market where construction timelines routinely slip, that gap matters. Dar Al Arkan's stock had already priced in much of the optimism before the results arrived, trading at a premium to book value that assumed delivery would proceed on schedule and margins would hold. That assumption is doing a lot of work.

Dar Al Arkan is not an outlier. Across the Saudi real estate sector on Tadawul, the pattern repeats: stocks have run hard over the past two years, valuations have expanded, and the underlying operational metrics are only beginning to catch up. The Tadawul All Share Real Estate Index gained roughly 18 percent in 2023 and held most of those gains through 2024, even as transaction volumes in the physical market showed signs of cooling in certain segments. The divergence between equity market performance and ground-level property data is the central tension in the sector right now.

The physical market context matters here. Saudi residential transaction volumes, as tracked by the Ministry of Justice's weekly deed data, showed a notable deceleration in the second half of 2024, particularly in Riyadh, where land prices had risen so sharply that affordability constraints began to bite. The average price per square metre for residential land in north Riyadh crossed SAR 3,000 in several districts by mid-2024, a level that pushed monthly mortgage payments beyond the comfortable threshold for a significant portion of the target buyer pool. The Saudi Real Estate Refinance Company, which provides secondary market liquidity to mortgage originators, reported that mortgage issuance growth slowed from the double-digit pace of 2022 and 2023 to a more modest rate in 2024. When mortgage volumes slow, developer sales pipelines eventually follow, and the lag between a slowdown in physical market activity and its appearance in developer earnings is typically two to four quarters.

💡 رؤية

The supply side of the equation is where the analysis gets complicated.

The listed developers have been partially insulated from this by a structural feature of the Saudi market: the dominance of off-plan sales. When a developer sells a unit off-plan, it books a contract and collects installments, but revenue recognition under IFRS 15 depends on the percentage of completion. This means a developer can show strong contracted sales growth even as the physical delivery machine slows down. Investors who focus on contracted sales as the primary metric are essentially reading a leading indicator that has its own embedded optimism, because it assumes no cancellations, no construction delays, and no financing gaps. In a market where construction cost inflation ran at elevated levels through 2023 and into 2024, driven partly by labor costs and partly by materials prices linked to global supply chains, those assumptions carry real risk.

The commercial real estate segment tells a different story, and in some ways a more straightforward one. Saudi REITs listed on Tadawul, which hold a mix of retail, office, hospitality, and residential income assets, have been navigating a genuine improvement in underlying fundamentals. Jadwa REIT Saudi, Al Rajhi REIT, and Riyad REIT have all reported occupancy improvements in their retail and hospitality portfolios as domestic consumption remained resilient and inbound tourism continued to grow. Riyadh's Grade A office market, which was chronically undersupplied relative to the demand generated by Vision 2030 corporate relocations and the regional headquarters program, saw vacancy rates compress to below 5 percent in prime locations by late 2024. That is a genuine supply-demand imbalance that supports rental growth, and the REITs with Riyadh office exposure have been among the better-performing names in the sector on a total return basis.

The regional headquarters program deserves specific attention because it is functioning as a structural demand driver that did not exist five years ago. Saudi Arabia's requirement that multinationals establish their regional headquarters in the kingdom to qualify for government contracts has pulled a meaningful volume of corporate tenants into the Riyadh office market. The program had attracted over 500 companies by the end of 2024, according to figures from the Ministry of Investment, and each corporate relocation brings not just office demand but also housing demand for expatriate employees and their families. This is the mechanism through which Vision 2030's corporate ambitions translate into real estate fundamentals, and it is one of the more durable demand drivers in the market.

The supply side of the equation is where the analysis gets complicated. The giga-projects, NEOM, Diriyah, Qiddiya, and the Red Sea Project, represent a combined planned supply of residential, hospitality, and commercial space that is unprecedented in scale. NEOM alone has announced residential capacity for approximately 9 million people in its various components, a figure that strains credulity when set against current population projections for the northwest region. The more analytically useful question is not whether these projects will be built in full but what fraction of their planned supply will actually reach the market within a timeframe that affects current pricing. Delivery timelines have already been revised for several components, and the capital requirements are substantial enough that phasing decisions will inevitably shape the actual supply curve. For listed developers and REITs, the giga-projects represent both a competitive threat and a potential demand catalyst, because the infrastructure investment they require pulls workers, contractors, and eventually residents into the kingdom.

The hospitality segment within the listed real estate universe is worth isolating. Saudi Arabia's Vision 2030 tourism targets, which call for 150 million visitors annually by 2030, have driven a hotel development pipeline that is among the largest in the world by room count. JLL estimated that Riyadh alone had over 20,000 hotel rooms under development as of late 2024, with Makkah and Jeddah adding further supply. The listed REITs with hospitality exposure, particularly those holding assets in Makkah where religious tourism provides a structural demand floor, have shown relatively stable occupancy metrics. The risk is concentrated in the leisure and business travel segments, where the new supply coming online over the next three years will test whether demand growth can absorb the additional inventory without compressing revenue per available room.

Valuation is the thread that ties these observations together. The Saudi real estate sector on Tadawul trades at a weighted average price-to-earnings multiple that, for the larger developers, sits in the range of 20 to 30 times trailing earnings, depending on the name and the period. For REITs, the relevant metric is price-to-funds from operations, and several names trade at premiums that imply distribution yields of 4 to 5 percent, which is not particularly compelling in an environment where Saudi riyal-denominated fixed income instruments offer comparable or better risk-adjusted returns. The argument for owning listed real estate over fixed income rests on the expectation of capital appreciation and distribution growth, both of which require the physical market to continue performing. If transaction volumes remain subdued and mortgage growth stays muted, that argument weakens.

The sector is not without genuine catalysts. The Saudi government's affordable housing programs, including the Sakani initiative which has facilitated over 700,000 housing units since its launch, continue to generate demand for developers operating in the mid-market segment. The population is young, urbanizing, and growing, with the kingdom's median age below 30 and household formation rates running at levels that imply sustained housing demand for the next decade. Interest rate dynamics matter too: if the Federal Reserve continues its easing cycle and the Saudi Arabian Monetary Authority follows, as it has historically given the riyal peg, mortgage rates will ease and affordability will improve, potentially reigniting transaction volumes.

What the listed stocks are pricing in, however, is not the base case. They are pricing in the optimistic scenario where delivery timelines hold, margins expand, tourism targets are met, and the giga-projects generate demand without generating competing supply. That scenario is possible. It is not guaranteed. The gap between what the equities assume and what the physical market has so far confirmed is the risk that investors in Saudi real estate stocks are carrying, whether or not it appears in any prospectus.

For informational purposes only. Not investment advice, a solicitation, or a recommendation. Consult a licensed financial advisor before making any investment decision.